[Senate Hearing 115-251]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-251


   THE SEMIANNUAL TESTIMONY ON THE FEDERAL RESERVE'S SUPERVISION AND 
                   REGULATION OF THE FINANCIAL SYSTEM

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                                   ON

EXAMINING THE EFFORTS, ACTIVITIES, OBJECTIVES, AND PLANS OF THE FEDERAL 
RESERVE BOARD WITH RESPECT TO THE CONDUCT, SUPERVISION, AND REGULATION 
       OF FINANCIAL FIRMS SUPERVISED BY THE FEDERAL RESERVE BOARD

                               __________

                             APRIL 19, 2018

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
                             
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                
                                


                Available at: http: //www.govinfo.gov /
                
                
                              __________
                                    

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
30-347 PDF                  WASHINGTON : 2018                     
          
----------------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, 
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). 
E-mail, [email protected]                
                


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
JERRY MORAN, Kansas                  DOUG JONES, Alabama

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Elad Roisman, Chief Counsel

                      Joe Carapiet, Senior Counsel

                      Travis Hill, Senior Counsel

                 Elisha Tuku, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

          Amanda Fischer, Democratic Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                      Cameron Ricker, Deputy Clerk

                     James Guiliano, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        THURSDAY, APRIL 19, 2018

                                                                   Page

Opening statement of Chairman Crapo..............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                                WITNESS

Randal K. Quarles, Vice Chairman for Supervision, Board of 
  Governors of the Federal Reserve System........................     4
    Prepared statement...........................................    36
    Responses to written questions of:
        Senator Brown............................................    41
        Senator Sasse............................................    52
        Senator Rounds...........................................    54
        Senator Warner...........................................    60
        Senator Warren...........................................    65
        Senator Heitkamp.........................................    67
        Senator Schatz...........................................    68
        Senator Cortez Masto.....................................    70

                                 (iii)

 
   THE SEMIANNUAL TESTIMONY ON THE FEDERAL RESERVE'S SUPERVISION AND 
                   REGULATION OF THE FINANCIAL SYSTEM

                              ----------                              


                        THURSDAY, APRIL 19, 2018

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:32 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. The Committee will come to order.
    Today we will receive testimony from Federal Reserve Vice 
Chairman of Supervision Randy Quarles regarding the efforts, 
activities, objectives, and plans of the Federal Reserve Board 
with respect to the conduct, supervision, and regulation of 
financial firms supervised by the Federal Reserve Board. 
Welcome, Chairman Quarles.
    Vice Chairman Quarles has done an excellent job so far, and 
I urge Congress to confirm him for his full term on the Board 
as soon as possible.
    Promoting economic growth remains a top priority for this 
Congress, and reducing the rate and cost of excessive and 
unnecessary regulation leads to more jobs and enables a better 
functioning economy and more consumer choices.
    As Vice Chairman for Supervision, Mr. Quarles plays a key 
role in developing regulatory and supervisory policy for the 
Federal Reserve System.
    I have been encouraged by the statements by both Federal 
Reserve Chairman Powell and Vice Chairman for Supervision 
Quarles which they have made about the need to revisit some of 
the Federal Reserve's existing regulations.
    I was particularly encouraged by Vice Chairman for 
Supervision Quarles' statements in January that the overarching 
objectives of his agenda are efficiency, transparency, and 
simplicity of regulation.
    I agree with those objectives.
    He highlighted the following initiatives as consistent with 
these objectives: revising capital rules applicable to 
community banks; extending the resolution planning cycle for 
certain banks; enhancing the transparency of stress testing; 
recalibrating the leverage capital ratio requirements; 
streamlining the Volcker rule; tailoring liquidity requirements 
to differentiate between large non- G-SIBs and G-SIBs; 
revisiting the ``Advanced Approaches'' thresholds; and 
reexamining the ``complex and occasionally opaque'' framework 
for making determinations of ``control'' under the Bank Holding 
Company Act.
    Some of these initiatives are already underway, and I hope 
the others will be commenced and completed in the near future.
    I also hope that the Economic Growth, Regulatory Relief, 
and Consumer Protection Act makes it to the President's desk 
soon.
    The primary purpose of that bill is to make targeted 
changes to simplify and improve the regulatory regime for 
community banks, credit unions, midsized banks and regional 
banks to promote economic growth.
    It affords the banking regulators, including the Federal 
Reserve, more flexibility to tailor regulations, and it will 
fall on your agency and others to interpret this bill.
    I look forward to working with the regulators to ensure 
their interpretations are consistent with Congress' intent.
    I also welcome any additional color Vice Chairman Quarles 
can provide on areas where the Fed and Congress may act to 
further reduce regulatory burdens.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. And, Vice Chairman 
Quarles, nice to see you again. Thank you for joining us. Thank 
you for the access and discussions we are able to have.
    On this very day 10 years ago--April 19th, 2008--the 
Columbus Dispatch, the newspaper of record in the largest city 
in my State, reported that 28,000 Ohioans had lost their jobs 
just in the previous month. As the economy collapsed during 
those last months and months of the Bush administration, as the 
economy collapsed because of Wall Street's recklessness, a vice 
president at the Columbus Chamber of Commerce described Ohio's 
economy as ``the worst of all possible worlds.''
    For those 28,000 Ohioans, and the millions more around the 
country that ultimately lost their jobs, 10 years ago probably 
does not feel so far away. The heartbreak, the fear, and the 
stress of losing a home to foreclosure, being forced to switch 
schools, needing to postpone buying expensive prescription 
drugs, all that casts a long, long shadow.
    The Fed missed the crisis the last time. It had the power 
to rein in predatory mortgage lending; it did not. It had the 
power to stop banks from operating with too much borrowed 
money; it did not. It had the power to hold bank executives 
accountable; it did not. It failed, even as advocates in 
communities--and I heard from them often in the part of 
Cleveland I now live in--even as advocates in communities 
spotted problems and pleaded for the Fed to act.
    Because the Fed neglected its mission and the Bush 
administration, of which you were a part, did not do its job, 
Congress the next year had to pass Wall Street reform over the 
opposition of so many on this Committee and so many members of 
the Senate.
    Now with legislation coming from this Congress and the 
backsliding of this Administration, we are on the verge of 
unraveling many of these reforms. In the words of one banking 
analyst, ``when we fast forward 5 years, 10 years from now, the 
dismantling of the financial infrastructure is going to be 
greater than anyone could foresee at the time.''
    When Washington dismantles protections, Wall Street always 
cheers. Ultimately, Main Street pays the price. It did 10 years 
ago. It will in the future.
    The decisions being made now may lead us to the next crash. 
When times are good, policymakers, lawmakers, and regulators--
if they are not vigilant--can get lulled into a sense that 
``this time it is different.''
    The horizon certainly looks clear right now--just as it did 
during the Bush years right before the crisis, when Mr. Quarles 
was in charge of overseeing bank policy at Treasury.
    Just like back then, big banks are raking in record 
profits. Just like back then, they are lining their pockets 
with stock buybacks. Just like back then, the White House looks 
like an executive retreat for Goldman Sachs and other Wall 
Street executives.
    The Fed slapped Wells Fargo with a penalty right as Chair 
Yellen's term ended. Now that bank is about to get a big boost 
from a Fed proposal released last week. Under the new plan, 
Wells Fargo will be allowed to pay out $20 billion in capital 
to executives and shareholders rather than use that money to 
make loans or prevent bailouts. And, almost inconceivably, the 
CEO of Wells Fargo got a 36-percent raise in 2017, even as he 
presided over one consumer abuse after another. I cannot 
imagine anybody in either party on this Committee that has sat 
here and listened to the litany of abuses from Wells Fargo 
would think that is justified to give a CEO of a bank like that 
a 36-percent raise.
    Collectively, the country's biggest banks stand to get a 
$121 billion windfall from a plan that would let them operate 
on more borrowed money, with less skin in the game. Really.
    While Mr. Quarles talks about this proposal, and the Fed's 
many other plans, as a simple ``recalibration'' or 
``tailoring'' or ``re-evaluation''--his words--of the rules, we 
know what it really means. We know from last week when we heard 
from CFPB Acting Director Mulvaney what he is doing to consumer 
protections. The end result? Fewer rules guarding hardworking 
Americans from taxpayer bailouts and financial scammers; more 
incentives for Wall Street greed.
    Somehow ``tailoring'' only seems to go in one direction 
these days. It happens to be the direction that Wall Street 
wants.
    History tells us what will happen next. The IMF, an 
international financial agency, studied financial markets since 
the 18th century. Periods of deregulation usually provoke a 
crisis. Policymakers ``learn their lessons'' and re-regulate. 
Eventually, the collective amnesia sets in--we know a lot about 
collective amnesia in this Committee. The collective amnesia 
sets in; they deregulate yet again. We know that cycle. 
Unfortunately, the middle class pays for that cycle.
    When big banks are flush with profits, as they are now, 
policymakers should be preparing them for rough times ahead. 
Instead, Washington is repeating a failed pattern of boom and 
bust. When things go bad once again, executives will get golden 
parachutes. Workers, retirees, and consumers will be left 
holding the bag. Shameful. Just shameful. Makes me wonder why 
we are here.
    Chairman Crapo. Thank you.
    Now, Chairman Quarles, we will turn to your testimony. As 
you are aware, we ask that you try to keep your remarks to 5 
minutes, but we want to hear everything you have to say, and 
then we will open it to questions. You may proceed.

