The Federal Reserve’s first vice chairman of supervision faced a slew of questions on Tuesday from lawmakers concerned with how he’d reshape the ways it regulates and oversees U.S. banks.
Randal Quarles, the Fed’s lead on regulation and oversight, faced lawmakers for the first time since his July confirmation hearing.
Quarles told members of the House Financial Services Committee that the central bank was making progress on several efforts to loosen Dodd-Frank Act rules, which were passed in 2010 to stabilize the financial system.
“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,” said Quarles in prepared testimony.
Quarles said the Fed was also mulling ways to reveal more about its stress tests of major banks and is considering asking for public feedback on aspects of the exams. He also defended the Fed’s involvement with international financial commissions, such as the Financial Stability Board and Basel Committee on Banking Supervision, to advocate for US banks and push for increased transparency.
Republicans and Democrats both pressed for more details on how far the Fed plans to loosen rules on capital buffers and leverage ratios for large banks, clarify a controversial ban on risky investments and police bank boardrooms for misdeeds.
Quarles, a former Treasury Department undersecretary, is the first person to fill the role of Fed vice chair for supervision, a position created by Dodd-Frank that went unfilled under former President Obama.
Charged with leading the Fed’s efforts to regulate and supervise the financial sector, Quarles appeared before the committee days after the central bank released several proposed changes to Dodd-Frank rules.
In the past two weeks, the Fed has unveiled proposals to tailor capital buffers for banks to their risk profiles and recalculate the minimum ratio of a bank’s leverage to core capital. Both actions are meant to make rules intended to strengthen banks clearer and less costly for smaller firms.
Lawmakers briefly addressed those proposals, but were most concerned with the Fed’s more controversial regulatory efforts.
Democrats urged Quarles to avoid major changes to the Volcker Rule, a Dodd-Frank provision banning banks from “proprietary trading,” making risky investments with their own capital.
Named after former Fed Chairman Paul Volcker, the rule has been widely criticized by Republicans and banks for a lack of clarity on what the rule covers and the costs of compliance for smaller firms that pose little risk to the broader economy.
The Fed is currently mulling ways to set stricter standards for the kinds of trades the rule is meant to ban and potentially exempt banks below a certain asset threshold from compliance.
Quarles said the Fed is focused on setting clear guidelines after federal regulators took Dodd-Frank’s “statutory language and turned it into certainly a very difficult, somewhat impossible standard.”
“The scope of the rule does limit our ability to respond,” Quarles added. He also said exempting a swath of smaller banks from the rule would not “create any sort of financial stability risk at all.”
Rep. Stephen Lynch (D-Mass.), a veteran of the Financial Services panel, said he saw no need for the Fed to clarify what he considered a clear, outright ban on proprietary trading.
“No is no. There is no streamlining ‘no,’” Lynch said. “We wanted it to be difficult. We saw what happened.”
Republicans pressed Quarles on how strictly he believes the Fed could and should scrutinize what happens in bank boardrooms after its severe penalties for Wells Fargo.
The Fed in February restricted Wells Fargo’s growth and sought to force out four members of its board of directors. Wells Fargo is banned from doing anything that would increase its total consolidated assets past their December 2017 levels while it takes measures to bolster its compliance with federal banking laws.
The Fed’s move against Wells Fargo was one of the most powerful actions taken against a big bank since the 2007 financial crisis, and was approved days before the end of former Chair Janet Yellen’s term leading the Fed. The Fed board cleared the plan unanimously, while Quarles abstained after recusing himself from all matters related to Wells Fargo.
Quarles’s father-in-law, Spencer Eccles, led a Utah bank that was purchased in 2000 by Wells Fargo. Eccles is a descendant of Marriner Stoddard Eccles, a former Fed chairman.
Republicans expressed concerns that the Fed could oust a bank’s board member on a whim without considering its legal or moral authority to do so. Rep. Jeb Hensarling (R-Texas), the Financial Services Committee chairman, said banks have complained to him about Fed inspectors sitting in on board meetings or chastising banks about their lobbying activities.
Hensarling said the Fed’s conduct appeared to overstep its authority as a regulator. He called on the central bank to take a step back.
“Where is the line to be drawn between supervision and corporate governance,” Hensarling asked, “because i fear it’s getting somewhat murky.”
Quarles said that Fed inspectors shouldn’t weigh in on a bank’s lobbying decisions, but defended the Fed board’s right to remove board members “in very rare circumstances”
“If at the highest level, if there were serious concerns about the fitness of a director,” Quarles said, “that should be something we weigh in on.”