Federal Reserve Vice Chairman for Supervision Randal Quarles downplayed the possibility that a financial crisis could result from the central bank’s latest efforts to overhaul supervision of big banks.
“[The changes] do not materially affect the resilience of the [financial] system,” Quarles said Wednesday in testimony before the House Financial Services Committee, referring to recent rulemaking by the Fed to tailor oversight of banks to specific banks’ activities and size, while lessening the burden of some regulations for banks. The rule revision constituted a major change to the standards put in place by Dodd-Frank, the law enacted in response to the 2008 financial crisis.
At Wednesday’s hearing, Democrats raised fears about the Fed’s move to lower requirements for banks to hold cash and other liquid assets on hand in the event of a crisis. But Quarles insisted banks would still maintain liquidity even in a disaster.
“There’s still trillions of dollars more liquidity in the system than there was before the crisis,” he said.
Pressed by Rep. Maxine Waters D-Calif., the top Democrat on the panel and presumed chairwoman in the next Congress, Quarles asserted that the Fed has no plans to lower the standards for capital that apply to the six U.S. banks considered potential threats to the global economy.
“I wouldn’t characterize that as a weakening of regulation, just different regulation,” Quarles said of the recent rulemaking to ease regulatory burdens for banks that are smaller than the six largest ones.
The Fed rewrote the rules under the direction of Congress, which passed a bipartisan financial regulatory reform law earlier this year calling for regulatory relief. But the Fed went a step further than called for by the legislation, saying it will tailor rules for some of the largest banks in the country.
Because the Fed went beyond Congress’ mandate, one member of the Fed’s Board of Governors, Lael Brainard, dissented in a vote on the rulemaking. Asked about her concerns, Quarles said that they were taken into account and part of a “robust process.”
Quarles also said that the Fed would work with the Office of the Comptroller of the Currency, one of the other federal bank regulatory agencies, on its rewrite of the Community Reinvestment Act, an anti-discrimination law created in the 1970s. The OCC has worked to update the CRA, in part over the increase in digital banking, but Democrats remain wary of potential loopholes in changes to the way the law is enforced.
“I do still expect there to be a joint rulemaking,” said Quarles.
While most of the questions Quarles faced focused on the recent proposed regulatory changes and a shift in an accounting standard for banks, due to take place next year, Quarles was also asked about the Fed’s approach toward technology.
“We certainly are trying not to be a disincentive in those decisions banks may want to make,” said Quarles, when asked by Rep. Patrick McHenry R-N.C., who is expected to become the top Republican on the panel in the next Congress, about whether the Fed might discourage partnerships between banks and financial technology firms.
Quarles also downplayed the effect cryptocurrencies like Bitcoin and Ether have on the financial system.
“They really aren’t money yet. They’re an asset,” said Quarles, noting the major volatility in price that cryptocurrencies face, though he added that “10 to 20 years down the road,” cryptocurrencies could play a role in the multi-trillion dollar payments system.
