Quarles: Post-2008 Reforms Aided Large Banks’ Pandemic Response

Regulatory reforms adopted by the world’s largest banks have bolstered the financial system’s ability to absorb the sudden economic shocks of the coronavirus pandemic, Federal Reserve Vice Chairman for Supervision Randal Quarles, who also chairs the Financial Stability Board, said in a speech today. Citing a recent FSB report evaluating progress made to address resolvability of global systemically important banks, Quarles noted that capital levels have increased significantly among these institutions, doubling since 2011 to reach 14%. This, he said, was “a result of both the Basel III reforms agreed to in 2010 and of independently improved decision-making at our large banks.”

Quarles added that capital surcharges “have contributed to enhanced resilience,” and that banks have built up greater loss-absorbing and recapitalization capacity since the last crisis. Together, these improvements helped banks enter the COVID-19 crisis “in a much stronger position than they did the global financial crisis.” In addition, an increased focus on resolution planning “has improved banks’ capabilities to produce timely, accurate and granular information,” which “has already proved helpful to both banks and authorities during the pandemic.”

While the FSB’s review suggests the post-2008 reforms are having their desired effect, Quarles emphasized that regulators must remain vigilant. In particular, he warned of rising risks outside the financial sector. “The FSB’s monitoring shows that the share of bank assets as a percentage of total financial assets has dropped from 46% in 2008 to 39% in 2018,” he said. “As non-bank financial institutions increase their market share, risks have moved outside the banking system. The market turmoil in March underlines the need to better understand the risks in non-bank financial intermediation and reap the benefits of this dynamic part of the financial system without undermining financial stability.”