For release on delivery
10:00 a.m. EDT
May 19, 2021
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
May 19, 2021
Chairwoman Waters, Ranking Member McHenry, members of the Committee, thank you
for the invitation to testify today. Last May, my colleagues and I came before you-in a virtual
format for the first time-discussing our actions to maintain a strong banking sector as a source
of support for consumers, households, and businesses. I'd like to thank the Committee for its
flexibility and its commitment to ongoing, open dialogue, especially in the course of such a
challenging year.
My remarks one year ago came after the onset of sudden and pervasive financial stress.1
Early turmoil in overseas financial markets quickly crossed borders and, within days, had
reached almost every asset class and corner of the financial system. From the beginning, the
causes of this strain were clear, rooted in the policy measures taken to address the outbreak of
COVID-19. But at that time, the full implications of the COVID event remained unclear, and the
costs would continue to mount.
The American economy and banking sector then remained at the edge of the storm, with
one wave of stress behind us and others yet to come. Today, the storm waters are receding. The
economy is beginning a strong recovery, which owes much to an extraordinary, coordinated, and
sustained campaign of support, by both Congress and the Federal Reserve, that helped clear a
path to the other side of the COVID event.
As the Federal Reserve's recent reports detail, banking organizations have remained an
important source of strength in this recovery.2 Entering the COVID event, the banking system
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was fortified by over 10 years of work to improve safety and soundness, from both regulators
and the banks themselves. Higher levels of capital and liquidity, better risk management, and
more robust systems let them absorb an unprecedented shock-while providing refuge from
market instability, delivering essential public aid, and working constructively to support
borrowers and communities.3 In short, the full set of post-2008 reforms-as refined and
recalibrated by the work of the last four years-ensured that this time would truly be different
than the last. Today, the U.S. banking system is actually more liquid and better capitalized than
it was a year ago, with over $100 billion in additional loan loss reserves, leaving it well-
positioned to weather future shocks.
While a strong recovery is underway, it is not yet complete.4 Some households and
businesses are still vulnerable, even as we enter this last stretch of the return to normal. Our role,
as policymakers, is to support the financial system and the economy through the end of this
transition back to normal operations. Our challenge, however, is to do so as circumstances
change and the nation's need for that support evolves.5
Most immediately, we have worked to align our emergency actions with other relief
efforts, as the economic situation improves. Last spring, the Federal Reserve adopted a set of
extraordinary and mostly temporary measures to ease the strain in financial markets and ensure
banks could support communities and meet customer needs.6 In the last six months, we have
3
See Randal K. Quarles, "Remarks at the Hoover Institution" (speech at the Hoover Institution, Stanford, CA (via
webcast), October 14, 2020), https://www.federalreserve.gov/newsevents/speech/quarles20201014a.htm.
4
See, e.g., Jerome H. Powell, "Getting Back to a Strong Labor Market" (speech at the Economic Club of New York
(via webcast), February 10, 2021), https://www.federalreserve.gov/newsevents/speech/powell20210210a.htm.
5
See Jerome H. Powell, "Community Development" (speech at the "2021 Just Economy Conference" sponsored by
the National Community Reinvestment Coalition, Washington, D.C. (via webcast), May 3, 2021),
https://www.federalreserve.gov/newsevents/speech/powell20210503a.htm ("Lives and livelihoods have been
affected in ways that vary from person to person, family to family, and community to community").
6
For a catalogue of these actions, see "Supervisory and Regulatory Actions in Response to COVID-19," Board of
Governors of the Federal Reserve System, last updated March 15, 2021,
https://www.federalreserve.gov/supervisory-regulatory-action-response-covid-19.htm.
