Randal K Quarles: The Financial Stability Board - beyond the fog of
battle
Speech by Mr Randal K Quarles, Vice Chairman for Supervision of the Board of Governors of the
Federal Reserve System, at the 2019 European Bank Executive Committee Forum "The Future
of Banking: The Human Factor", Brussels, 2 April 2019.
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Thank you for the opportunity to join you. I am grateful for the chance to speak with such a
diverse and distinguished group of academics, industry leaders, and colleagues in regulation and
central banking. Conversations like these always remind me that, while we all approach our roles
in the financial sector differently, we share a deeper commitment to a common goal: a safe,
stable, and resilient financial system, capable of supporting strong and sustainable economic
growth.
A decade ago, that common goal became an imperative. The financial regulatory community
worked frantically to repair the vulnerabilities that the global financial crisis exposed and to
address a set of financial risks that failed to respect national borders. The financial system we
have today bears the imprint of our response a decade ago. Basel III is now final. Derivatives
markets are now safer and better regulated. Levels of capital and liquidity at the largest banks are
now higher, and with reforms to recovery and resolution, the risks and potential costs of a
catastrophic failure of a major institution are lower. These are profound accomplishments of
international cooperation, which returned the global financial system from the brink of collapse to
stability and health. But health does not make cooperation or vigilance any less necessary. On
the contrary, as the G20 leaders said in creating the Financial Stability Board (FSB), "a sense of
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normalcy should not lead to complacency."
The FSB exists to help sustain the common efforts made in the throes of the crisis-to identify
and address systemic vulnerabilities, to develop stronger regulatory and supervisory policies,
and to create a more resilient global financial system. It is a platform, and a place for its 24
members and 73 representatives to coordinate their work; to identify and address issues that
span financial products, intermediaries, and markets; and to avoid the pre-crisis regulatory
fragmentation that left financial stability risks unaddressed. The relevance of this platform, to its
members and to a changing financial system, is critical to preserving our last 10 years of
hardearned gains.
Today, I want to briefly outline three tenets that I believe are essential to preserving the relevance
and vitality of the FSB: engagement, vigilance, and analysis. These principles, which I discussed
more fully in remarks last week, underlie the most successful elements of the post-crisis
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reforms. They should remain the foundation of the FSB's work, as we turn from drafting new
standards to implementing them and devote more time and attention to the emerging
vulnerabilities.
Engagement
Regulatory cooperation has long been essential to financial stability-not only because it fosters
consistency in global rules, but also because it fosters trust. When authorities develop new
policy together, when they identify common standards and implement them in their home
countries, and when they plan and debate the nature of emerging risks, they also develop a
common understanding of each other's work and a common approach to addressing new
problems.
However, trust among regulators means little on its own. It must come with the trust of the
constituencies regulators serve, and the trust of those whom our decisions affect. The FSB is a
conduit for this trust, as it is accountable to the G20 and to the nations and people the G20
leaders represent. We have an obligation to make the most of that conduit, by engaging in
genuine, substantive dialogue with a wide range of stakeholders, to a greater and more effective
degree than in the past. We should invite reflection on the design and impact of our efforts, solicit
input on risks to financial stability, and better communicate our mission and activities to the
public, without the veneer of technical jargon.
The FSB can begin this work at home, by strengthening the role of the regional groups that are
already part of the organization. In 2011, the FSB established six consultative groups
representing large regions of the globe. The intent was to expand our outreach beyond the
membership of the G20 and to better reflect the FSB's global mission and impact. Today, the
groups meet once or twice a year and help the FSB obtain broader input into its policy
development agenda. They can, and should, have the opportunity to do more-not only to
promote implementation of international policy initiatives but also to give a clear view of financial
stability developments in their respective regions. A study of the groups' operations is now
underway, which will shed light on how to upgrade their effectiveness as an outreach and
feedback mechanism.
We can also engage more effectively outside the FSB-with businesses, public institutions,
market participants, and scholars-and give the public the means and the opportunity to provide
meaningful feedback on our work. Some steps are already underway. We established a new
expectation that all FSB policy recommendations will be open for at least 60 days of public
comment, instead of the shorter periods used in the past. We began a recent effort around the
differences in regulatory environments and market conditions across jurisdictions-known as
"market fragmentation"-by convening key stakeholders and academics for a full-day workshop,
which I hope will be the rule for future projects, not the exception. Earlier this year, we released
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publicly the FSB work program for the first time.
This broad engagement is essential to understanding new developments that are relevant to
financial stability. Take, for example, the "fintech" trends I discussed in remarks last week, to
which the FSB is dedicating significant attention. Claims about fintech run the gamut from the
utopian to the apocalyptic-yet the mantle of fintech covers a wide range of new business
models, products, and trends. Their contours and their impact also vary across national
boundaries, from mobile wallets in Kenya, to online mortgages in the United States, to money
market funds founded by technology companies in China. Understanding one of these new uses
of technology is not the same as understanding all of them. Identifying the risks and opportunities
they pose requires context, information, and insight that can only come from a variety of
stakeholders with experience developing, using, and monitoring them.
