For release on delivery
10:00 a.m. EST
December 4, 2019
Statement by
Randal K. Quarles
Vice Chair for Supervision
Board of Governors of the Federal Reserve System
before the
Committee on Financial Services
U.S. House of Representatives
December 4, 2019
Chairwoman Waters, Ranking Member McHenry, members of the committee, thank you
for the opportunity to appear today, alongside my colleagues from the regulatory community.
We join you on the cusp of a significant and shared milestone: the full and faithful
implementation of Congress's efforts to improve financial regulation, in the form of the
Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).1 Today, I
will briefly review the steps we have taken toward this milestone; share information on the state
of the banking system, from the report that accompanies my testimony; and discuss the
continuing need to ensure our regulatory framework is both coherent and effective.2
Roughly 18 months ago, Congress passed legislation to consolidate a decade of work on
financial reform, and to better tailor financial regulation and supervision to the risks of the
institutions being regulated. The EGRRCPA was a specific, targeted response to the conditions
facing today's banking organizations and their customers. It was also rooted, however, in long-
standing congressional practice: of reviewing the work done in the immediate aftermath of a
crisis; of addressing any gaps; and of ensuring that public and private resources go toward their
best, most efficient use. This approach informed the Banking Acts of 1933 and 1935, on issues
from shareholder liability to deposit insurance.3 It informed the bills passed after the savings-
and-loan crisis, requiring "prompt corrective action" at struggling firms and reducing the
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examination burden at strong ones.4 And it continues to inform our efforts now, from the
passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act to today.5
The Board's latest Supervision and Regulation Report, which we published last week,
confirms the current health of the banking system.
•
It depicts a stable, healthy, and resilient banking sector, with robust capital and
liquidity positions.
•
It details stable loan performance and strong loan growth, particularly among regional
banks, whose share of overall bank lending continues to grow.
•
It describes steady improvements in safety and soundness, with a gradual decline in
outstanding supervisory actions at both the largest and smallest organizations.
•
And it identifies areas of continued supervisory focus, including operational
resiliency and cyber-related risks, which are among our top priorities for the year to
come.
The banking system is substantially better prepared to manage unexpected shocks today
than it was before the financial crisis. Now, when the waters are relatively calm, is the right time
to step back and examine the efficiency and effectiveness of our protection against future storms.
With the EGRRCPA, Congress made a significant down payment on that task. In less than 18
months after the act's passage, we implemented all of its major provisions.
Earlier this year, we completed a cornerstone of the legislation to tailor our rules for
regional banks, which was entirely consistent with a principle at the heart of our existing work:
firms that pose greater risks should meet higher standards and receive more scrutiny. Our
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previous framework relied heavily on a firm's total assets as a proxy for these risks and for the
costs the financial system would incur if a firm failed. This simple asset proxy was clear and
critical, rough and ready, but neither risk-sensitive nor complete. Our new rules employ a
broader set of indicators, like short-term wholesale funding and off-balance-sheet exposures, to
assess the need for greater supervisory scrutiny.6 They maintain the most stringent requirements
and strictest oversight for the largest, most complex organizations-the collapse of which would
do the most harm.
We and our interagency colleagues also have worked on a range of measures addressed to
smaller banks, with particular attention to better capturing and reflecting the characteristics of the
community bank business model. These include elements of last year's legislation, and other
steps we have taken in the same spirit, intended to help community banking organizations
survive and thrive:
•
We adjusted the scope of our supervisory assessments, our stress-testing
requirements, our appraisal regulations, and the Volcker rule-all aimed at the
activities of large, complex institutions, not small local banks.7
6
Board of Governors of the Federal Reserve System, "Federal Reserve Board Finalizes Rules That Tailor Its
Regulations for Domestic and Foreign Banks to More Closely Match Their Risk Profiles," news release, October 10,
2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191010a.htm.
