The introduction of the Basel III endgame capital proposal has damaged the Federal Reserve’s reputation for impartiality and fairness, former Fed Vice Chairman for Supervision Randal Quarles said Wednesday. During a panel discussion at the Federalist Society, Quarles—who was a member of the Fed board from 2017-2021—said that while he supported minimum capital standards, the level proposed was unjustified and could ultimately push activity out of the banks into less regulated parts of the financial system.
Quarles was especially critical of the process used to advance the proposed standards. As an independent, nonpartisan agency, the Fed should strive to reach as much consensus in its decision making as possible, he said. The opposite approach—simply putting something forward and saying ‘if you don’t like it, vote no’—is likely to result in wild shifts in policy that would hurt the financial system, he added. The capital proposal moved forward despite skepticism from some Fed board members.
“When I arrived at the Fed several years ago, there was a lot of advice to me to ‘burn it all down,’” Quarles said. “I said, ‘No, we’re not going to do that.’ We will be measured; we will be analytical; we will build support for what we are doing … And if we do it that way, it will last.
“If a proposal concerning capital such as the proposal the Fed has put forward were to become final, then when my replacement comes in and says, ‘We tried it your way and we are not going to do that anymore,’ that will result in a much more unstable system that will be bad for everyone,” he said.