STATEMENT OF RANDAL K. QUARLES, VICE CHAIRMAN FOR SUPERVISION, 
        BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Quarles. Thank you. Thank you, Chairman Crapo, Ranking 
Member Brown, Members of the Committee. I very much appreciate 
the opportunity to testify today on the Federal Reserve's 
regulation and supervision of financial institutions.
    The Federal Reserve, along with the other U.S. banking 
agencies, has made substantial progress in building stronger 
regulatory and supervisory programs since the global financial 
crisis, especially with respect to the largest and most 
systemic firms. These improvements have helped to build a more 
resilient financial system, one that is well positioned to 
provide American consumers, businesses, and communities access 
to the credit they need even under challenging economic 
conditions.
    At the same time, we are mindful that just as there is a 
strong public interest in the safety and soundness of the 
financial system, there is a strong public interest in the 
efficiency of the financial system. Our financial sector is the 
critical mechanism for directing the flow of savings and 
investment in our economy in ways that support economic growth, 
and economic growth, in turn, is the fundamental precondition 
for the continuing improvement in the living standards of all 
of our citizens that has been one of the outstanding 
achievements of our country. As a result, our regulation of 
that system should support and promote the system's efficiency 
just as it promotes its safety. And, moreover, our achievement 
of these objectives will be improved when we pursue them 
through processes that are as transparent as possible and 
through measures that are clear and simple rather than 
needlessly complex.
    So in my testimony today, I will review our regulatory and 
supervisory agenda to improve the effectiveness of the 
postcrisis framework through these principles of increased 
efficiency, transparency, and simplicity.
    I have also included an update on the condition of the 
industry and the Federal Reserve's engagement with foreign 
regulators in my written testimony.
    Beginning with efficiency measures, the Board and the 
Office of the Comptroller of the Currency last week issued a 
proposal that would recalibrate the enhanced supplementary 
leverage ratio, or eSLR, applicable to the G-SIBs. The proposal 
would calibrate the eSLR so that it is less likely to act as a 
primary constraint--because when it is a primary constraint it 
can actually encourage excessive risk taking--while still 
continuing to serve as a meaningful backstop.
    Last year, the Board also adopted a rule that eliminated 
the so-called qualitative objection of the Federal Reserve's 
CCAR exercise for midsized firms--those that pose less systemic 
risk. As a result, deficiencies in the capital planning 
processes of those firms will be addressed in the normal course 
of supervision. I think that approach should also be considered 
for a broader range of firms. Last week, we called for comment 
on that potential expansion.
    On the subject of tailoring, I support congressional 
efforts regarding tailoring, as offered here in the Senate and 
in the House. In addition to this potential legislation, there 
are further measures I believe we can take to match the content 
of our regulation to the character and risk of the institutions 
being regulated. For example, I believe it is time to take 
concrete steps toward calibrating liquidity coverage ratio 
requirements differently for non- G-SIBs than for G-SIBs. I 
also think that we can improve the efficiency of our 
requirements with regard to living wills.
    The U.S. banking agencies have also taken a number of steps 
to advance more efficient and effective supervisory programs. 
For example, we recently increased the threshold for requiring 
an appraisal on commercial real estate loans from $250,000 to 
$500,000. That does not pose a threat to safety and soundness. 
And the Fed has instituted various measures to clarify and 
streamline its overall approach to the supervision of community 
and regional banks, in particular. All of that is detailed in 
my written testimony.
    Transparency is central to the Fed's mission, in 
supervision no less than in monetary policy. Late last year, in 
the first material proposal following my confirmation, the 
Board released for public comment an enhanced stress testing 
transparency package. The proposal would provide greater 
visibility into the supervisory models that often determine the 
bank's binding capital constraints, and we are continuing to 
think about how we can make the stress testing process more 
transparent without undermining the strength and usefulness of 
the supervisory stress test.
    Looking ahead, we are also in the process of developing a 
revised framework for determining ``control'' under the Bank 
Holding Company Act. A more transparent framework of control 
should, among other things, facilitate the raising of capital 
by community banks where control issues are generally more 
prevalent.
    Simplicity of regulation promotes public understanding and 
compliance by the industry with regulation. Just last week, we 
issued a proposal that would effectively integrate the results 
of the supervisory stress test into the Board's nonstress 
capital requirements. For the largest bank holding companies, 
the number of loss absorbency ratios would be reduced from 24 
to 12, but the proposed changes would generally maintain or in 
some cases modestly increase the minimum risk-based capital 
required for the G-SIBs--although no bank would actually be 
required to raise capital because their existing capital levels 
are well above the minimums--and modestly decrease the amount 
of risk-based capital required for most non- G-SIBs.
    Our fellow regulators are also working with us to further 
tailor implementation of the Volcker rule to reduce burden, 
particularly for firms that do not have large trading 
operations and do not engage in the sorts of activities that 
may give rise to proprietary trading.
    In conclusion, the reforms we have adopted since the 
financial crisis do represent a substantial strengthening of 
the Federal Reserve's regulatory framework and should help 
ensure that the U.S. financial system remains able to fulfill 
its vital role of supporting the economy. We will do everything 
we can to fulfill the responsibility that has been entrusted to 
us by the Congress and the American people, and I thank you 
again for the opportunity to testify before you this morning. I 
am looking forward to answering your questions.
    Chairman Crapo. Thank you very much, Chairman Quarles. I 
will start out.
    First, last month, as you know, the Senate passed the 
Economic Growth, Regulatory Relief, and Consumer Protection 
Act. During the debate there was an intense attack on that bill 
with a number of allegations. The one I want to refer to and 
discuss with you is the one that by lifting the threshold, the 
$250 billion threshold, we were going to leave a number of 
major banks completely unregulated and susceptible to high 
risk.
    Do you believe that if enacted into law that bill will 
provide significant regulatory relief to community banks and 
midsized banks as well as some of our regional banks, while 
still giving the Federal Reserve the authority it needs to 
fully supervise and regulate those institutions?
    Mr. Quarles. Yes, Mr. Chairman, both I and the Federal 
Reserve as an institution are very supportive of efforts to 
tailor regulation, particularly for community banks, as 
exemplified in S. 2155. And I do think that the measures that 
are in that bill would still leave the Federal Reserve with 
full ability to protect the safety and soundness of the system.
    Chairman Crapo. All right. Thank you. I want to switch now 
to a question on firearms, which has become much, much more 
topical these days. According to press reports, the New York 
State Department of Financial Services is planning to send 
letters that warn banks and insurers of the reputational risk 
they incur by doing business with the National Rifle 
Association and the gun industry. As a prudential regulator, 
your job is to ensure the safety and soundness of banks. A 
bank's reputation might be relevant to the bank's safety and 
soundness, but reputational risk should not be used as an 
excuse for a regulator to scrutinize any behavior it does not 
like.
    Do you believe that doing business with the NRA or with 
firearms manufacturers or others in the firearms industry 
threatens the safety and soundness of banks under the Fed's 
supervision?
    Mr. Quarles. Well, let me begin, Chairman, by acknowledging 
the importance and significance of the tragedy in Florida and 
other tragedies that have resulted in some of these concerns.
    That said, I do not believe that lending to the NRA or to a 
law-abiding gun firm in the gun industry raises safety and 
soundness questions. I do not believe that the decision not to 
lend raises safety and soundness questions, and as a 
consequence, those issues are really outside of our remit as 
regulators of the system at the Federal Reserve.
    Chairman Crapo. All right. Thank you.
    Mr. Quarles. If I could perhaps amplify.
    Chairman Crapo. Yes.
    Mr. Quarles. One of the principles that I have tried to 
stress as a supervisor is that we should not substitute our 
personal judgments as supervisors for the business judgments of 
bank management and directors, and that is a principle that 
applies across a broad range of issues, again, that I am trying 
