Quarles: COVID-19 Proved Forward-Looking Capital Framework ‘Works Effectively’

Given the strong performance of banks throughout the COVID-19 pandemic and resulting economic downturn, regulators should not need to employ “ad hoc and roughly improvised limitations” on the restrictions of capital distributions going forward, Federal Reserve Vice Chairman for Supervision Randal Quarles said at an industry event today.

Quarles emphasized that the pandemic proved that “our rigorous, forward-looking capital framework, which includes the stress capital buffer, works effectively,” and that while regulators required large banks to resubmit their capital plans and placed restrictions on capital distributions during the height of the crisis, “we now know that we can have particular confidence in the stress capital buffer framework, as it is informed by a real-time stress testing regime.”

While he noted the particular strength of the banking system during COVID-19, Quarles also acknowledged that other areas of the financial system experienced challenges, such as a “concerning” run on prime money market funds and commercial paper that required government intervention to stabilize money markets. “Addressing the shortcomings we saw among non-banks continues to be a focus of both domestic policymakers and the international community, particularly under my chairmanship of the Financial Stability Board,” he said. “We cannot afford to allow the same things to happen again.”