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maintained or extended some of those measures, where appropriate, to preserve household
assistance and promote continued access to credit.7
We also began the transition back to our normal activities, our normal supervisory
posture, and our normal rulebook. We closed 12 of our 13 emergency lending facilities; let
temporary changes to our leverage rules expire as planned; and announced plans to transition
large banks back to our regular capital regulation program, calibrating dividend and share
repurchase restrictions to the results of the upcoming supervisory stress tests.8
These are important near-term steps, and they are part of any responsible transition out of
our emergency posture. However, our role and our responsibility extend much further than
merely returning to normal. We also have an obligation to look closely at the last year, to
understand how the financial system came to experience such severe stress, and to identify and
act on any lessons we find. The COVID event was a unique shock, but it was also the first real-
world test of the regulatory and supervisory regime established after the 2008 financial crisis. As
7
See, e.g., Board of Governors of the Federal Reserve System, "Federal Reserve Board announces it will extend its
Paycheck Protection Program Liquidity Facility, or PPPLF, by three months to June 30, 2021," news release, March
8, 2021, https://www.federalreserve.gov/newsevents/pressreleases/monetary20210308a.htm; Board of Governors of
the Federal Reserve System, "Federal Reserve Board announces the second extension of a rule to bolster the
effectiveness of the Small Business Administration's Paycheck Protection Program (PPP)," news release, February
9, 2021, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210209a.htm; Board of Governors of the
Federal Reserve System, "Federal Reserve announces the extension of its temporary U.S. dollar liquidity swap lines
and the temporary repurchase agreement facility for foreign and international monetary authorities (FIMA repo
facility) through September 30, 2021," news release, December 16, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20201216c.htm; Board of Governors of the
Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency,
"Agencies provide temporary relief to community banking organizations," news release, November 20, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201120a.htm.
8
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the
Comptroller of the Currency, "Temporary supplementary leverage ratio changes to expire as scheduled," news
release, March 19, 2021, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319b.htm; Board of
Governors of the Federal Reserve System, "Federal Reserve Board announces that the temporary change to its
supplementary leverage ratio (SLR) for bank holding companies will expire as scheduled on March 31," news
release, March 19, 2021, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm; Board of
Governors of the Federal Reserve System, "Federal Reserve announces temporary and additional restrictions on
bank holding company dividends and share repurchases currently in place will end for most firms after June 30,
based on results from upcoming stress test," news release, March 25, 2021,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210325a.htm.
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such, it gives us a chance to examine that regime's strengths and shortcomings, and to position it
well for future challenges.
Any list of lessons must begin with the strong performance of supervisory stress testing.9
The stress-testing program not only prepared banks for a period of prolonged hardship; it also
clarified their health and resilience as the COVID event progressed. This role was a return to the
original purpose of stress testing and a confirmation of its earliest use during the 2008 financial
crisis. It also, however, affirmed the ways that stress testing has evolved in recent years, into a
more flexible, more transparent anchor for the Federal Reserve's broader capital program.
For example, while it was prudent-given that this was the first real-world test of the
post-2008 system-for us to impose temporary capital distribution restrictions beyond those that
form part of that system, we now know that our framework works. We can have particular
confidence in the framework when it is supplemented and informed by a real-time stress testing
regime. In the future, having learned the lessons of this test, we will be able to rely on the
automatic restrictions of our carefully developed framework when the stress test tells us the
system will be resilient, rather than impose ad hoc and roughly improvised limitations.
Other areas, however, are ripe for closer examination, both domestically and
internationally. These include the strains in short-term funding markets, and the second
destabilizing run on prime money market mutual funds in roughly a decade, which required
significant public intervention to address.10 Despite some efforts after the 2008 crisis to enhance
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the resiliency of these investment vehicles, the basic model of a seemingly stable-value fund,
backed by assets the value and liquidity of which varies, remained vulnerable. Work is ongoing
both domestically and at the Financial Stability Board on how to better address these
vulnerabilities.
Areas for further examination also include Treasury markets, where last year's selling
pressures overwhelmed dealers' willingness or ability to intermediate, and which continue to be
a focus for the Board, the Department of the Treasury, and other regulators.11 Among other
measures, we are reviewing the design and calibration of the supplementary leverage ratio,
which was originally gauged for a financial system with far lower levels of cash reserves and a
much smaller Treasury market.12
Finally, these areas for further review include a rapidly changing set of customer
practices; changing patterns in the use of financial services, by consumers and businesses; and a
changing relationship between banks and their nonbank partners. These trends predate the
COVID event, but the past year accelerated them dramatically, with important implications for
financial stability, safety and soundness, consumer protection, and underserved communities'
access to safe and fair financial services. The Federal Reserve is working to understand and
address this changing landscape in a number of ways-from the use of artificial intelligence, to
the evolving need for operational resiliency, to the growing risk of disruptive shocks from
cybersecurity failures.13
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We are not alone in our work to understand these post-COVID-event lessons. We have
valuable and willing partners in our fellow regulators, in other agencies across government, and
in our colleagues abroad. We continue to participate actively in relevant work at the Financial
Stability Board and other international forums, since financial risks do not respect the
jurisdictional lines between agencies or countries. And we are committed to keeping Congress
closely and actively informed of our efforts, mindful of the effect these trends may have on our
core mandate.