to stress throughout the supervisory system. And so I think 
that would apply here as well.
    Chairman Crapo. Well, thank you, and I appreciate the 
approach you have taken in your career to regulation. You said 
in your introductory statement something similar to the fact 
that if we can eliminate complexity, if we can eliminate 
opaqueness and get more transparency, there are benefits that 
flow from that.
    Could you just discuss what benefits flow from having a 
regulatory system that is less complex, more transparent, and, 
frankly, less excessive when we see excessive burdens being 
applied to any industry, but in this case the financial 
industry?
    Mr. Quarles. Well, I think the benefits of transparency and 
simplicity in regulation, actually they flow both ways, right? 
So there is a significant benefit in reducing burden, not just 
in the cost of complying with regulation, but there is an 
improvement in compliance and achieving the objectives of 
regulation, as well when the measures that are proposed are 
understandable by the industry, they are then capable of 
complying with them, that the public can see the consequences 
better of regulation, understand more what the particular 
provisions are.
    So, I think that you have a significant reduction in cost 
and an increase in the efficiency of the system at the same 
time as you have, a greater ability to achieve the objectives 
of regulation through transparent processes and simple 
measures.
    Chairman Crapo. And doesn't that all ultimately result in 
more capital being available to individuals and small 
businesses?
    Mr. Quarles. It results in an increased ability of the 
financial sector to support the real economy, the source of job 
creation, real economic growth, growing living standards; and 
it also supports the ability of the public to engage with 
regulation if it is more understandable.
    Chairman Crapo. Thank you.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    The FDIC joined the Fed and the OCC in 2014 to establish 
the enhanced supplemental leverage ratio, as you know, in part 
to ensure that not just the parent company has capital but that 
families' savings in depository institutions are also 
protected. But last week, FDIC dissented from the Fed's 
proposed changes to the leverage ratio which would allow the 
eight largest banks to drain away $120 billion in capital to 
fund more stock buybacks and dividends and executive bonuses. 
The leverage ratio proposal also received a no vote from one of 
the three members of the Fed's Board.
    To put that in perspective, Chair Yellen went her entire 4-
year term developing consensus without a single dissent from 
any member of the Fed Board.
    Are you concerned the agency tasked with protecting 
families' deposits opposes your plan and that the Fed is moving 
away from the consensus-based approach that characterized all 
the Dodd-Frank rulemakings? Or are you just waiting until the 
whole entire Trump deregulatory deregulation regulators get put 
in place?
    Mr. Quarles. We have had a full discussion on the eSLR 
regulatory proposal, both among the members of the Board and 
with the other regulatory agencies. I think the issue there is 
that when the eSLR or any leverage-based capital measure 
becomes the binding capital constraint on a firm's decision, 
then that means that it is making its decisions not on a risk-
based basis. It has an incentive to take more risk than it 
otherwise would if it is going to incur the same capital cost.
    The FDIC put out a statement expressing its concern that at 
this point in the cycle this was a modest release of capital. 
It is quite a small amount given the overall level of capital 
that would actually be released. It is about $400 million 
actual change given the role of the eSLR and the overall 
capital framework. And in the judgment of the majority of the 
regulators, removing that perverse incentive was something that 
was important to do quickly.
    Senator Brown. Thank you. I would point out that Chair 
Yellen had some very conservative regulators, regulators that 
came out of your administration, with regulators that came 
later, and she found a way to get consensus. I think your 
proposals are radical enough that you have not.
    A couple other questions. The Fed released a second plan 
last week proposing changes to CCAR. The Fed's press release 
said capital requirements would be maintained or would somewhat 
increase for the eight largest U.S. banks. Analysts at Goldman 
Sachs estimate that the biggest banks, however, would see a 
windfall of $54 billion in dividends, buybacks, and bonuses.
    Is Goldman's analysis wrong? Did the Fed conduct a 
comprehensive analysis like Goldman did?
    Mr. Quarles. We have done an analysis on the basis of our 
2017 information as to what the capital consequences of the 
measures that we proposed last week would be, and, as I have 
indicated, while it varies modestly from firm to firm, for the 
G-SIBs, capital is basically modestly increased, for the non- 
G-SIBs modestly decreased. The overall level of capital in the 
system remains effectively flat.
    Senator Brown. I guess Goldman's analysis would not use, as 
you did a couple of times, the word ``modestly'' there. My 
concern about the Chairman's bank deregulation bill and all of 
these Fed proposals, it is like a game of Jenga. You are 
pulling out piece after piece, and soon enough the entire 
foundation is going to collapse, and you probably will have 
moved on from your job. Maybe the Chairman and I will have 
moved on. But it is a concern that I hope this Fed addresses 
more acutely than you have.
    Last question. Last month, Chairman Powell provided a 
carefully worded answer that obscured the fact that large 
foreign banks may very well face weaker rules in the U.S. under 
the Chairman's bank deregulation bill, even if not outright 
exemption from Section 165. Since that testimony, your former 
colleagues at your firm, Davis Polk, whose clients have 
included Deutsche Bank and Barclays, seem to disagree. Davis 
Polk lawyers about a month ago said they ``saw no reason to 
expect that the Federal Reserve would deviate from their 
approach in implementing Dodd-Frank when implementing the new 
$250 billion threshold. It likely means that the toughest Dodd-
Frank rules and the requirement to establish an intermediate 
holding company would not apply unless the foreign bank had 
$250 billion in assets in the U.S. We attempted to amend. We 
were unsuccessful.''
    My question is: Will you commit, absolutely commit, 
contrary to Secretary Mnuchin, that the Fed will not raise the 
$50 billion intermediate holding company threshold above which 
the toughest Dodd-Frank rules apply?
    Mr. Quarles. Well, there is certainly nothing in S. 2155 
that would require us to change our approach with respect to 
the foreign banks, either on the level of establishment of an 
IHC or on the application of enhanced standards to them. The 
issue is that the threshold being raised from $50 to $250 
billion that is contained in the Senate bill, does not have a 
practical effect for any foreign bank operating in the United 
States because you look at their global assets and the global 
assets of all of them, there is not a bank that is sort of in 
that range that would be affected by a move from 50 to 250.
    So there is nothing in the bill that requires us to change 
our approach. The overall IHC framework I think has been 
working fairly well.
    Senator Brown. So I guess--and I'm closing, Mr. Chairman. I 
guess I can only see that you are leaving your options open to 
deregulate these foreign banks that have assets above 50 and 
under 250 assets in the U.S.
    Mr. Quarles. That was not the purpose of my response.
    Senator Brown. But is that the outcome? I mean, are you 
leaving that option open to deregulate?
    Mr. Quarles. No. As one member of a Board that I hope is 
soon not just three people, but as one member of a Board of 
Governors, I obviously cannot commit on what the final outcome 
will be. But I can assure you we do not have a sort of secret 
plan in my satchel here as to what we are going to do as soon 
as the bill passes.
    Chairman Crapo. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. I appreciate you 
calling this hearing. Vice Chair, thank you for being here and 
being accessible, as the Ranking Member mentioned. I will say 
chairing another committee and thinking about the bland opening 
comments I make, Senator Brown, I admired the cadence and 
rhetorical flair of your opening comment. I noticed the 
repetition. It was really something. I am actually going to go 
chastise my staff for me----
    Senator Brown. I can help you come to some of your new 
political positions, too, if you would like.
    [Laughter.]
    Senator Corker. All right. Thank you so much.
    Mr. Vice Chair, you are not confirmed for the longer term, 
and that has not happened just because it takes so much floor 
time to make that happen. I have had some conversations with 
you, and I can tell that there is a little tentativeness as you 
talk with people like me and others because you have got to 
depend on Republican votes to be confirmed.
    I would say to the my Democratic counterparts that I think 
the Vice Chair would actually push back more against 
Republicans if he was actually confirmed. It is just something 
to think about. I know I called him about something the other 
day, and he knew Chairman Crapo was in a different place, and 
he was tentative about talking to me about it. I would just say 
that to have a guy who is sort of on the bubble really means 
