Improving regulatory transparency and the Fed’s progress in making the post-crisis regulatory framework simpler and more efficient were the two main topics of discussion during The Federal Reserve Vice Chairman for Supervision, Randal Quarles’, semiannual testimony to the House Financial Services Committee on Wednesday.
Opening the proceedings, Hensarling said that the Dodd-Frank Act had dramatically increased the Fed’s powers “way beyond its traditional monetary policy responsibilities.”
“Through so-called “heightened prudential standards,” the Fed can functionally now control the largest financial institutions in our economy, which is most disconcerting,” Hensarling said. “Increased capital and liquidity standards, as long as they are not counter-productive or duplicative, add to stability; regulatory complexity and micro-management do not. If not properly tailored and calibrated, both hinder economic growth.”
However, during his testimony, Quarles said that the Fed was making progress in making the post-crisis “regulatory framework simpler and more efficient.”
Outlining the Fed’s initiatives, Quarles said, “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. “The motivations are clear: supervisory resources are not limitless, and supervision is not costless, either to the public or to supervised institutions. Activities and firms that pose the greatest risk should receive the most scrutiny, and where the risk is lower, the regulatory burden should be lower as well,” Quarles said.
He pointed out that this principal had also guided the Fed’s implementation of the Dodd-Frank modifications or the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).
He said that the Fed had already expanded the eligibility of community banking firms for the Small Bank Holding Company Policy Statement, and for longer, 18-month examination cycles; given bank holding companies below $100 billion in assets immediate relief from supervisory assessments, stress testing requirements, and some additional Dodd-Frank Act prudential measures; and implemented changes to liquidity regulation of municipal securities and capital regulation of high-volatility commercial real estate exposures.
Speaking about the improvements in the regulatory framework that the Fed had made, Quarles told the committee that tailoring regulation and supervision to risk was a programmatic goal of the Federal Reserve policy and had been so for more than two decades.
He told the committee that the Fed had taken a number of steps to further increase transparency and provide more information about its supervisory activity to the institutions it regulated as well as the general public.
Giving the example of its recent improvising of supervisory rating systems for large financial institutions, he said that The new rating system would “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.”
Quarles told the committee that the Fed would make final a set of measures to increase visibility into the Board’s supervisory stress testing program. “The enhanced disclosures will include more granular descriptions of our models; more information about the design of our scenarios; and more detail about the outcomes we project, including a range of loss rates for loans held by firms subject to the Comprehensive Capital Analysis and Review,” Quarles explained.
Giving a report on the safety and soundness of the U.S. Banking System, he said that the banking sector remained in strong condition and was in line with the strong performance of the U.S. economy, with “lending growth, fewer nonperforming loans, and strong overall profitability.”
“Large institutions are well capitalized and liquid, and their capital planning and liquidity risk-management processes are improving. Ninety-nine percent of regional and community banks are currently well capitalized, and supervisory recommendations made to smaller firms during the financial crisis have largely been closed,” Quarles said.
Starting the proceedings by acknowledging that he would be retiring as Chairman of the House Financial Services Committee soon, Jeb Hensarling, Chairman of the Committee congratulated the Democrats on their midterm win and ensured an efficient and peaceful transfer of power. “I don’t know who will chair the committee, although I have a pretty good idea,” he said in a clear indication towards Ranking Member Maxine Waters who is most likely to succeed him as the Chairperson.
Before his opening statement, Hensarling acknowledged Waters’ longtime participation in the House Financial Committee. “I certainly would congratulate her on her accomplishment and congratulate her on all the times we have been able to work on a bipartisan basis,” he said.
Thanking Hensarling for his offer to be of assistance in the transition, Waters, however, said that while it was thought that “I would chair this committee we haven’t gone through our formal process as yet. And I welcome and appreciate the opportunity to certainly have the support from my colleagues on this side of the aisle to chair this committee and I look forward to working with you in any and every way that I can,” she said.
To view, the complete testimony click here.