Back to General Resources

SBC Federal Reserve Oversight Hearing

Senate Committee on Banking, Housing, and Urban Affairs     

The Semiannual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System

Tuesday, May 25, 2021

Witnesses

Opening Statements
Chairman Sherrod Brown (D-Ohio)
In his opening statement, Brown said that even before the pandemic, the economy was not working for most people as worker wages have been flat for decades and jobs have continued to move overseas. He commented that despite this outcome, corporate profits continued to climb and CEO pay has soared. Brown said people do not trust banks, citing predatory mortgages and high overdraft fees. He told Quarles that checking Wall Street’s power is supposed to be his job but criticized Quarles for rolling back rules that should be serving as checks on the banks. He urged Quarles to bring the focus back to the people who make this country work, ensure that banks account for climate risk, guard against unregulated cryptocurrencies, and ensure that workers’ wages keep up with the cost of living.

Ranking Member Pat Toomey (R-Penn.)
In his opening statement, Toomey said Congress granted the Fed the independence to isolate itself from political influence, but also provided the Fed a narrowly defined monetary policy and regulatory mission. He stressed that the Fed does not have the authority to seek and address political issues, arguing that the Fed’s recent actions and focus on climate change raise concerns as to whether the Fed is operating outside of its mandate. Toomey emphasized that the Fed should focus on supervising the risks within its domain, like high asset prices. He added that the primary cause of these risks is the Fed’s own “accessibly accommodative” monetary policy, arguing there is no justification for maintaining zero percent interest rates. He said the warning signs of inflation are increasingly present and outlined his belief that the Fed’s current approach almost guarantees the economy will be behind the curve of recovery. 

Testimony
Randal K. Quarles, Vice Chairman For Supervision, Board of Governors of the Federal Reserve System
In his testimony, Quarles said the American economy and banking sector remained at the edge of the “COVID-19 storm,” with one wave of stress behind us and others yet to come. He mentioned the Federal Reserve’s recent reports which detail how banking organizations have remained an important source of strength in this recovery with higher levels of capital and liquidity, better risk management, and more robust systems that let them absorb the shock. Quarles called the pandemic a unique shock and that it was real world test of the regulatory and supervisory regime established after the 2008 financial crisis. He said any lessons to be learned begin with the strong performance of supervisory stress testing. He continued that the stress-testing program not only prepared banks for a period of prolonged hardship, but also clarified their health and resilience as the pandemic progressed. Quarles mentioned various other areas that remain a focus for the Fed including short-term funding markets, Treasury markets, and the design and calibration of the Supplementary Leverage Ratio (SLR). He concluded that the Fed’s two highest priorities for this year are to finalize the post-crisis Basel III reforms and to complete the long-overdue transition away from LIBOR.

Question & Answer
Prudential Regulation and Financial Stability
A variety of members on both sides of the aisle asked for Quarles to present his thoughts on financial stability as well as the greatest threats to macroeconomic and financial stability moving forward. Quarles said he believes that we are not in an era of especially large risk to financial stability. He continued that the pandemic has highlighted the risks associated with, as well as the improvements that can be made to, the regulatory framework around nonbank financial institutions and the exposure of nonbanks in the financial sector. Quarles also outlined his view that current inflationary pressures are transitory, and that the Fed has the tools to address inflation if and when the time comes.

Sen. Jon Ossoff (D-Ga.) asked where the relevant regulators lack sufficient visibility in the capital markets. Quarles said most of the Fed’s data comes from supervision of the banking system. He continued that the Fed’s supervision of risk in the nonbanking system has been adequate for them to judge risks in this sector but noted they do not get it directly from those firms, so there can always be cases of data gaps. In response to a question from Sen. Thom Tillis (R-N.C.), Quarles stated that the Fed is attempting to become more transparent in terms of supervisory reports to clarify what Matters Requiring Attention (MRAs) and Matters Requiring Immediate Attention (MRIAs) are and how many there are.

Sen. Cynthia Lummis (R-Wy.) asked whether Quarles has any concerns that Basel III’s net stable funding ratio requirement might cause changes or adjustments in certain commodity markets. Quarles responded that he has not seen evidence of that in the United States and that they have provided significant advance notice to firms on how to prepare for the July 1st deadline.

Sen. Jerry Moran (R-Kans.) also asked about Basel III and how best to maintain the tailoring rules that were recently implemented. Quarles said tailoring the regulatory framework remains a core principle as they develop proposals to implement the final pieces of Basel III. He added that for the most part, those rules will likely tailor themselves. Moran then asked Quarles to expand on why right-sizing of regulations proved effective over the past year and why they should further those efforts. Quarles said the lessons learned demonstrated that we have a strong banking system and the measures taken improved capital liquidity. He concluded that together, these both worked to create a strong regulatory environment.