that even when he disagrees with Crapo or myself or someone 
else, he is going to be tentative about that until he is 
confirmed. It is just something to think about. So that is my 
belief. It really is. And I think it is affecting his ability 
to push back on some of the large institutions and others and 
work with them and them rely on guidance. So that is just my 
observation. He is shaking his head up and down, actually, 
agreeing with me.
    Mr. Quarles. You might say that, Senator. I could not 
possibly comment.
    [Laughter.]
    Senator Corker. It is something for, I think, people on 
both sides of the aisle to think about.
    During this last bill passage, there was a Section 402--it 
is actually the issue I was talking about. You know, Senators 
here try to take care of their constituents back home 
sometimes, and so we have these custodial banks that are 
located in only a few States, and so we had some Senators write 
a bill that did away with certain types of investments on the 
denominator side of the equation, right? And so everybody 
around here is enterprising, and so other Senators figured out, 
hey, you know, there is a way for me to get some other 
institutions in under the hood if I can just change the 
language here just a little bit. And so that occurred during 
the process.
    Would we not be better off on technical decisions like that 
relative to what should and should not be counted, wouldn't we 
be much better off if people like you were making those 
decisions? And doesn't the 402 section that we actually have in 
the bill, doesn't it complicate your life as far as setting 
ratios in an appropriate way? I would like for you to be really 
honest with me.
    Mr. Quarles. I appreciate the question and----
    Senator Corker. And I probably will vote for your 
confirmation regardless, OK?
    Mr. Quarles. And I think I can be pretty candid. You know, 
I do think that the issue of the fact that the current 
calibration of the eSLR is a binding constraint, and 
particularly for the custody banks, but it is not just an issue 
for the custody banks. You know, it creates those perverse 
incentives that I----
    Senator Corker. You are saying what is in the bill.
    Mr. Quarles. And so I think that a solution to it is 
important. The solution that is in the bill, you know, is one 
solution.
    Senator Corker. Not the preferred solution.
    Mr. Quarles. Well, it is a solution for a limited number of 
institutions. The concern that I would have as a regulator in 
pursuing that solution--and, you know, there are regulatory 
arguments for that solution, but the concern I would have as a 
regulator is that I do not know where one would turn off the 
dial, where one would stop on this slippery slope. So if one 
excludes a certain class of assets--in this case central bank 
reserves--should one also include Treasury securities, et 
cetera? As a regulator, the strong arguments that would be made 
against me would sort of push me down that slope.
    I do think that a legislature is in a better position to 
resist the slipper slope for that solution. But I also think 
that there is a broader response----
    Senator Corker. You are saying the regulators are not good 
at resisting pushback from----
    Mr. Quarles. Well, I think it depends on the specific 
issue, and on this specific issue you have got sort of a series 
of arguments, you know, that at least from my perspective I was 
worried would lead to a slippery slope. I do not think that 
that applies, however, to the provision in S. 2155. I do think 
that there is a broader solution that is required. That is why 
last week we proposed to recalibrate the eSLR to address this 
same issue. I think that that has broad applicability across a 
range of firms.
    If the provision in S. 2155 does become law, then we will 
need to think as regulators about how we adjust the calibration 
to ensure that we are not sort of double counting in some 
places.
    Senator Corker. So I know my time is up. I would just say 
to the Chairman, I think 402 is a damaging section to this 
bill. In some ways it helps lend credence to some of the 
arguments that Ranking Member Brown was laying out on the front 
end--just a little bit, not much. Just a little credence, not 
much. And I would think that we would be better off in your 
negotiations with Hensarling, we would be better off dropping 
402 and letting the regulators do their job. And I think left 
to their own accord, most of my Democratic colleagues would 
agree with that. Many Republicans colleagues I know already 
agree with that, and so I hope we will strike that entire 
section with that.
    Thank you for the time.
    Chairman Crapo. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Vice Chair Quarles, do you agree with the conclusion of the 
Financial Crisis Inquiry Commission that in the years leading 
up to the crisis compensation and bonus practices at big banks 
too often rewarded short-term gains, big bets, and encouraged 
senior executives to green-light irresponsible risk taking?
    Mr. Quarles. Yes. I do not have sort of in my immediate 
short-term memory all of the reasoning behind that, but I agree 
with that statement. I do.
    Senator Menendez. OK. In a speech last month, New York Fed 
President Dudley said, `` . . . an effective regulatory regime 
and comprehensive supervision are not sufficient. We also need 
to focus on the incentives facing banks and their employees. 
After all, misaligned incentives contributed greatly to the 
financial crisis and continue to affect bank conduct and 
behavior.''
    Most recently we saw this very problem exposed at Wells 
Fargo. The former CEO and the head of the Community Bank 
Division were raking in bonuses while their employees were 
churning out millions of unauthorized accounts.
    Section 956 of Dodd-Frank requires bank regulators to 
prohibit incentive-based compensation practices that reward 
senior executives for irresponsible risk taking. Regulators 
issued a proposal in May of 2016, but nearly 2 years later, 
nothing has been finalized. In the meantime, Wall Street 
bonuses jumped 17 percent in 2017 to an estimated $184,220,000, 
the most since 2006.
    When you were asked about this rulemaking in January, you 
said, ``I do not have any updates on that for you. It is not 
something that I have talked to the other regulators about 
yet.''
    So today I am asking you: How is it that you have had time 
to revisit capital rules, revisit leverage rules, revisit the 
Volcker rule, all of which were finalized after years of 
deliberation, public comments, and input from other regulators, 
and you have not had time to finish the incentive-based 
compensation rulemaking for the first time?
    Mr. Quarles. That is something that is on the agenda, but 
it is not something that I have a timeframe for you on today.
    Senator Menendez. Well, you revisited a whole host of 
already existing rules, but a rule that is actually part of a 
requirement of the law has not even been visited. And it is on 
the agenda, you tell me, but you cannot give me a timeframe. 
Well, I think that is pretty outrageous. Can you give me some 
sense of a timeframe?
    Mr. Quarles. Not a specific timeframe, but I can tell you 
that I do think that that is an important issue, and it is 
something that we will be discussing.
    Senator Menendez. President Dudley thought a key way of 
addressing a big bank culture of recidivism was through 
changing compensation arrangements. In contrast, when you were 
asked about bank culture, you said it is ``perhaps not 
impossible but very difficult for a financial supervisor to 
come up with useful, predictable interventions.''
    Isn't changing compensation precisely how you can address 
bank culture?
    Mr. Quarles. Addressing the culture of an organization is 
one of the most important things for an organization, but an 
extremely complex matter that involves a variety of different 
incentives. It is something that is most appropriate and ought 
to be a very high priority for the management of an 
institution. It is something that is a very high priority for 
me at the Federal Reserve with our own culture.
    Senator Menendez. It is a very high priority for the 
Congress. They put it into law. And I do not see how you all 
are seeking to follow the law.
    Mr. Quarles. Well, we are working on implementing that. It 
has not fallen behind the refrigerator and been forgotten 
about.
    Senator Menendez. Well, I can assure you it will not be 
going behind the refrigerator because I am going to remind you 
of it, and others about it as we go ahead.
    Finally, I know there is significant interest by this 
Administration in offering a proposal to make changes to the 
Community Reinvestment Act. I am not opposed to modernization. 
When 97 percent of banks receive satisfactory or outstanding 
ratings, but yet African American and Latino families continue 
to be disproportionately denied mortgage loans, even when 
controlling for income loan amount and location, we have got a 
real problem on our hands.
    Now, I have, however, real concerns that new proposals will 
lead to weakened enforcement by regulators and discounted 
importance on physical bank branches. Do you expect the Federal 
Reserve will join the OCC's forthcoming proposed rulemaking?
    Mr. Quarles. We are working on that as a joint matter, so I 
expect that that will be issued as a joint proposal.
    Senator Menendez. If I may, Mr. Chairman, the Treasury 
report issued earlier this month recommends that the Federal 
Reserve adopt the OCC's new policy allowing banks with failing 
