CovOps
 Location : Ether-Sphere
Job/hobbies : Irrationality Exterminator
Humor : Über Serious
 |  Subject: Quarles draws bipartisan fire as Fed winds down deregulation drive  Sat Jan 11, 2020 2:31 am | |
| The Fed's top regulator is wrapping up his campaign to pare down the massive, post-crisis rulebook for the nation's banks.
The Federal Reserve’s top regulator, Randal Quarles, is facing heat from both sides of the aisle as his two-year campaign to pare down the massive, post-crisis rulebook for the nation's banks draws to a close.
Democrats say Quarles, an appointee of President Donald Trump, has gone too far in rolling back important regulations designed to prevent a repeat of the 2008 financial meltdown; Republicans argue that he hasn’t done enough to clear away cumbersome provisions that they say are stifling growth.
Story Continued Below
But Quarles says his high-wire regulatory act has succeeded because the U.S. economy will be better off as banks put more money to better use — lending, investment, shareholder payouts — without imperiling the financial system.
Story Continued Below
While the focus in the immediate aftermath of the crisis — the worst since the Great Depression — was on safety and soundness, he said, the question then became, "how can we ensure that this system is also providing the most amount of financing support to the real economy that it can?”
“If you look through the panoply of things that have been done — it’s like over 30 regulatory changes in the course of the last couple of years — there are examples of making things more efficient, making it simpler, without affecting the resiliency of the system really at all,” the mild-mannered former bank lawyer said in an interview. “I feel pretty good about that.”
Still, Democrats are alarmed about moves pursued by the Fed and other regulators, which have given banks more leeway to make risky trades and more advance information about tests that examine if they would withstand another major economic downturn. Both the trading curbs and the so-called stress tests were pivotal parts of the post-crisis response, which included the landmark 2010 Dodd-Frank legislation that rewrote the rules for Wall Street.
The agencies also loosened regulations for regional banks like PNC and Capital One, which aren’t as big or complex as JPMorgan Chase or Bank of America but still have a large economic footprint.
“I’m concerned about the collective amnesia you all appear to have as you make changes to the bank rules — changes that allow Wall Street to get back to its old tricks,” Sen. Sherrod Brown (D-Ohio) told Quarles and other regulators when they appeared before Congress last month.
Republicans used those hearings to press Quarles to do more to slim down the rulebook, such as easing the capital surcharge faced by megabanks, arguing that the web of requirements they face often interact in counterproductive ways.
“Given the many post-crisis reforms that have been implemented, is now not the logical time to recalibrate the surcharge to reflect economic growth and reforms?” Rep. Ann Wagner (R-Mo.) asked at a House hearing. “We need these rules updated.”
Story Continued Below
A significant unfinished rule is still high on the Fed’s agenda: the proposed stress capital buffer, which would overhaul the stress tests for large banks.
Quarles said the Fed still wants to have “a good chunk” of the buffer effective for this year’s tests. “We did propose the broad outline of the rule in April 2018 and are looking to see what we can do in the short term with that proposal,” he added.
He has more recent ideas that diverge from the original proposal. Some of those ideas would lower capital standards, although he said removing the leverage ratio — a straightforward measure of debt to equity — from the stress testing regime wouldn’t significantly lower core capital.
Quarles said his preferred method for offsetting capital decreases elsewhere would be to integrate a higher countercyclical capital buffer into the framework, but “we certainly haven’t determined that that’s the answer.” The countercyclical buffer is designed to raise capital in good economic times when financial risks are elevated; it can then be decreased in a downturn to encourage banks to lend.
Quarles came into office as the Trump administration pledged to hack away at the Dodd-Frank Act, after the law had opened the way for Obama-era appointees to spend years imposing a suite of new regulations.
The result of that effort was a safer financial system, but nobody was fully satisfied, not even the primary architect, former Fed Governor Daniel Tarullo. Quarles, a libertarian-leaning private equity investor, was tapped to tackle the broad range of industry complaints about the intricate network of new rules.
