As the Bureau of Consumer Financial Protection considers changes to its ability-to-repay rules and the Federal Reserve proposes changes to its stress test and capital reserve requirements, concerns and criticisms arise from both sides of the regulatory spectrum. On one side, some view these changes as a positive but perhaps insufficient step toward addressing what they view as burdensome regulations. On the other side are those decrying these proposals as a step toward unhinged deregulation that will lead toward predatory practices and a possible financial crisis.
During his keynote presentation, Randal Quarles, Vice Chairman for Supervision at the Federal Reserve Board, explained that the proposed changes to the Fed’s stress test are “intended to increase both the transparency and efficiency” of the tool and that the tests “will and should evolve as we continue to learn from this management tool.”
Instead of placing a uniform capital reserve requirement for all financial institutions in a particular bracket, Quarles supports more “dynamic” capital reserve requirements that are risk-sensitive and tailored to each institution.
When asked how he responds to those who say the Fed isn’t doing enough to address perceived burdensome regulations, he said that he believes the proposal is “a move in the right direction, and I think it’s significant simplification of the regime.”
He pointed out that while large financial firms currently have to meet 24 separate capital-related requirements, the new proposed rule reduces these to 14 requirements.
As to those who believe the Federal Reserve is going too far in relaxing standards for financial institutions, Quarels said, “I do think, when looked at fairly, what we are doing is very justified recalibration as opposed to relaxation.”
He emphasized that the Federal Reserve views the countercyclical capital buffer is “a financial stability tool” and not a “macroeconomic dampener.”
The issue of over- versus under-regulation of financial institutions, as well as the theme of transparency, were also central in a panel discussion following Quarels’ remarks.
Randall Guynn, a renowned bank regulatory expert and head of the Financial Institutions Group at Davis Polk & Wardwell, LLP, complimented Quarels’ commitment to “transparency, simplicity, and efficiency.”
However, Kathleen Day, professor at the Carey Business School at Johns Hopkins University, discounted this praise, saying she’s heard these keywords before. She expressed extreme concern the “deteriorating standard” of “lowering capital standards,” “weakening of the Volcker rule,” and the Bureau of Consumer Financial Protection’s movement to change the ability-to-repay rule.
“Reach for your wallet when you hear these things,” she told the audience, suggesting that current proposals will lead toward consumer abuses and another financial downturn.
However, H. Rodgin Cohen, Senior Chairman at Sullivan & Cromwell, LLP, took another standpoint.
As for whether consumer abuses could lead to a financial crisis, he conceded, “Here I agree 100 percent with Kathleen. The evidence is there. It could. There’s no question about it.”
However, he continued: “But whatever the CFPB’s position may be, the bank regulatory agencies were not stripped of their authority to examine these institutions, and they are examining them as fully and comprehensively in the consumer area as they were two or three years ago, five years ago. So I think what Congress did is create a double level of protection.”
He furthermore suggested, “It’s not surprising that there’s going to be flaws and errors or that the circumstances have changed.”
He simply described the current shift in regulation as “a relatively comprehensive response to what has occurred in the past 10 years.”