CRA ratings to merge or expand so long as they can demonstrate 
a potential benefit. Do you anticipate the Federal Reserve will 
adopt this policy?
    Mr. Quarles. We have not considered that policy as a Board, 
so I do not want to prejudge the judgment of my fellow 
Governors. But I think that it is important to note that what 
the Treasury is saying there is that if a benefit in that 
particular area, in the service of middle-income and lower-
income communities can be demonstrated from a particular 
application, that the whole picture should be taken into 
account, and that seems reasonable to me.
    Senator Menendez. I have other questions, but I will submit 
them for the record.
    Thank you, Mr. Chairman.
    Chairman Crapo. Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman. Good morning, Mr. 
Chairman.
    First, I want to join Senator Corker in his observation 
that our Ranking Member has a silver tongue, and I mean that as 
a compliment. A silver-tongued devil.
    Number two, this is an observation. I am not looking for a 
comment. We have not had a recession since 2008, so from one 
point of view, our too-big-to-fail banks have not really been 
tested. And I would strongly encourage, for what my opinion is 
worth, that we tread very carefully before we lower capital and 
liquidity ratios and start fooling with the leverage ratio 
until we see how our banks do in a real full-blown recession. 
But that is not what I really wanted to ask you questions 
about.
    Would Citigroup have survived the meltdown in 2008 had the 
U.S. Congress not provided it capital?
    Mr. Quarles. I do not know the answer to that question, 
Senator, but, obviously, it was under extreme financial stress.
    Senator Kennedy. How about the Bank of America?
    Mr. Quarles. I would have to take the same position.
    Senator Kennedy. OK. Did any person in senior management at 
Citigroup go to jail as a result of the meltdown in 2008?
    Mr. Quarles. I am not aware of anyone.
    Senator Kennedy. OK. And I believe the American taxpayer 
provided Citigroup somewhere in the neighborhood of $475 
billion in capital and loan guarantees. Does that sound about 
right?
    Mr. Quarles. That sounds about right.
    Senator Kennedy. Let us suppose that a senior member of 
management at Citigroup had been investigated in 2008 and an 
FBI agent showed up at his or her house and said, ``Hey, I want 
to come in and look around, but I do not have a warrant,'' and 
that Citigroup senior manager said, ``Well, look, man, you 
know, I have got a Fourth Amendment right. You cannot come in 
here without a warrant.'' Do you think other banks should not 
do business with that senior manager at Citigroup because he 
exercised his Fourth Amendment right?
    Mr. Quarles. No, I do not.
    Senator Kennedy. OK. Let us suppose that senior manager had 
been subpoenaed to testify in court, and the senior manager 
took the stand, was sworn in, and said, ``You know, I have got 
a right under the Fifth Amendment of the United States 
Constitution not to answer questions, and I do not mean to 
upset anybody, but I think I am going to use that right.'' 
Would that have been legal?
    Mr. Quarles. No.
    Senator Kennedy. For him to take the Fifth Amendment?
    Mr. Quarles. I am not speaking as a lawyer here, but I 
cannot imagine that it would have been illegal.
    Senator Kennedy. Well, trust me. It would have been. OK? Do 
you think that other banks ought not to do business with that 
senior manager at Citigroup because he exercised his right 
under the Fifth Amendment to the United States Constitution?
    Mr. Quarles. That would not be my personal decision, no.
    Senator Kennedy. OK. Let us suppose that a customer wants 
to exercise his First Amendment right to speak out against 
abortion. Do you think banks ought not to do business with him?
    Mr. Quarles. On that basis alone, that would not be my 
personal view. As a supervisor, I am not sure it would be my 
role to direct the bank on that question.
    Senator Kennedy. OK.
    Mr. Quarles. But that would not be my personal view.
    Senator Kennedy. Let us suppose that a customer wants to 
speak out in favor of a woman's right to choose. Do you think a 
bank ought not to do business with him?
    Mr. Quarles. I would have the same view. I would not think 
that the bank should refuse to do business. As a supervisor, 
given my stress that we should not be second judging 
managements and directors on what business lines they choose to 
go into, I am not sure it would be my role to second guess it, 
but I personally would not do it.
    Senator Kennedy. Would your answers be the same if the 
subject were climate change as opposed to abortion?
    Mr. Quarles. Completely.
    Senator Kennedy. OK. Well, as you know, Citigroup and Bank 
of America have decided to make gun policy for the American 
people, supplanting the U.S. Congress. Citigroup in particular 
says it will not do business with anybody that sells guns to 
people who have not passed a background check. It will not do 
business with anybody who sells guns to someone under 21, who 
sells bump stocks, high-capacity magazines, all of which are 
permissible under the United States Constitution. Would that 
position violate State and local age discrimination laws?
    Mr. Quarles. I do not know the answer to that.
    Senator Kennedy. Well, if it did and a federally regulated 
bank was in violation of State and local law, would you do 
something about it?
    Mr. Quarles. If a bank is violating local law, we have a 
responsibility as a supervisor to----
    Senator Kennedy. OK. Citigroup says that it will not do 
business with anybody that sells guns to someone who does not 
have a background check. Under the NICS data base system, you 
can actually buy a gun without a data base if your name--if the 
FBI does not give you an answer within 3 days, you get to buy 
the gun, and then they keep checking, and later on if they find 
out you are not entitled to the gun, they come get it. So if 
Citigroup's position violates Federal law, would you have 
something to say about that?
    Mr. Quarles. If there were a violation of Federal law, yes, 
that is part of our role as supervisors.
    Senator Kennedy. All right. I have only got a couple more, 
Mr. Chairman.
    In Arizona, in Alaska, in Wyoming, you can carry a handgun 
without a permit, concealed or unconcealed, under the United 
States Constitution. Do you think Citigroup ought to stop doing 
business in Arizona, Alaska, and Wyoming?
    Mr. Quarles. Well, that is a pretty fraught question 
because, as a supervisor, I think that their decision----
    Senator Kennedy. All right. Let me interrupt you because I 
am going to get cutoff.
    Mr. Quarles. OK.
    Senator Kennedy. But I do not mean to be rude.
    Mr. Quarles. I understand. Of course I understand.
    Senator Kennedy. I think you are doing a swell job. In 
Kansas--in Vermont, you only need to be 16 years old to 
purchase certain guns. Do you think all banks ought to pull out 
of Vermont? What do you think Senator Sanders would say?
    Mr. Quarles. I know what Senator Sanders would say, but 
those are issues, I think, that, again, as supervisors, I am 
trying to stress that we should not substitute our judgment as 
to what geographies and business lines banks go into.
    Senator Kennedy. I understand. Well, what I am trying to 
stress is we do not need red banks and blue banks. We do not 
need banks that will only do business with people who voted for 
President Trump. We do not need banks who will only do business 
for people who voted for Secretary Clinton. We need banks that 
are safe and sound and honest and that appreciate it when the 
American taxpayer puts up billions and billions of dollars of 
their hard-earned money to keep these banks from going belly 
up. That is what we need.
    Thank you, Mr. Chairman.
    Mr. Quarles. Thank you, Senator.
    Chairman Crapo. Thank you. And I have let one Senator on 
each side take a couple extra minutes. I would like all the 
other Senators to know that it is balanced and you are back to 
5 minutes.
    [Laughter.]
    Senator Kennedy. I just did it because Senator Brown did 
it.
    Chairman Crapo. OK, so it is balanced. But, please, honor 
the time. Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Vice Chairman, 
thank you for your service. thank you for being here.
    I want to ask you about the evidence of a regulatory 
burden. In a recent speech, Chairman Jerome Powell stated, ``As 
you look around the world, U.S. banks are competing very, very 
successfully. They are very profitable. They are earning good 
returns on capital. Their stock prices are doing well.''
    So I am looking for the case for some kind of evidence 
that--and I am open to this--some kind of evidence that 
regulation is holding them back, and I am not really seeing 
that case as made at this point. And the data back up his 
comment. Bank of America announced a profit of $6.9 billion in 
the first 3 months of this year, the biggest quarterly profit 
in history. The facts show that banks are thriving. The FDIC 
shows that banks had record-breaking profits in 2016, and 2017 
would have broken that record again if it were not for one-time 
charges from the new tax law. JPMorgan Chase and Company 
analysts predict record increases in bank dividends of 38 
percent in 2018 and 26 percent in 2019, and the Bank of 
America, for example, is expected to increase dividends by 126 
percent through 2019. Demand for credit, such as home loans, 
car loans, credit cards, has surpassed pre-recession highs, and 
lending is up. These are the most profitable financial 
