United States: FRB Vice Chair Explains Plan For Tailored Banking Supervision

Last Updated: January 23 2018
Article by Scott A. Cammarn

Most Read Contributor in United States, November 2018

Board of Governors of the Federal Reserve System ("FRB") Vice Chair for Supervision Randal Quarles advocated for a more tailored approach to supervising banks.

In an address before the American Bar Association Banking Law Committee Annual Meeting, Vice Chair Quarles discussed the need for increased efficiency and transparency and identified several measures the FRB is taking to improve the regulatory regime. Among them are appropriately recalibrating the capital and leverage ratio rules and reforming the Volcker Rule. Vice Chair Quarles shared that the agencies are collectively working on a "Volcker Rule 2.0" proposal. He indicated the Federal Reserve is committed to a continued review and refinement of the resolution planning process and stress testing program.

Vice Chair Quarles explained that the FRB will tailor supervision to the "size, systemic footprint, risk profile, and business model" of banks. He said that the goal of such supervision is relevant to both small, mid-size and big banks. He reported that the FRB is supportive of raising the $50 billion statutory threshold for application of enhanced prudential standards or implementing an approach that takes into account other factors besides consolidated assets. Vice Chair Quarles called for more appropriate calibration of liquidity requirements for large Global Systemically Important Banks ("GSIBs") as opposed to large non-GSIBs.

Vice Chair Quarles also stated that the FRB will revisit the "advanced approaches" thresholds that are used to identify the internationally active banks subject to certain risk-based capital requirements and Basel Committee standards. He added that he is not "advocating an enervation of the regulatory capital regime applicable to large banking firms."

Separately, Vice Chair Quarles indicated that the Federal Reserve is "rationalizing and recalibrating" the concept of "control" as used under the Bank Holding Company Act, given that the standard has become somewhat ambiguous even though "a determination of control under the [Bank Holding Company] Act is significant because even remote entities in a controlled group can be subject to the BHC Act's restrictions on activities and a host of other regulatory requirements."

Vice Chair Quarles said that post-crisis reform has largely resulted in a stronger and more resilient system. He asserted that new efforts by the FRB will result in significant progress in the "areas of core reform" (capital, liquidity, stress testing and resolution).

Commentary /Scott Cammarn

Vice Chair Quarles' comments at the ABA Banking Law Committee align with the comments by other representatives of the Federal Reserve as well those from the FDIC and OCC. Collectively, there is a widespread reluctance among the regulators to make material changes to the banking regulations enacted post-crisis related to three basic concepts – capital improvement, liquidity enhancement, and resolvability – at least with respect to the largest banking organizations. However, all regulators expressed a desire to streamline and simplify regulations, including the elimination of redundant or overly burdensome requirements, especially with respect to small and mid-size banking organizations.

With respect to the concept of "control," Vice Chair Quarles' comments relate to the concept of "controlling influence," an ill-defined, somewhat subjective standard under the Bank Holding Company Act whereby control will be presumed by the Federal Reserve if one entity is deemed to have a "controlling influence" over the management or policies of another entity. While Federal Reserve Staff have adopted a variety of informal standards for assessing whether a "controlling influence" may or may not exist, these standards have never been formally announced. Further, inasmuch as the "controlling influence" test is regarded as a lowest threshold of "control" that exists in the Bank Holding Company Act (i.e., lower than the two alternative tests, 25% of a class of voting shares or the ability to control the election of a majority of the directors), the "controlling influence" standard has become the legal principle by which many minority investments and joint ventures are now judged for compliance with the Bank Holding Company Act. That being said, it seems unlikely that the Federal Reserve will issue bright-line standards of when control will be presumed to exist under the "controlling influence" standard, for fear that potential acquirers will toe up to the line. Rather, it is expected that the Federal Reserve will issue standards under which a "controlling influence" will be presumed not to exist – in effect, a series of safe harbors – similar to those advocated earlier this year by the Clearing House.

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