Celebrating his third month on the job as the Board of Governors for the Federal Reserve’s vice chairman for supervision, Randal Quarles is sharing his views for improving the effectiveness of post-crisis financial regulation.

Quarles did so during a Jan. 19 speech at the American Bar Association’s Banking Law Committee annual meeting in Washington, D.C.

“The Federal Reserve and our colleagues at other agencies have now spent the better part of the past decade building out and standing up the post-crisis regulatory regime,” he said. “At this point, we have completed the bulk of the work of post-crisis regulation.” A notable exception to that work is U.S. implementation of the recently concluded Basel III "end game" agreement on bank capital standards at the Basel Committee.

In assessing whether “this new body of regulation” is working effectively and as intended, Quarles proposed an evaluation metric: “if we have a choice between two methods of equal effectiveness in achieving a goal, we should strive to choose the one that is less burdensome for both the system and regulators.”

Efficiency of regulation can be improved through a variety of means, he said.

“For example, it can mean achieving a given regulation's objective using fewer tools,” he said. “It can mean addressing unintended adverse consequences to the industry and the broader public from a regulation or eliminating perverse incentives created by a regulation. It can mean calibrating a given regulation more precisely to the risks in need of mitigation.”

Effectiveness “can also mean simpler examination procedures for bank supervisors, or less intrusive examinations for well managed firms,” he added. “Confusion that results from overly complex regulation does not advance the goal of a safe system.”

When Quarles arrived at the Federal Reserve, “the early stages of reflection on how to improve the cost-benefit balance of post-crisis regulation had already begun, mainly in a few narrow areas of focus.” These “areas of low-hanging fruit" included: small bank capital simplification, burden reduction in resolution planning, enhancements to stress testing, leverage ratio recalibration, and Volcker rule simplification.

Progress, in Quarles’ view, is being made.

The banking agencies recently proposed changes to the capital rules for smaller firms, consistent with last year's Economic Growth and Regulatory Paperwork Reduction Act report, “which is a positive step toward meaningful burden relief for smaller banks.”

Also, the Federal Reserve, along with the Federal Deposit Insurance Corporation, extended the upcoming resolution planning cycles for the eight most systemic domestic banking firms and for foreign banks with limited U.S. operations in order to allow for more time between submissions. Most recently, the Federal Reserve released a package of proposed enhancements to the transparency of its stress testing program, which is currently out for comment.

Leverage ratio recalibration also is among the Federal Reserve's highest-priority, near-term initiatives, Quarles said, promising a proposal was near.

“Finally, the relevant agencies have begun work on a proposal to streamline the Volcker rule,” he added. “This project is a quite comprehensive and substantial undertaking as well as a five-agency endeavor. As such, it will naturally take a bit of work for the agencies to congeal around a thoughtful Volcker rule 2.0 proposal for public review. Volcker rule reform remains a priority in the Federal Reserve's regulatory efforts.”

Quarles said he has asked staff to conduct a comprehensive review of the regulations in the core areas of capital, stress testing, liquidity, and resolution.

“I will start with the issue of tailoring supervision and regulation to the size, systemic footprint, risk profile, and business model of banking firms,” he said. “The Federal Reserve has devoted considerable energy in its post-crisis regulatory work to incorporate the tailoring concept in its regulation and supervision across the spectrum of small, medium, and large firms. “

A recent example of this approach is our late 2017 proposal to simplify capital requirements for small- and medium-sized banking firms.

“In my view, there is further work for the Federal Reserve and the other banking agencies to do on the tailoring front,” he said. “I would emphasize that tailoring is not an objective limited in scope to a subset of the smallest firms. As my colleagues and I have said before, the character of our regulation should match the character of the risk at the institution. Accordingly, we should also be looking at additional opportunities for more tailoring for larger, non-Global Systemically Important Banks, or non-G-SIBs.”

Quarles said he supports 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.”

Another area he wants to revisit are the "advanced approaches" thresholds that identify internationally active banks.

“These thresholds are significant not only for identifying which banking firms are subject to the advanced approaches risk-based capital requirements, but also for identifying which firms are subject to various other Basel Committee standards, such as the supplementary leverage ratio, the countercyclical capital buffer, and the LCR,” he said. “The metrics used to identify internationally active firms, $250 billion in total assets or $10 billion in on-balance-sheet foreign exposures, were formulated well over a decade ago, were the result of a defensible but not ineluctable analysis, and have not been refined since then.”

Quarles also promised “a meaningful simplification” of the Fed’s framework of loss absorbency requirements.

Candidates for simplification include: elimination of the advanced approaches risk-based capital requirements; one or more ratios in stress testing; and “some simplification of our TLAC 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,” he said.

Although not a post-crisis regulation, “the Board's complex and occasionally opaque framework for making determinations of control under the Bank Holding Company Act is another area that is ripe for re-examination through the lenses of efficiency, transparency, and simplicity,” Quarles said. 

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