institutions in history.
    And so the question is quite simple: What problem are we 
trying to solve with deregulation?
    Mr. Quarles. In the first instance, I would say at least as 
I look at the regulatory reform effort, it is not an effort to 
deregulate. It is an effort to ensure that we achieve our 
regulatory objectives in an efficient way. So of the proposals 
that we made last week, there is in the capital reduction under 
the stress capital buffer proposal----
    Senator Schatz. OK, I understand. I mean, I do not want to 
quibble about how we characterize this thing. I want you to 
answer the question. If these banks are experiencing record 
profits, that is one sort of--I think we can agree upon that. 
Can we?
    Mr. Quarles. Yes, absolutely.
    Senator Schatz. OK. And then we can also agree that sort of 
generally the reason you might want to loosen up restrictions 
or what you call ``tailor'' is to allow more capital to be 
deployed to small businesses and individuals who may want loans 
so they can grow the economy and pursue the American Dream, not 
so that all of those additional profits can be plowed back into 
dividends and stock buybacks.
    So I ask you again: What problem is being solved by what I 
call ``deregulation'' and what you may name differently, but 
what problem are you solving?
    Mr. Quarles. Well, if we want to get sort of at the very 
specific level, there has been sort of a shortage, a 
restriction of small business credit. We have found that at the 
Federal Reserve. That is the type of credit that has 
historically in this country been provided by community and 
regional banks. There are a variety of reasons for that 
restriction, but I do think that one of those reasons is 
regulatory burden, and that we can improve the efficiency of 
the regulatory system without in any way undermining its safety 
and soundness and address that problem, among a number of 
others.
    Senator Schatz. Is there any evidence that when they become 
more profitable, either as a result of the tax law or as a 
result of a loosening of the constraints from Dodd-Frank, that 
they actually make more capital available to small businesses? 
Because what I see is record stock buybacks and dividends. And 
so I get the argument you are making, but you are a data-driven 
person, I assume, and this is a data-driven industry. So I want 
to understand. Do you have any research that demonstrates that, 
to the extent that we give tax relief to the most profitable 
financial institutions in human history and we give regulatory 
relief to these same institutions, is there any evidence that 
this actually helps the people that you are describing?
    Mr. Quarles. I certainly know that on the regulatory 
front--and I am pretty sure, although I cannot think of 
specific studies on the tax front, but I am pretty sure that in 
general they exist--that there are economic studies that show 
that in both of those areas, the benefits will be spread among 
a number of constituencies, and that will include both----
    Senator Schatz. But you are just repeating your claim. I am 
asking you for evidence, and you just kind of go around and 
around sort of repeating the rhetoric that supports this claim. 
But I am asking for evidence, and you are saying there is 
evidence. I am asking you what it is.
    Mr. Quarles. I will be happy to forward that to you.
    Senator Schatz. OK. I will be waiting.
    Thank you.
    Senator Brown [presiding]. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. Welcome, Mr. 
Quarles. Thank you for testifying here. Two things I wanted to 
touch on.
    First, it is my understanding that the Board of Governors 
of the Fed consists of three members right now. There are only 
three of the seven members. And I wonder if from your 
perspective that poses any challenges to the day-to-day 
operations and functioning of the Fed and how important it is 
in your mind that we confirm individuals to these vacancies.
    Mr. Quarles. It is very obviously welcome but also 
important to confirm the people who have been nominated to open 
seats on the Federal Reserve Board. We can do our work, but it 
is clearly a strain on the organization. And the organization 
functions better when we have a broader range of viewpoints, 
more diverse backgrounds, you know, a full complement of 
people.
    Senator Toomey. Thank you, and I am hoping soon we will be 
able to confirm you to the full term that I would suspect and 
hope would follow the big overwhelming vote I think you got 
previously.
    Mr. Quarles. Thank you, Senator.
    Senator Toomey. Let me move on to another one. As you know, 
the Senate passed by a substantial bipartisan margin a banking 
regulatory reform bill with mostly modest regulations, 
regulatory reforms. One of the most important items in that 
legislation, in my opinion, was raising the threshold for the 
automatic SIFI designation from $50 billion to $250 billion, so 
I think that is very constructive because the banks otherwise 
captured by this are, in fact, not systemically important to 
the country and they, therefore, do not deserve to be subject 
to this added cost and regulatory burden.
    However, I still think that even in the case of $250 or 
$300 or $500 billion banks, this whole category, it would still 
be more appropriate to have a regulatory framework that is 
based primarily on the activities of the institution rather 
than an arbitrary asset designation. As you know, there is 
nothing meaningfully different from an asset threshold point of 
view about a bank that is $251 billion versus one that is $249 
billion.
    So, number one, do you agree with that point, with the idea 
that this regulatory framework ought to be more based on 
activities certainly for these banks that are in the lower end 
of this range? And then I have one other question for you.
    Mr. Quarles. On the question of asset thresholds versus 
activities if I had my druthers, probably you would set an 
asset threshold below which there was an exemption, below which 
you were perfectly confident that firms of that size were going 
to be of a complexity and nature that they would not pose 
systemic risk. And then above that, you would take a variety of 
factors into account in determining the application of enhanced 
standards. Ultimately, as you all know better than I, it is up 
to the Congress to decide how that balance will be struck. But 
once it is struck, I think that we as regulators ought to take 
into account those full range of factors in determining how to 
tailor regulation in the realm where regulation remains to be 
applied.
    Senator Toomey. So one specific area where it is my 
understanding that you have the discretion to modify this is 
the application of the LCR, and especially for large regional 
banks that are not G-SIBs. Smaller banks, under $250 billion, 
my understanding is there is--the sort of default setting is a 
different regime, a modified LCR, and that you have the 
authority to apply a modified version of the LCR for larger 
banks if their activities warrant that. Are you making progress 
on making changes to how the LCR would be applied to banks that 
might be bigger than $250 billion?
    Mr. Quarles. We are, Senator, and I agree with you that 
that would be an appropriate differentiation. I have said that 
publicly, and that is something that we are working on to 
determine exactly how to appropriately tailor that regulation.
    Senator Toomey. Do you have a timeframe in mind that you 
could estimate for us when we would see something?
    Mr. Quarles. Well, without wanting to toss this back, we 
are waiting to see what the legislative framework settles down 
to be, and when we see what that is, then we will know how to 
respond on the tailoring front. I suppose certainly at least 
right now, if that were to extend for a longer period, we might 
move forward on a different schedule, but at least right now we 
are waiting to see sort of what the legislative framework we 
are given is.
    Senator Toomey. I am sorry for going--I will wrap up, but I 
would just urge you to--we do not know the timeframe by which 
we are going to--I assume you are referring to the disposition 
of the Senate-passed bill.
    Mr. Quarles. Correct.
    Senator Toomey. It is an open question as to how that is 
going to proceed, and when is very much an open question. So I 
would really urge you to move ahead as quickly as you 
reasonably can.
    Mr. Quarles. I appreciate that, Senator.
    Senator Toomey. Thank you.
    Senator Brown. Senator Cortez Masto.
    Senator Cortez Masto. Thank you, and thank you, Vice Chair, 
for being here.
    Let me switch topics a little to cost-benefit analysis. I 
understand that the Federal Reserve has a new Policy 
Effectiveness and Assessment Unit. Is that correct?
    Mr. Quarles. That is correct.
    Senator Cortez Masto. And so how many people are working in 
the unit and what is the core mission of the unit?
    Mr. Quarles. It is a small group of economists. I will have 
to get you the exact number so that I do not misstate, but the 
core mission of the unit is to look at the body of postcrisis 
regulation and to kind of do a deep dive into an analysis of 
the effectiveness in areas of capital liquidity and 
resolvability.
    Senator Cortez Masto. And do they engage in a cost-benefit 
analysis? I have heard this topic quite often.
    Mr. Quarles. In the broadest sense of the term, yes. I 
mean, they are looking at overall effectiveness, and obviously, 
costs, broadly considered, are part of that.
    Senator Cortez Masto. Do you think cost-benefit analysis is 
a key function for what you are supposed to be doing?