7
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the
Comptroller of the Currency, "Agencies Issue Final Rule to Exempt Residential Real Estate Transactions of
$400,000 or Less from Appraisal Requirements," news release, September 27, 2019,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190927a.htm; Board of Governors of the Federal
Reserve System, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Office of the
Comptroller of the Currency, and Securities and Exchange Commission, "Agencies Finalize Changes to Simplify
Volcker Rule," news release, October 8, 2019,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191008a.htm; Board of Governors of the Federal
Reserve System, "Federal Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic and Foreign
Banks to More Closely Match Their Risk Profiles," news release, October 10, 2019,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191010a.htm; Board of Governors of the Federal
Reserve System, "Federal Reserve Board Invites Public Comment on Proposal That Would Modify Company-Run
Stress Testing Requirements to Conform with Economic Growth, Regulatory Relief, and Consumer Protection Act,"
news release, January 8, 2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190108a.htm; and
Board of Governors of the Federal Reserve System, "Federal Reserve Board Issues Statement Describing How,
Consistent with Recently Enacted EGRRCPA, the Board Will No Longer Subject Primarily Smaller, Less Complex
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• We clarified our capital treatment of commercial real estate loans, which are central
to the credit books of many community banks.
• We detailed our approach to anti-money-laundering exams, and our goal of
prioritizing high-risk activities over routine matters.8
• We expanded eligibility for our small bank holding company policy statement,
opening the door to simpler funding requirements for a broader range of small
banking firms.9 We also increased the scope of banks eligible for longer examination
cycles.10
•
We revised a management-interlock rule for the first time since 1996, removing a
governance barrier for more small banks and their holding companies.11
•
We made our short-form call report shorter, removing items that were often ancillary
to filers' core lending activities.
Banking Organizations to Certain Board Regulations," news release, July 6, 2018,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180706b.htm.
8
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the
Comptroller of the Currency, "Agencies Propose Rule Regarding the Treatment of High Volatility Commercial Real
Estate," news release, September 18, 2018,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180918a.htm; and Board of Governors of the
Federal Reserve System, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National
Credit Union Administration, and Office of the Comptroller of the Currency, "Federal Bank Regulatory Agencies
and FinCEN Improve Transparency of Risk-Focused BSA/AML Supervision," news release, July 22, 2019,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190722a.htm.
9
Board of Governors of the Federal Reserve System, "Federal Reserve Board Issues Interim Final Rule Expanding
the Applicability of the Board's Small Bank Holding Company Policy Statement," news release, August 28, 2018,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180828a.htm.
10
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the
Comptroller of the Currency, "Agencies Issue Final Rules Expanding Examination Cycles for Qualifying Small
Banks and U.S. Branches and Agencies of Foreign Banks," news release, December 21, 2018,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221c.htm.
11
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the
Comptroller of the Currency, "Agencies Issue Final Rule to Update Management Interlock Rules," news release,
October 2, 2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191002a.htm.
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• And we finalized a new community bank leverage ratio, giving small, strong banking
organizations a much simpler way to meet their capital requirements.12
Our goal, through this period of intense regulatory activity, has been to faithfully
implement Congress's instructions. However, those instructions also speak to a broader need,
and one central to our ongoing work: to ensure our regulatory regime is not only simple,
efficient, and transparent, but also coherent and effective.13
Financial regulation, like any area of policy, is a product of history. Each component
dates from a particular time and place, and it was designed, debated, and enacted to address a
particular set of needs. No rule can be truly evergreen; gaps and areas for improvement will
always reveal themselves over time. Our responsibility-among the most challenging and
essential we have-is to address those gaps without creating new ones; to understand fully the
interaction among regulations; to reduce complexity where possible, before it becomes its own
entire
source of risk; and to ensure our rulebook supports the safety, stability, and strength of the
financial system.
