Quarles Highlights Role of Stress Tests in Pandemic Response

The Federal Reserve’s efforts to improve the efficiency and effectiveness of stress tests have proven critical in helping the agency and the financial industry respond to COVID-19, Fed Vice Chairman for Supervision Randal Quarles said today. In a speech at an event hosted by the Atlanta Fed, Quarles noted that the Fed was able to quickly conduct a sensitivity analysis early in the pandemic to determine how it would affect the financial system. Such an analysis was possible “because we routinely collect standardized data from banks on their exposures and have developed our own loss and income models at the Fed,” he said. “Thus, we were able to conduct this analysis purely internally, without putting additional burdens on banks during an already-difficult time.”

Quarles added that as a result of actions taken by banks and the Fed, “the aggregate common equity ratio across large banks increased from 12% at the end of 2019 to 12.8% at the end of 2020. During this same time, large banks built roughly $90 billion in loan loss reserves.” He also expressed his view that banks likely could have made it through the pandemic without the restrictions the Fed imposed on dividends and share repurchases—though he did not signal whether the agency would lift those restrictions in the days ahead.