    Mr. Quarles. I think that it is a very important element of 
what we are supposed to be doing.
    Senator Cortez Masto. And I agree. I think sound data is 
critically important in informing the policies and decisions 
that you will be making. But one of the things I do have 
concerns about--and I have seen this over and over again--that 
such analysis actually fails to capture the human and economic 
costs of massive financial system failure. Would you agree?
    Mr. Quarles. I would agree with that, yeah.
    Senator Cortez Masto. Thank you. Let me ask you this: Would 
you agree that the Fed underestimated the human costs of a 
potential financial crisis prior to 2008?
    Mr. Quarles. Yes, I would, because we underestimated the 
likelihood of it, yes.
    Senator Cortez Masto. All right. And, thus, the concern 
that we are hearing and that I have about rolling back some of 
these regulations and giving the Fed the authority over safety 
and soundness. I will tell you, in Nevada, from 2007 to 2014, 
there was no Federal oversight predicting what was going to 
happen and then there helping us address the issue. So that is 
the concern I have with S. 2155 and the rollback of the 
regulations over the largest banks. So I appreciate your 
agreeing with me with those concerns.
    Let me jump to another topic on fair lending. The Center 
for Investigative Reporting recently published several articles 
on modern-day redlining after its year-long investigation based 
on 31 million records publicly available under the Home 
Mortgage Disclosure Act to identify lending disparities. The 
studies found numerous fair lending violations. African 
Americans and Latinos are charged higher fees and interest on a 
mortgage than white borrowers with similar credit histories. 
African Americans, Asians, Latinos, and Native Americans are 
denied mortgages at higher rates even with similar credit and 
income. And single women pay higher interest rates for 
mortgages even when they have higher credit scores and bigger 
downpayments than single men.
    Now, you have said that you oppose discrimination in 
lending. The Federal Reserve has examination and supervisory 
authority of banks with fewer than $10 billion in assets. How 
does the Federal Reserve discover discrimination in lending? 
Does it involve using the HMDA data?
    Mr. Quarles. We do use HMDA data, but where there is 
additional data that we believe is necessary, we have the 
supervisory ability to get that. So the HMDA data at issue 
here, it is principally a question of public disclosure. We 
have the ability to get the data that we need to perform that 
supervisory assessment irrespective of those particular HMDA 
provisions, and we do.
    Senator Cortez Masto. So let me ask you this: If S. 2155, 
which excludes 85 percent of banks and credit unions from 
reporting HMDA, becomes law, can you ensure that banks making 
fewer than 500 mortgage loans a year are not engaged in 
redlining or other types of discrimination?
    Mr. Quarles. We would have the information that we need, 
again, through our ability to require it to be provided to us 
as a supervisory matter to take those actions, yes.
    Senator Cortez Masto. And how can we in the public sphere 
ensure that you are doing that? Because prior to 2007, we know 
the Feds were not there, and so how do we, without having that 
public information transparent, so you have independent 
watchdogs looking and assessing to make sure that redlining is 
not occurring, how do we ensure that you are doing your job if 
we do not have that information?
    Mr. Quarles. Transparency and accountability is important, 
particularly for an institution such as the Federal Reserve. 
Ultimately, however, the balance between public disclosure and 
the cost on institutions is one that the Congress will have to 
make. I can assure you, though, that however you ultimately 
choose to strike that balance, we will have the ability as 
supervisors to get the information that we need.
    Senator Cortez Masto. But there is no independent 
verification that you are actually doing it, correct?
    Mr. Quarles. Well, as I understand the provision in 2155, 
there is quite a bit still of public disclosure. But, the 
balance that you strike is up to you to strike.
    Senator Cortez Masto. Thank you. I know my time is up. 
Thank you very much.
    Senator Brown. Senator Cotton.
    Senator Cotton. Thank you, Mr. Quarles, for your appearance 
here today. I want to speak to you about FINRA Rule 4210.
    Two years ago, I sent a letter to the SEC expressing 
concern about this rule, which established margin requirements 
on to-be-announced securities such as mortgage-backed bonds. 
The key problem here is that Rule 4210 applies to broker-
dealers but not to banks. Thus, broker-dealers can use their 
banking arm to evade the requirement, which can create an 
unfair and uneven playing field.
    Earlier this week, Federal Reserve staff confirmed with my 
adviser that this is a potential inequity, and I would say that 
there are Arkansas firms that will simply exit the market if 
this uneven playing field comes to pass. Do you share my 
concern about this matter?
    Mr. Quarles. I would say that certainly as a general 
principle, a level playing field is important, and that is 
across a range of issues, whether it is banks and broker-
dealers, big banks and small banks, domestic banks and 
international banks. So it is a pretty high priority for us as 
regulators to try to ensure that our regulatory system creates 
a level playing field.
    On the specific issue of the FINRA rule you are citing, I 
am only now becoming familiar with it but am very engaged in 
understanding how it is affecting that level playing field.
    Senator Cotton. OK. Rule 4210 is one of those final rules 
not yet in effect which both the SEC and the Federal Reserve 
have the ability to alter. Can I get your commitment to take a 
review of it and to ensure that it does not create an unequal 
playing field between smaller broker-dealers and larger bank-
affiliated firms?
    Mr. Quarles. We will certainly review it through that lens, 
yes.
    Senator Cotton. Thank you. Let us look now to the 
international system, specifically the Financial Stability 
Board, or FSB. In January, I sent a letter, along with several 
other members of this Committee, to President Trump raising my 
concerns that went to many other members of the Administration, 
including yourself. I am sure it is right at the top of your 
mind.
    Mr. Quarles. Actually, it is.
    Senator Cotton. Just in case it is not, I will say that I 
am worried that the FSB has morphed from an advisory 
organization into a global regulatory body and using quasi-
enforcement tools. A couple months ago, Secretary Mnuchin 
testified that FSB is, in fact, an advisory organization and 
that its rules are voluntary, not binding. Do you agree that 
the FSB rules are voluntary?
    Mr. Quarles. Yes. Yes, I do.
    Senator Cotton. In 2015, four Chinese banks sought an 
exemption from an FSB rule related to how much capital they 
hold. Can you imagine a scenario in which a United States firm 
would ever have to seek an exemption from an advisory rule of 
the FSB?
    Mr. Quarles. No.
    Senator Cotton. In 2013, the FSB determined that two large 
American insurers were globally systemically important 
insurers. Those two insurers, though, had not yet been 
designated as systemically important financial institutions in 
the United States. That creates an unusual circumstance in 
which the FSB, which operates by consensus to include U.S. 
Government officials, had determined that U.S. firms were 
globally systemic, yet those same U.S. officials had not 
determined that they were systemic in our Nation itself. I 
suspect the Trump administration would have a slightly 
different approach to this matter, but what can we do to ensure 
that future Administrations do not take such strange steps in 
which they are acting through the FSB to achieve results on 
regulating U.S. firms that they have not yet taken under U.S. 
law?
    Mr. Quarles. The FSB designations are purely advisory. It 
is up to national authorities in any particular country to 
implement them, and we have our FSOC process through which that 
would be done, and the FSB advisory stance does not really 
affect the FSOC process.
    I think the larger question, though, that you are raising 
is an important one, which is I do think that we in our 
engagement in these international fora, the FSB, the Basel 
Committee, I think is very important because I think trying to 
ensure a level playing field for our globally active 
institutions is in their interest. It is in our national 
interest. But we need to ensure that we are fully engaged with 
all of the various stakeholders in our country as we go into 
those national fora and represent, you know, a broad range of 
views as opposed to a narrow range of views.
    Senator Cotton. Thank you. I agree with that. It is 
important to stay engaged to ensure that we have fair and equal 
playing fields overseas. It is also important to ensure that 
U.S. sovereignty prevails in the regulation of our financial 
institutions, to include large financial institutions which 
have----
    Mr. Quarles. I completely agree.
    Senator Cotton. ----not just rich bankers at their top but 
lots of clerks and secretaries and delivery personnel and 
tellers and everything else spread around the country whose 
jobs may depend on the United States getting a fair and level 
playing field overseas as well as not having overseas advisory 
institutions stretch their regulatory hands inside of our 
