At the American Bankers Association’s Banking Law Conference in Washington, D.C. last week, Randal Quarles, vice chair for supervision of the Federal Reserve Board of Governors, called for more efficient, transparent, and simple financial regulations.
“By efficiency I mean the degree to which the net cost of regulation–whether in reduced economic growth or in increased frictions in the financial system–is outweighed by the benefits of the regulation,” he explained.
As for transparency, Quarles said this is a necessary precondition for government accountability.
“The governed have a right to know the rules imposed on them by the government,” he said. “In addition, there are valuable, practical benefits to transparency around rulemaking; even good ideas can improve as a result of exposure to a variety of perspectives.”
On simplifying regulations, Quarles said public understanding of regulations will typically lead to compliance by the industry.
“Confusion that results from overly complex regulation does not advance the goal of a safe system,” Quarles said.
Quarles added that post-crisis financial regulation has resulted in higher and better-quality capital, innovative stress-testing, new liquidity regulation and improvements in the resolvability of large firms.
“We undoubtedly have a stronger and more resilient financial system due in significant part to the gains from those core reforms,” Quarles said.
These achievements are consistent with the responsibility of the Federal Reserve to be a steward of a safe financial system, said Quarles. But more can be done, he added.
“At this point, we have completed the bulk of the work of post-crisis regulation, with an important exception being the U.S. implementation of the recently concluded Basel III “end game” agreement on bank capital standards at the Basel Committee,” Quarles said. “As such, now is an eminently natural and expected time to step back and assess those efforts. It is our responsibility to ensure that they are working as intended and — given the breadth and complexity of this new body of regulation — it is inevitable that we will be able to improve them, especially with the benefit of experience and hindsight.”
Quarles outlined his vision for post-crisis regulation going forward. It starts with tailoring supervision and regulation to the size, systemic footprint, risk profile and business model of banks.
“I would emphasize that tailoring is not an objective limited in scope to a subset of the smallest firms,” he said. “We should also be looking at additional opportunities for more tailoring for larger, non-global systemically important banks. In this regard, I support congressional efforts regarding tailoring, whether by raising the current $50 billion statutory threshold for application of enhanced prudential standards or by articulating a so-called factors-based threshold. I believe we at the Federal Reserve have the responsibility to ensure that we do further tailoring for the institutions that remain subject to our rules to ensure that regulation matches the risk of the firm.”
He also called for the simplification of the Total Loss Absorbing Capacity rule.
“Let me be clear, however, that while I am advocating a simplification of large bank loss-absorbency requirements, I am not advocating an enervation of the regulatory capital regime applicable to large banking firms,” Quarles said.
Finally, he advocated for more enhanced stress-testing transparency.
“I appreciate the risks to the financial system of the industry converging on the Federal Reserve’s stress-testing model too completely, so I am hesitant to support complete disclosure of our models for that reason,” he said. “However, I believe that the disclosure we have provided does not go far enough to provide visibility into the supervisory models that often deliver a firm’s binding capital constraint.”