Fed's Quarles Draws Regulatory Road Map to Ease Bank Rules

(Bloomberg) -- Federal Reserve Vice Chairman Randal Quarles, the central bank’s supervision chief, shared a laundry list of ways to make regulation less burdensome for Wall Street -- including streamlining capital rules, overhauling post-crisis trading limits and making major changes to how the agency conducts stress tests.

“Confusion that results from overly complex regulation does not advance the goal of a safe system,” Quarles said Friday at an American Bar Association conference in Washington.

In a wide-ranging speech, the former Carlyle Group executive set an ambitious agenda, including a mission to reduce complexity in how banks prepare to weather future crises.

“While I am advocating a simplification of large-bank loss-absorbency requirements, I am not advocating an enervation of the regulatory capital regime,” said Quarles, who has given few public speeches since he joined the Fed in October.

In what may be the most urgent item on his agenda, he said, the Fed is finishing its “near-term” effort to rewrite big-bank leverage limits. The central bank has been working with the Office of the Comptroller of the Currency on a leverage-ratio proposal that would reduce capital demands on some Wall Street firms, people familiar with the effort have said.

Reviewing Rules

Quarles signaled that he is embracing a mission to review and revise many of the rules the Fed enacted in response to the 2008 financial crisis.

A major target is the Volcker Rule, which restricts banks’ ability to invest on their own behalf. Quarles said the five agencies that approved the rule in 2013 have been back at work crafting a new version. He called it “a quite comprehensive and substantial undertaking” that won’t be completed soon.

One particularly ambitious objective will be welcomed by lenders such as US Bancorp and Capital One Financial Corp. Quarles said he favors further “tailoring” rules to go easier on banks that are less complex than the Wall Street giants. He said that he supports Congress raising the $50 billion asset floor for banks to face the toughest rules, and that he further wants the Fed to make regulations “meaningfully less strict” for regional banks.

‘Meaningful Simplification’

Quarles also offered ideas that will please the biggest financial firms. He said he wants a “meaningful simplification” of steps banks must take to ensure they can absorb losses. That would include revising a rule that requires bank holding companies to maintain a supply of long-term debt that could be used for recovery and recapitalization after a failure.

He also addressed two of Wall Street’s biggest headaches: living wills and stress tests. For the living wills -- resolution plans banks must submit to show they can go through bankruptcy without shaking the financial system -- Quarles called for a “permanent extension” of deadlines from annual to every two years, while also suggesting a reduced burden for midsize lenders. For stress tests, he said the Fed may eliminate at least one of the capital ratios it measures, and he wants to reveal more information on how banks are assessed.

“The disclosure we have provided does not go far enough to provide visibility into the supervisory models that often deliver a firm’s binding capital constraint,” he said.

The Fed said last month that it’s planning to put out a lot more information about the stress tests. That’s been a major lobbying point for Wall Street banks, which have said the lack of clarity on what the regulator is evaluating has hurt their ability to prepare for the tests.

“The Federal Reserve and our colleagues at other agencies have now spent the better part of the past decade building out and standing up the post-crisis regulatory regime,” Quarles said. “Now is an eminently natural and expected time to step back and assess those efforts.”

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