I will continue to seek ways to invite and encourage engagement during my chairmanship, and to
give the public a clearer and fuller view of FSB's decisionmaking process. Few efforts are closer
to the heart of our collective work or to the accountability and trust that the FSB helps foster.
Vigilance
Trust and accountability are also prerequisites for the FSB to pursue its mission. The first prong
of our mandate, now a decade old, is to "assess vulnerabilities affecting the global financial
system, and identify and review . . . the regulatory, supervisory, and related actions needed to
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address them . . . ." The FSB's primary role, and its principal contribution to international
financial regulation, is to look forward-to see past the issues and practices of the day, and
identify new vulnerabilities, long before they lead to widespread economic distress.
The FSB's Standing Committee on Assessment of Vulnerabilities (under the leadership of FSB
Vice Chair Klaas Knot of De Nederlandsche Bank, here today) is an important forum and catalyst
for this work. In the months ahead, the committee will develop a new framework for the
identification and assessment of financial vulnerabilities. Their efforts will rely on transparent
engagement with a wide range of stakeholders-including banks and nonbank financial
institutions, the academic community, financial regulators, national authorities, and
standardsetting bodies. This kind of broad outreach is essential. The causes of financial crises rarely
announce themselves ahead of time, and only a wide range of views can give us the perspective
and understanding to address them in advance. The right model for this work is not a small team
of detectives-it is a search party.
The FSB's efforts on nonbank financial intermediation, which I discussed last week, reflect a
similar approach. Nonbank financing has grown since the financial crisis, and it has been a
source of systemic risk, often involving high leverage, maturity and liquidity mismatches, opaque
structures, and concentrated holdings of risky assets. Nonbank financing can also lead to lower
lending standards, bidding up the price of risky assets and sending an encouraging signal to
credit underwriters. These channels played a role in the recent global financial crisis, and more
recently, new forms of interconnectedness between nonbank financial firms and the banking
system have emerged. In some scenarios, both domestically and internationally, such ties could
amplify risks.
These developments raise important issues. Is the growth of nonbank financing altering existing
market structures? Are there new vulnerabilities in the financial system? How will nonbank
financing develop, and how should it do so? The FSB is taking a variety of complementary
approaches to answering these questions.
First, we produce an annual report that outlines the developments in nonbank financing, detailing
global trends and potential risks and providing reliable information to foster public discussion.
Second, the FSB develops policies to promote the resilience of these firms (without impeding the
growth of sustainable nonbank financing models), and we work closely with other multinational
organizations to monitor implementation. Finally, and going forward, we must begin analyzing the
effectiveness of the policies on nonbank financing that have been implemented.
Analysis
The same spirit of self-reflection should guide the FSB's efforts in other policy areas.
Stakeholders trust the FSB to undertake thoughtful, detailed work on emerging risks to financial
stability. Yet identifying those risks before a crisis means dealing in uncertainty, and making
policy on evolving issues, where no one can claim complete expertise. To maintain that trust, we
must be willing to make improvements when the evidence justifies it-to undertake rigorous
analysis, before and after issuing new standards, and to follow that analysis where it leads.
Many post-crisis policies, including those aimed at the implicit subsidy for "too-big-to-fail"
institutions, have been in place long enough to allow for evaluation. We can now begin to ask
fundamental, critical questions: What have the effects of these reforms been, whether intended
or unintended, salutary or adverse? Have we successfully reduced or eliminated the problem?
Has there been a tradeoff, in the form of new, unintended risks or costs?
As I have described elsewhere, the FSB is launching a global study with multinational
policymakers to start answering these important questions as part of its broader effort to
evaluate the effects of post-crisis reforms. We intend to bring analytical rigor to these questions,
and we recognize that the academic community has undertaken much work in this area. As a
result, we will draw extensively on academic advisors during all phases of the work we are
undertaking. I also encourage other experts in this field to look closely to the consultative
document that will be coming from the study next year. We welcome the input as we undertake
the study of this signature issue from the crisis.
The task of this project, like the task of the FSB itself, is to foster insight on the road ahead. The
work of the FSB reflects the fact that, in a global financial system, we cannot see and address
emerging problems alone. Working as allies and colleagues, we have bound up most of the
wounds from the last financial crisis. To avoid reopening them-and returning to a fragmented
international regime-we will have to recommit to collaboration, embrace insight where it
emerges, and follow evidence where it leads. With broad engagement, rigorous vigilance, and
committed analysis, the risks ahead of us can be less dangerous than the ones we left behind.
1
Leaders' Statement (PDF), The Pittsburgh Summit (G20), September 24-25, 2009.
2
Randal K. Quarles, "The Financial Stability Board in 2019" (speech at the Joint Conference of the European
Central Bank and the Journal of Money, Credit, and Banking, Frankfurt, Germany, March 28, 2019).
3
See www.fsb.org/2019/02/fsb-work-programme-for-2019/.
4
"Financial Stability Board Charter (PDF)," April 2, 2009.