Tag Archives: Federal Reserve study

A hand for Quarles:
Improved thinking, regulation at the Fed

   LAST FALL, WE URGED the Federal Reserve’s Vice Chair for Supervision, Randal K. Quarles, to “call your office” in impelementing the provisions of 2018’s regulatory-reform-minded Crapo bill, especially as applied to small and community banks.

   In particular, we encouraged hmi to take note of the growing mountain of evidence — much of it at the Fed, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency — that large financial institutions should be the primary focus of regulation… whereas, the health of smaller banks, if relieved of some of the regulatory burden, would actually contribute not only to competive diversity, but financial stability.

Judging from his May 15 testimony before the Senate Committe on Banking, Housing, and Urban development, Quarles made that call.

The Fed, Quarles explained, approached the Crapo Act (a.k.a. “ERRCPA”) as a call on regulators to “to focus our energy and attention on both the institutions that pose the greatest risks to financial stability and the activities that are most likely to challenge safety and soundness.”

In addition to noting the Fed’s effort to relieve small institutions from most of the burdens of the Volcker rule — which happend last summer — Quarles reviewed the main tiers of Crapo Act implementation:

“We also have been providing targeted regulatory relief, especially for community banks and other less complex organizations.

• “We proposed a new interagency Community Bank Leverage Ratio to give community banking organizations a more straightforward approach to satisfying their capital requirements. State bank supervisors and others have provided thoughtful comments on our work, which we are taking into account.

• “We expanded community banking organizations’ eligibility for both longer examination cycles and exemptions from holding company capital requirements, and we have proposed more limited regulatory reporting requirements for community banks.

• “We provided smaller regional bank holding companies immediate relief from annual holding company assessments and fees, stress testing requirements, and other prudential measures designed for larger institutions.”

The shift in conceptual approach that appears to be in progress is heartening — even if better regulation, compared to monetary reform, as a second-best solution. The breadth of paradigm shift is event in the detailed Federal Reserve Supervision and Regulation Report of May 14.

More on that report to come. In the meantime, we’re offering polite applause for the prudent “regulatory hand” to Mr. Quarles.

Smaller banks, smaller stress. Bigger banks….
(Randal K. Quarles, call your office)

THREE CHEERS for the U.S. Federal Reserve for its recent study, “The Differential Impact of Bank Size on Systemic Risk, by Amy G. Lorenc and Jeffery Y. Zhang.

The study couldn’t come at a more critical time, as the Fed, Federal Deposit Insurance Corporation, and others immerse themselves in implementing the new requirements of the Crapo bank-regulation reform act.

   “Our empirical results,” the authors write, “show that stress experienced by banks in the top 1 percent of the size distribution leads to a statistically significant and negative impact on the real economy. This impact increases with the size of the bank. The negative impact on quarterly real GDP growth caused by stress at banks in the top 0.15 percent of the size distribution is more than twice as large as the impact caused by stress at banks in the top 0.75 percent, and more than three times as large as the impact caused by stress at banks in the top 1 percent.

These results,” they conclude, “support the idea that the largest banks should be subject to the most stringent requirements while smaller banks should be subject to successively less stringent requirements.”

Banking systems systems dominated by large banks are like a majestic ship — they can do many things; they move fast; they have big guns. But if one or two of these great vessels is hit, and sinks…

Community banks, by contrast, function like a network of rafts. They can’t move as swiftly. They don’t have huge guns. Water comes over the side and people get wet… but like a raft, the system doesn’t sink as readily.

Though the passage of the Crapo act in May was a valuable step, the fact remains, as we wrote at the time in “Fed, you’re up next, “it will take well beyond that for the Federal Reserve, FDIC, and other institutions to implement many of the new law’s provisions via regulation — and longer still for their impact to be felt in the real world.”

Note: the Fed acted in late August to implement an important increase in the threshhold level for small bank holding company policy statements to $3 billion — another step forward.

Here’s hoping the rule-writers at the Fed (att: Randal K. Quarles, pictured nearby) take the time to familiarize themselves with the Fed’s own important research contribution.