Federal Reserve vice chairman discusses supervision

On January 17, Federal Reserve Vice Chair for Supervision Randal K. Quarles spoke before the American Bar Association Banking Law Committee meeting in Washington, D.C. on bank supervision and ways to improve transparency, efficiency, and effectiveness.

With respect to supervision, Quarles said that the Fed’s communication with supervised banks could be improved and made several specific proposals in the areas of large bank supervision, transparency improvements, and overall supervisory process improvements.

In terms of large bank supervision, Quarles discussed how banks are added to the list of complex institutions overseen by the Large Institution Supervision Coordinating Committee (LISCC), particularly with respect to decreases in foreign banking organizations’ (FBOs) size and risk profiles.

According to Quarles, over the past decade, four foreign banks have significantly shrunk their presence in the U.S. and reduced risk within their U.S. operations. As a result, these banks’ “estimated systemic impact” is now much smaller than that of the U.S. global systemically important banks. Moving these FBOs to a lower category, he noted, would allow the firms to be supervised alongside other foreign and domestic firms with similar risk profiles.

However Quarles emphasized that any changes in these four FBOs’ supervisory portfolios “would have no effect on the regulatory capital or liquidity requirements that currently apply.”

Quarles also discussed the Fed’s stress capital buffer proposal—which “will give banks significantly more time to review their stress test results and understand their capital requirements before we demand their final capital plan”—noting that the Fed continues to research ways to “reduce the volatility of stress-test requirements from year to year.”

Concerning transparency, Quarles stated, among other things, that he supports submitting significant supervisory guidance documents with Congress for the purposes of the Congressional Review Act, as it already does with new rules.

Quarles also proposed the creation of a database of all significant agency rules and interpretations and seeking public comments on significant supervisory guidance before it is issued.

Finally, Quarles said the Fed hopes to maintain “firm and fair supervision” by (i) increasing the ability of supervised firms to share confidential supervisory information; (ii) adopting a rule on the use of guidance in the supervisory process; (iii) restoring the “‘supervisory observation’ category for lesser safety and soundness issues”; and (iv) limiting the use of future Matters Requiring Attention to violations of law, violations of regulation, and material safety and soundness issues.