Quarles Wants Tiered Bank Liquidity Rules in Efficiency Push

By Evan Weinberger

Federal Reserve Vice Chair for Supervision Randal Quarles wants to make changes that will enhance the “efficiency” of the rules banks operate under, including updating liquidity rules so that the biggest global banks have tougher requirements than regional and community banks.

In prepared congressional testimony released April 16, Quarles said that he intends to keep in place the broad superstructure of rules created by the 2010 Dodd-Frank Act, but that some changes were needed in order to make sure that banks can better understand and operate under them.

“Efficiency of supervision and regulation means that if we have a choice between two methods that are equally effective in achieving a supervisory goal, we should strive to choose the one that is less burdensome,” Quarles said, according to prepared text released by the Fed and the House Financial Services Committee in advance of an April 17 hearing.

Quarles, the first Senate-confirmed Fed vice chair for supervision, is the point man for the central bank’s regulatory efforts, including its collaborations with other U.S. and global regulators. The position was created in Dodd-Frank but never filled by former President Barack Obama.

Tailored Regulation

President Donald Trump has put in place regulators that he says will do a “big number” on Dodd-Frank, but Quarles in his testimony focused on tailoring rules so that the biggest banks are still stuck with tougher requirements while smaller banks have an easier time with compliance.

“In doing this, we at the Federal Reserve intend to maintain the core elements of the post-crisis framework that have been put in place to protect the financial system’s strength and resiliency, while also seeking ways to enhance its effectiveness,” Quarles said.

Quarles called for a change to liquidity rules, which govern how much readily-available cash and convertible assets that banks have to have on hand, in a departure from the existing regulatory scheme.

In particular, Quarles said that global systemically important banks, or G-SIBs, should be forced to live up to tougher liquidity standards than smaller banks.

“I believe it is time to take concrete steps toward calibrating liquidity requirements differently for non-G-SIBs than for G-SIBs,” he said.

Among the other efforts that Quarles pointed to in his prepared testimony are simplifying the Volcker Rule, Dodd-Frank’s ban on proprietary trading, to make it easier for banks to comply. Quarles also supported efforts in Congress to exempt smaller banks from the rule and other aspects of pending legislation.

A bill (S. 2155) passed by the Senate last month would exempt banks with less than $10 billion in assets from Volcker Rule compliance.

Quarles made no mention of legislation (H.R. 4790) passed by the House April 13 that would make the Fed the lead agency on the Volcker Rule. The Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission all currently have responsibility for the rule.

Quarles also highlighted proposed changes to leverage rules for the biggest banks, the elimination of some stress test evaluations for smaller banks and extending the living will cycle as ways to improve efficiency in the regulatory system.

A Trump Team Moderate?

Since assuming the post in October, Quarles has frequently voiced support for making changes to bank rules for community and regional banks while keeping tougher standards in place for the biggest, most systemically important institutions. That position is shared by Fed Chair Jerome Powell, a longtime friend of Quarles.

“The Fed is not an institution that wants to push for radical changes,” Charles Horn, a partner at Morgan Lewis & Bockius LLP and a former official with the OCC and SEC, told Bloomberg Law.

While there is some concern among Dodd-Frank supporters that Quarles will go too far in pulling back on those rules, many view Quarles as being less inclined to blow up the system than Trump appointees at other agencies.

“In the current state of financial regulation where we live, this will be the adult in the room speaking about these issues,” said Jeremy Kress, a lecturer at the University of Michigan’s Ross School of Business who previously served as an attorney in the Fed’s banking regulation and policy group.

Still, there is some distrust among consumer advocates. The danger as they see it is that Quarles may have the same agenda as those in the Trump administration pushing for bigger changes to bank rules, but he has a calmer way of saying it.

“He’s not rhetorically amping things up,” Marcus Stanley, the policy director for Americans for Financial Reform, said in a telephone interview.

Stanley said he hopes that Democratic stalwarts like Sens. Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts push Quarles on some of his moves and policy preferences when he appears before the Banking Committee on April 19.

To contact the reporter on this story: Evan Weinberger at eweinberger@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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