Reflecting on his four years as a member of the Federal Reserve Board, outgoing Gov. Randal Quarles (and former vice chair for supervision) Thursday outlined areas of “unfinished business” for his successor – including further refinements to the supervisory and regulatory framework.
Quarles indicated he would leave his position on the board in October, shortly after his term as vice chair ended. His term as a member of the board ends in February. He told the audience at the American Enterprise Institute that his remarks were his final speech as a member of the Fed Board. No successor to his board seat for supervision vice chair has yet been nominated by the White House.
Regarding refinements to supervision and regulation at the Fed, Quarles said the central bank would be more effective in overseeing banks, and more effective in promoting the stability of the financial system, if it maintains its commitment to be open and transparent in how it conducts its work.
“Transparency, accountability, and the public legitimacy it confers have empowered the Fed to meet the great challenges that our economy and financial system have faced in recent years,” he said. “If the Federal Reserve is to continue to play that vital role, then it must also continue to extend transparency to all of its important responsibilities.”
The former top supervisor for the Fed also said the agency should address “leverage ratio fundamentalism.” He said one of the Fed’s “principal matters” to tackle in the upcoming months will be to calibrate its leverage capital standards. Quarles came down on the side of loosening things up. “During times of stress in the financial system, when it is most important for banks to be able to continue serving businesses and households, or intermediating transactions, a binding leverage constraint—or even one that threatens to become binding—may discourage banks from engaging in safe activities, such as those involving U.S. Treasury securities,” he said.
He also addressed: Basel III reforms (advocating an adjustment in the global systemically important bank (G-SIB) surcharge in the U.S., to bring it more in line with the internationally agreed level); dealing with volatility in stress tests (by averaging the results of the current year’s stress test with the corresponding stress test results from the previous two years); refining cross-border resolution and market fragmentation (by making sure that U.S. pre-positioning requirements for foreign banks with significant U.S. operations are appropriately calibrated); ensuring that supervisory expectations are well understood (by improving the supervisory communications process); and dealing with digital assets (by letting the “ingenious and inventive private sector move rapidly – after ensuring no fractional reserves or liquidity mismatches, consumer protection with clear legal claims on asset pools, and deterring criminal activity).
Quarles offer alternatives to the Fed’s recent actions to set up lending facilities to tackle the coronavirus crisis. While he indicated that was the right thing to do, he said those efforts resulted in “breaching the long unbreachable firewall of offering direct lending to non-financial businesses, both large and small—as well as a wide range of state and municipal governments …”
“I believe we should establish a clear understanding that, should the Fed ever again use its 13(3) authority to establish credit facilities similar to those of the COVID event, Congress will without delay create a structure to transfer the ongoing funding and governance of the credit facilities into a non-Fed vehicle that will fund, manage, and eventually wind down the extraordinary credit support,” he said.
He also urged the Financial Stability Board (FSB, the international group of regulators he chaired during his time at the Fed), to continue addressing structural vulnerabilities in money market mutual funds (MMFs).
The outgoing Fed Board member noted his speech, at 25-pages long, was second only in length to the final speech delivered by former Fed Gov. Daniel Tarullo, at 26 pages. He said his shorter speech was consistent with “my relentless quest to improve the Fed’s efficiency and simplicity.”
He also did not miss an opportunity, in his final speech, to refer to an obscure term — a trademark of his past remarks. He described his remarks as of “Mahabharatan length.” That is: a speech in length similar to a great (and long) Sanskrit epic of the Hindus from the fifth century.