for release on delivery 10 : 00 a. m. est november 14, 2018 statement by randal k. quarles vice chairman for supervision board of governors of the federal reserve system before the committee on financial services u. s. house of representatives november 14, 2018 chairman hensarling, ranking member waters, other members of the committee, thank you for the opportunity to testify on the federal reserve's regulation and supervision of the financial system. my testimony today covers two main topics : our efforts to improve regulatory transparency, including the report accompanying my submission to the committee, and our progress in making the post - crisis regulatory framework simpler and more efficient. the role of transparency in regulation and supervision i am mindful that this semiannual testimony - - like my position as vice chairman for supervision - - is grounded in congress ’ s efforts to strengthen and improve the nation ’ s regulatory framework following the financial crisis. this testimony reflects a critical element of those efforts : the desire, and the need, for greater transparency. transparency is part of the foundation of public accountability and a cornerstone of due process. it is also key to a well - functioning regulatory system and an essential aspect of safety and soundness, as well as financial stability. transparency provides financial firms clarity on the letter and spirit of their obligations ; it provides supervisors with the benefit of exposure to a diversity of perspectives ; and it provides markets with insight into the condition of regulated firms, fostering market discipline. transparency increases public confidence in the role of the financial system to support credit, investment, and economic growth. the federal reserve has taken a number of steps since my last testimony to further increase transparency, and to provide more information about our supervisory activities to both regulated institutions and the public. - 2for example, the board recently improved its supervisory ratings system for large financial institutions. 1 ratings are an essential vehicle for supervisory feedback - - a clear, concise way to convey whether a firm meets expectations, with tangible, predictable consequences for those that fall short. our ratings system for large institutions had remained unchanged since 2004, even as our supervision of those institutions evolved significantly after the crisis. the new rating system will better align ratings for these firms with the supervisory feedback they receive, and will focus firms on the capital, liquidity, and governance issues most likely to affect safety and soundness. the banking agencies also recently clarified that supervisory guidance is a tool to enhance the transparency of supervisory expectations, and should never be the basis of an enforcement action.

to retain the ability to lend against good collateral to certain groups of sound, regulated, nonbank financial firms. i ’ m not suggesting that we establish permanent contingency liquidity facilities, just that the federal reserve retain the authority to create the tools necessary to meet liquidity needs of groups of nonbank institutions should a panic impair the ability of securities markets, as well as banks, to function and the board of governors find that the absence of such functioning would threaten the economy. 3 the collateral would have to be of good quality and the institutions sound to minimize any credit risk to the federal reserve. holding open this possibility is not without cost. with credit potentially available from the federal reserve, institutions would have insufficient incentives to manage their liquidity to protect against unusual market events. hence, the emergency credit would generally be provided only to groups of institutions that were regulated and supervised to limit such moral hazard. if the federal reserve did not directly supervise the institutions that would potentially receive emergency discount window credit, we would need an ongoing and collaborative relationship with the supervisor. the supervisor should ensure that any institution with implicit access to emergency discount window credit nevertheless maintained conservative liquidity policies. the supervisor would also provide critical insight into the financial condition of the borrower and the quality of the available collateral and more generally whether lending was necessary and appropriate. large - scale asset purchases and the buildup of the reserve base the federal reserve and other central banks reacted to the deepening crisis in the fall of 2008 not only by opening new liquidity facilities, but also by reducing policy interest rates to close to zero. such rapid and aggressive responses were expected to cushion the effects of the shock on the economy by reducing the cost of borrowing for households and businesses, thereby encouraging them to keep spending. in addition, the federal reserve and a number of other central banks have provided more guidance than usual about the likely future path of interest rates to help financial markets form more accurate expectations about policy in a highly uncertain economic and financial environment. in particular, we were concerned that market participants would not fully appreciate for how long we anticipated keeping interest rates low. if they hadn ’ t, intermediate - and longer - term rates would have declined by less, reducing the stimulative effect of the very low policy rates. given the severity of the downturn, it became clear that lowering short - term policy rates alone would not be sufficient. we needed to go further to ease financial conditions and encourage spending. thus, to reduce longer - term interest