While few observers would say the regulatory framework is noticeably simpler now, the changes have reduced banks’ compliance costs. That’s a win for industry: A recent study from Rice University’s Baker Institute found large banks’ expenses jumped on average by more than $50 billion per year after Dodd-Frank.
But many rollbacks have been technical. Quarles and Fed Chair Jerome Powell, who signed off on a lot of the new rules during the Obama years, have said they set out to simplify the framework without lowering the overall level of required capital and liquidity.
Still, former officials warn of death by a thousand cuts. “It could’ve been worse,” said Sheila Bair, who headed the FDIC through the crisis. “But it’s been directionally all towards weakening.”
Most notable are the rollbacks in stress testing and in the Volcker rule, a 2013 regulation named after the former Fed chairman who came up with the concept of banning banks from using customer deposits to make speculative short-term trades for their own profit.
Quarles gave lenders more information about what would be contained in the stress tests in the name of transparency and has removed much of the public shaming for banks that don’t meet the Fed’s expectations.
Fed board member Lael Brainard has expressed worry that the central bank is chipping away at the stress tests and allowing big banks to reduce loss-absorbing capital. She also voted against last year’s update to the Volcker rule.
The Fed and four other agencies were unsatisfied with the 1,000-page rule, which aims to encourage bank trades that are good for the financial system while banning those that are profit-driven gambles.
To make enforcement more straightforward, they proposed defining the scope of scrutinized trades based on an accounting standard. That garnered the support of Obama appointees like Brainard. But banks pushed back aggressively against the provision because it would have broadened the rule’s reach, and regulators removed it from the final version.
“People managed to work themselves into such a frenzy over that,” Quarles said.
He said the goal was more objectivity, so he was fine with removing the accounting provision because the final result looked at roughly the same scope of trades as the original rule, with “much less room for arbitrary discretion on the part of regulators.”
Beyond just banks, the Securities and Exchange Commission and the Office of the Comptroller of the Currency were unhappy tying a bank regulation to unrelated accounting rules, which could have ended up influencing those rules, according to an agency official.
The agencies aren’t quite done reforming the Volcker rule; according to people familiar with the matter, they are finishing up a proposal that would reduce the scope of restrictions intended to prevent banks from owning hedge funds and private equity funds.
The Fed under Quarles also implemented a bipartisan 2018 law that directed regulators to decrease rules on small and regional banks, the culmination of a yearslong push by those firms.
“Always more that can be done, but I’m probably less concerned about [regulation] today than I was several years back,” Comerica CEO Curtis Farmer said in a brief interview late last year.
Following the Fed’s moves, BB&T and SunTrust merged to become the eighth-largest U.S. bank, saying they will be better able to compete with megabanks.
For his part, Quarles emphasized that large regional banks are required to have much more capital and liquidity than they did before the crisis: “Just not as much as JPMorgan.”
The biggest banks have benefited under the Trump-era regime, but they’ve gotten less deregulation than their smaller counterparts. Despite pressure from congressional Republicans to ease the capital surcharge faced by the eight U.S. megabanks, Quarles has given no indication it’s a priority.
U.S. regulators plan to update their rules to implement the latest international agreement at the Basel Committee on Banking Supervision, and Quarles said those changes could make parts of the surcharge calculation redundant. But tweaks to the surcharge could only be made as part of consideration of that entire package, he added.
“I would like to see more progress made,” JPMorgan Chase CEO Jamie Dimon told POLITICO last month, saying it’s important to ensure that global U.S. banks aren’t hurt by having tougher rules than foreign banks. “These things should be done because they’re good for America, they’re good for American growth and for jobs, and not because they’re good for banks.”
https://www.politico.com/news/2020/01/10/quarles-draws-bipartisan-fire-as-fed-winds-down-deregulation-drive-097165 |
|