Looking ahead, my colleagues and I are paying particular attention to coherence in our
capital regime. We are reviewing public input into proposed changes to the stress capital buffer,
which would simplify our regime by integrating our stress-test and point-in-time capital
requirements and maintain our current strong levels of capital.14 As we move forward, we also
12
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the
Comptroller of the Currency, "Federal Bank Regulatory Agencies Issue Final Rule to Simplify Capital Calculation
for Community Banks," news release, October 29, 2019,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191029a.htm.
13
Randal K. Quarles, "Early Observations on Improving the Effectiveness of Post-Crisis Regulation" (speech at the
American Bar Association Banking Law Committee Annual Meeting, Washington, D.C., January 19, 2018),
https://www.federalreserve.gov/newsevents/speech/quarles20180119a.htm.
14
Randal K. Quarles, "Refining the Stress Capital Buffer" (speech at the Program on International Financial
Systems Conference, Frankfurt, Germany, September 5, 2019),
https://www.federalreserve.gov/newsevents/speech/quarles20190905a.htm; and Randal K. Quarles, "Stress Testing:
A Decade of Continuity and Change" (speech at the "Stress Testing: A Discussion and Review" research conference
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understand the need to thoughtfully finalize implementation of Basel III, in a way that preserves
aggregate capital and liquidity levels at large banking organizations, avoids additional burden at
smaller ones, and upholds our standards for transparency and due process.
We also understand the need to ensure a smooth transition away from LIBOR, and other
legacy benchmark rates, so institutions can manage risks comprehensively and effectively.15
And we understand the need for clear, consistent supervisory communication on these and other
matters, which invites dialogue, reflects and reinforces our regulations and laws, and gives banks
necessary transparency into supervisory views on safety and soundness.16
We also understand the need to thoughtfully address new financial products and
technologies. Innovation has the potential to improve access to financial services, lower costs,
and support the competitive health of the banking sector. Its promise, however, inevitably comes
with risk-and as the financial crisis showed, risks that lie outside the banking system can have
consequences within it. Our approach to innovation should be both open and careful, engaging
thoughtfully with both the public and private sectors, to understand the benefits and costs that
such fundamental changes can bring.
Finally, we understand the need for coherence across borders. Over the last decade,
working with supervisors around the world, we have built a common understanding of the crisis,
its causes, and its consequences. Now, as the full set of post-crisis reforms comes into effect, we
should renew our focus on assessing their implementation and their overall impact. The
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financial system is truly global, and the structures and incentives that govern it are critical to its
stability and resilience.17 The regulatory community has started significant work to examine
those structures and incentives as a whole, from their effect on "too-big-to-fail" subsidies to their
impact on market fragmentation.18 We are participating actively in that work, as a way to ensure
the global financial system supports, rather than inhibits, American growth.
I appreciate the chance to discuss this work with you, and I look forward to answering
your questions. Thank you.
17
Randal K. Quarles, "Government of Union: Achieving Certainty in Cross-Border Finance" (speech at the
Financial Stability Board Workshop on Pre-Positioning, Ring-Fencing, and Market Fragmentation, Philadelphia,
September 26, 2019), https://www.federalreserve.gov/newsevents/speech/quarles20190926a.htm.
18
Randal K. Quarles, "The Financial Stability Board at 10 Years-Looking Back and Looking Ahead" (speech at
the European Banking Federation's European Banking Summit, Brussels, Belgium, October 3, 2019),
https://www.federalreserve.gov/newsevents/speech/quarles20191003a.htm; see also, Financial Stability Board,
"FSB Launches Evaluation of Too-Big-to-Fail Reforms and Invites Feedback from Stakeholders," news release,
May 23, 2019,
https://www.fsb.org/2019/05/fsb-launches-evaluation-of-too-big-to-fail-reforms-and-invitesfeedback-from-stakeholders/; and Financial Stability Board, "FSB Publishes Report on Market Fragmentation,"
news release, June 4, 2019, https://www.fsb.org/2019/06/fsb-publishes-report-on-market-fragmentation/.