Quarles Outlines Fed’s Next Steps for Recalibrating Large Bank Supervisory Framework

In remarks at the American Bankers Association’s Summer Leadership Meeting in Salt Lake City today, Federal Reserve Vice Chairman for Supervision Randal Quarles signaled that the Fed would act sooner than required by S. 2155 to tailor prudential standards for banks between $100 billion and $250 billion in assets.

Quarles addresses bankers at ABA’s 2018 Summer Leadership Meeting

While the new regulatory reform law gave regulators 18 months to develop an approach to applying enhanced prudential standards to these banks, Quarles indicated that the Fed “can and will move much more rapidly than this.” He noted that the size of an institution should be just one factor among many that regulators should consider, including complexity and interconnectedness. Examining an institution’s cross-border activity, use of short-term wholesale funding and nonbank activities are several ways the Fed could gauge the complexity and interconnectedness of these firms, he said.

Going forward, Quarles said that risk-based and leverage capital requirements, liquidity requirements and stress testing should continue to play an important role in supervision for these banks, though he supported adjustments to these requirements for less complex and less interconnected firms. Additionally, because most banks within this asset range do not pose a high resolvability risk, the Fed should “consider scaling back or removing entirely resolution planning requirements for most of the firms in that asset range.”

The Fed should also review the requirements for larger firms, he said, adding that “at the moment, many aspects of our regulatory regime treat any bank with more than $250 billion in assets with the same stringency as a G-SIB. I believe there should be a clear differentiation.”

ABA President and CEO Rob Nichols welcomed Quarles’ remarks. “ABA strongly supports a tailored approach to regulation because it ensures that risk practices and business models — rather than arbitrary asset thresholds — will determine appropriate levels of supervision. We firmly believe regulatory tailoring is the most effective and efficient way to maintain safety and soundness while allowing banks to better serve their customers and the broader economy,” Nichols said. “The urgency Vice Chairman Quarles conveyed and his commitment to determining how regulators could apply tailoring on a broader scale represent a very positive step forward.”