This work is critical, but only in service of a more fundamental goal: a safe, transparent,
and efficient approach to supervision and regulation, which ensures the financial system is strong
and stable enough to withstand even historic shocks.14 Those values are of perennial importance,
and they continue to be the bedrock of the Federal Reserve's work.15 They also animate two of
our highest priorities for this year: to finalize the post-crisis Basel III reforms and to complete
the long-overdue transition away from LIBOR. On the former, we remain committed to
implementing Basel III for our internationally active banking organizations in a full, timely, and
consistent manner, with a rulemaking proposal for public comment later this year. For LIBOR,
"Agencies seek wide range of views on financial institutions' use of artificial intelligence," news release, March 29,
2021, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210329a.htm; Board of Governors of the
Federal Reserve System, SR letter 20-24: "Interagency Paper on Sound Practices to Strengthen Operational
Resilience," November 2, 2020, https://www.federalreserve.gov/supervisionreg/srletters/SR2024.htm; see also
"Jerome Powell: Full 2021 60 Minutes Interview Transcript," 60 Minutes Overtime, April 11, 2021,
https://www.cbsnews.com/news/jerome-powell-full-2021-60-minutes-interview-transcript/.
14
Randal K. Quarles, "The Eye of Providence: Thoughts on the Evolution of Bank Supervision" (speech at the
Federal Reserve Board, Harvard Law School, and Wharton School Conference: Bank Supervision: Past, Present,
and Future (via webcast), December 11, 2020),
https://www.federalreserve.gov/newsevents/speech/quarles20201211a.htm.
15
Board of Governors of the Federal Reserve System, "Federal Reserve Board adopts final rule outlining and
confirming the use of supervisory guidance for regulated institutions," news release, March 31, 2021,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210331a.htm; Board of Governors of the Federal
Reserve System, "Federal Reserve Board publishes frequently asked questions (FAQs) comprising existing legal
interpretations related to a number of the Board's longstanding regulations," news release, March 31, 2021,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210331b.htm; Board of Governors of the Federal
Reserve System, "Federal Reserve publishes latest version of its supervision and regulation report," news release,
November 6, 2020, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201106a.htm.
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by contrast, the time for comment, speculation, and delay has long since passed. Continued use
of LIBOR in new contracts after 2021 would create safety and soundness risks, and we will
examine bank practices accordingly.16
The COVID event is not behind us, and the vulnerabilities it exposed are not gone. As
we continue to recover, the "vast influence of accident" can only grow, with consequences that
can disproportionately fall on the most vulnerable.17 However, we can do more than just wait
and hope that the path out of the COVID event is smooth. We can work to ensure the financial
system is resilient enough to support consumers, households, and businesses, and we can
recommit ourselves to supporting the economy through the completion of the recovery. The
work we undertake to learn the lessons of the past year is a critical step in upholding that
commitment.
Thank you. I look forward to your questions.
16
Randal K. Quarles, "Keynote Remarks" (speech at "The SOFR Symposium: The Final Year," an event hosted by
the Alternative Reference Rates Committee, New York, NY (via webcast), March 22, 2021),
https://www.federalreserve.gov/newsevents/speech/quarles20210322a.htm; see also Mark Van Der Weide, "The
End of LIBOR: Transitioning to an Alternative Interest Rate Calculation for Mortgages, Student Loans, Business
Borrowing, and Other Financial Products" (testimony before the Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, Committee on Financial Services, U.S. House of Representatives,
Washington, D.C., April 15, 2021),
https://www.federalreserve.gov/newsevents/testimony/vanderweide20210415a.htm.
17
Thucydides, The History of the Peloponnesian War, translated by Richard Crawley, at Ch. 3,
https://www.gutenberg.org/files/7142/7142-h/7142-h.htm.