Sen. Elizabeth Warren (D-Mass.) discussed the Fed’s decision to release certain foreign banks from the Large Institution Supervision Coordinating Committee regime. Quarles asserted that this decision did not weaken the supervision of these institutions.

Climate Risk
While Toomey continued to outline his concern that the Fed’s recent activity as it relates to climate will come at the expense of monitoring the real risks, Sen. Chris Van Hollen (D-Md.) requested an update on the Fed’s work to create a climate risk framework. Quarles responded that the standardization of climate risk data is important from a supervisory perspective and that he commits to working with Congress and the public to receive input as they work through this issue. Van Hollen also noted that he plans to reintroduce Climate Change Financial Risk Act.

Money Market Reforms
Toomey asked about the Fed’s intention to make further money market reforms, stating that the 30 percent liquid asset threshold triggered mandatory fees and made things worse. He continued that flaws in the existing regulations need to be fixed before proposing new ones. Quarles said the existing regulatory framework needs to be looked at and they are including this in the overall review of the issues that led to money market fund problems last March.

Financial Innovation, Technology, and Cyber Risk
Sen. Catherine Cortez Masto (D-Nev.) asked to what extent the Fed is updating consumer protection requirements to account for the rapidly changing technological environment. Quarles said the Fed is focused on examining the use of artificial intelligence (AI) by banks, as well as financial technology firms, to ensure these various technologies do not exacerbate risk to the consumers.

In responding to questions from Sens. Mark Warner (D-Va.) and Van Hollen regarding cryptocurrency and digital currencies, Quarles discussed efforts regarding a central bank digital currency (CBDC) as well as the clear growth of digital currency and virtual assets requiring robust engagement on behalf of the regulatory community. Quarles added that all the relevant agencies are engaged on this issue and they hope to produce a definition of what constitutes a cryptocurrency as well as a common regulatory framework.

Cortez Masto asked how the Fed is using stress testing to better assess how well firms, as well as the overall financial system, are prepared to respond to systemic cyber risk. Quarles said that as it relates to this area, they run “tabletops,” not stress tests, and are heavily engaged with firms on their cyber exposure.

Economic Inequality
Brown asserted that the Fed issued rules that make it easier for big banks to make risky bets and facilitate lending discrimination and asked Quarles how that does not contribute to systemic racism. Brown outlined his belief the Fed has not “stepped up” particularly with regard to housing discrimination. Quarles responded that the Fed is very active in pursuing lending violations and other discriminatory behavior in the banking industry.

Toomey expressed his concern that banks are engaging in advocacy with respect to systemic racism and that the Fed is operating beyond their statutory mandate. He asked Quarles if this advocacy could harm the Fed’s credibility as an independent and non-partisan entity. Quarles said the Fed has a narrow mandate, but he believes that research into breaking down the effects of large economic numbers by geography or demography can be appropriate. He added that it should just be analysis and not cross the line into advocacy.

In response to a question from Warner regarding Community Development Financial Institutions (CDFIs), Quarles emphasized that the Fed has a very active program as it relates to CDFIs and Minority Depository Institutions (MDIs) in order to provide direct capital. He added that the prudential regulators have released rules and FAQs to help further this assistance.

Sens. Bob Menendez (D-N.J.) and Raphael Warnock (D-Ga.) asked about the importance of a joint Community Reinvestment Act (CRA) rulemaking with the Fed, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) in ensuring that the most vulnerable communities are not left behind and if Quarles commits to working with those agencies to issue a joint rule making. Quarles said it is both important, desirable, and achievable for the three agencies to have a joint rule and approach on the CRA, adding that they are currently working to do so. He added that the Fed has released its own advanced notice of proposed rulemaking and CRA improvement framework.

Banking Deserts
Brown asked Quarles if he agrees the Fed has contributed to the loss of banks in rural areas. Quarles said no, and that when looking at bank mergers, they take into account the convenience and needs of the communities, adding that the closing of branches is very carefully reviewed.

Cortez Masto raised concerns regarding unbanked populations and asked what steps the Fed can take to ensure more access to bank accounts. Quarles said they participate in a number of efforts to increase the number of citizens with bank accounts, adding that their CRA evaluation of banks takes into account how banks provide community access to accounts. He also noted that the Fed participates in a program with banks to promote increased access to low cost transaction accounts.

For more information on this hearing, please click here.