borders.
    Thank you, Mr. Quarles.
    Mr. Quarles. Thank you, Senator.
    Chairman Crapo [presiding]. Senator Jones.
    Senator Jones. Thank you, Mr. Chairman, and thank you, Vice 
Chairman Quarles, for your attendance here today. I really 
appreciate your being here.
    I want to go back just a moment to an area that Senator 
Menendez discussed with you, and that is with the Community 
Reinvestment Act. Frankly, from my State's perspective, that is 
one of the most important things that the Fed will do, and I 
think modernizing the CRA is going to be one of the most 
important things that you may do in your term.
    What gives me a little bit of concern right now is that 
coming out of the OCC I see comments that as part of the 
modernization effort, they would like to see a universal 
measurement system, I think the comment was, for $100 million 
banks in Iowa the same as JPMorgan. That gives me a little bit 
of concern because of the obvious disparities in communities 
around the country, and I would like to kind of get your views 
on what you think. I am not tying you to specifics. I 
understand that. But I would like to kind of get your views on 
whether or not the CRA rules should appropriately reflect the 
individual needs of specific communities across the country.
    Mr. Quarles. I want to make sure that I do not sort of 
front-run the joint process that is going on----
    Senator Jones. Yes.
    Mr. Quarles. ----in discussing exactly these issues among 
the regulator, because we do want to come out with a joint 
proposal, and we are still talking about how some of these 
issues will be handled.
    As a general matter, though, I think that the purpose of 
CRA modernization, CRA reform, however one wants to describe 
it, is precisely to--I think there is a lot of consensus and 
desire on the part of community development organizations and 
players themselves, not just the banks and the regulators, in 
order to have that process really be broader, directed toward a 
broader range of community development activities than has 
happened in the past. And I think that under the principles of 
transparency and simplicity, I think that we can improve the 
regulation in a way that creates incentives to do that and 
creates incentives for compliance--really more than 
compliance--engagement by the banks that really does help 
revitalize the moderate- and lower-income sections of 
communities. And that is the lens through which the Fed is 
participating in these discussions.
    Senator Jones. All right. Thank you, sir. And going back to 
Senator Cortez Masto's questions, I was a cosponsor and voted 
for the bank regulatory bill, S. 2155, but the concerns that 
she raised are still a concern of mine as well. Again, we have 
a lot of minority communities, and I want to make sure that 
those folks are not discriminated against. I want to make sure 
that they are not redlined. Can you just simply--and I heard 
your answer, and I appreciate that. But will discrimination in 
housing and lending still be--will it be a priority with you 
and the Fed?
    Mr. Quarles. A very high priority for me personally and for 
the Federal Reserve as an institution.
    Senator Jones. All right. Thank you, sir.
    You have also talked about--I know one of the other 
priorities has been cybersecurity, and I think that that is a 
very--that is something that also gives me a lot of pause in 
today's world. And, particularly, I know there are a lot of 
efforts going on right now to beef up cybersecurity within our 
own system, but we are so globally connected now that I worry 
about our connectivity with other global markets and other 
banks.
    Can you give me a sense of what you are doing in working 
with international banking regulators to make sure that those 
banks are as secure and as up-to-date in working with the 
cybersecurity? Because if it happens somewhere else, it could 
very well affect folks in Alabama.
    Mr. Quarles. Yeah, that is obviously one of the most 
significant, if not the most significant risk that faces the 
financial sector currently, and you are right to highlight the 
international aspect of it. In our discussions among central 
banks and among bank regulatory agencies around the world, I 
would say that that is probably the highest priority item that 
we have, discussing ways to ensure that our systems are 
resilient. Internally, domestically, we look at that, including 
the international component, in sort of a broad range of 
interagency activities. There is the FBIIC, which is focused on 
tech infrastructure, the FSOC, you know, there are processes 
within the FSOC to look at this issue, very high priority for 
us.
    All of that said, I would say that we still have to do 
more. It is the issue that I am most concerned about and the 
one that I think that we are probably--that we have most to do 
on. I do not think that we have the best handle on it yet. We 
are working very hard on it.
    Senator Jones. All right, great. Thank you, Vice Chairman 
Quarles.
    Thank you, Mr. Chairman.
    Mr. Quarles. Thank you, Senator.
    Chairman Crapo. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. Thank you, Vice 
Chairman, for being here this morning.
    As you may know, I spent about 20-plus years in the 
insurance industry.
    Mr. Quarles. I knew that.
    Senator Scott. I am glad to hear that. And I am a big fan 
of the State-based regulation system for insurance. We have an 
old saying in South Carolina, like many things Georgia thinks 
it started in Georgia, but it started in South Carolina: ``If 
it ain't broke, don't fix it.''
    Unfortunately, Congress did some fixing in the Dodd-Frank 
Act as it relates to insurance. Many insurance savings and loan 
holding companies are now supervised at the holding company 
level by both the Federal Reserve and State insurance 
regulations, creating redundant rules of the road that are not 
proportional to the risk profile of these firms. That runs 
counter to your preference for regulatory efficiency, and it 
adds costs for policyholders. I will ask you just a couple 
questions.
    Do you support a more streamlined regulatory approach that 
would uphold a State-based system of insurance regulation while 
right-sizing the Fed's examination authority? And will you 
ensure that the Federal Reserve does not apply bank-centric 
supervisory tools or expectations to insurance savings and loan 
holding companies?
    Mr. Quarles. At that level of answer, the answer is 
definitely yes. I have been concerned, as I have talked with 
these insurance savings and loan holding companies, that it 
does seem as if the burden that our regulation of the holding 
company because of their owning what are sometimes relatively 
small and certainly in the context of their organizations 
relatively small savings and loans is out of whack. We are 
imposing too much burden on them.
    I do think that as long as they have a depository 
institution subsidiary, I think that there are sort of bank 
regulatory principles that we need to apply. We have not got 
the balance right. We have not worked out how to do that in a 
way that does not impose excessive burden on the institutions, 
and it is a high priority for me to fix that.
    Senator Scott. That is one of the reasons why I used the 
word ``right-sizing.''
    Mr. Quarles. Yes.
    Senator Scott. Because the reality of it is that the 
regulatory burden that is placed upon really the policyholders 
through additional cost should be appropriate for the risk 
profile that those firms actually have.
    Mr. Quarles. Agreed.
    Senator Scott. The Fed also regulates insurance through 
FSOC. Secretary Mnuchin told me a revamp of the nonbank SIFI 
designation process is underway. Can you give me an update on 
that? And is it a rule or guidance that is coming?
    Mr. Quarles. Well, again, not wanting to front-run a 
process that has a number of agencies involved in it and that 
we are in the middle of, the general direction of the process 
is pretty clear, which is that we are looking at how to--and 
certainly I support the approach of designating on an 
activities basis as opposed to an entities basis and 
determining what activities can create systemic risk and then 
finding a way to apply appropriate regulation to those 
activities. I think that while the practical issues that that 
raises are difficult, they are solvable, and I think that 
intellectually that is a superior way to think about the 
process.
    Senator Scott. Another way the Fed regulates insurance is 
through the IAIS. The ICS that you are working on should 
accommodate our State-based system of insurance regulation, not 
the other way around. Will you make that clear to the IAIS? And 
where are we in the ICS process?
    Mr. Quarles. Yes, that has our support for an 
internationally agreed capital regime that reflects our U.S.-
based approach. It is something that we have been pursuing in 
the international fora and are continuing to do so. We are 
pretty strong about that.
    Senator Scott. So I am going to take that as a yes, you 
will make clear to the IAIS----
    Mr. Quarles. We will, yes.
    Senator Scott. Thank you. Before I close, I want to mention 
the Fed's recent enforcement actions against Wells Fargo. I am 
all for regulatory relief. I think it is clear that we 
overcorrected in the past and our economy suffered as a result. 
What I am not for is fraud. What I am not for is theft. I hope 
you and your colleagues do not hesitate to pursue similar 
actions in the future when they are warranted.
    Thank you.
    Mr. Quarles. Thank you, Senator.
    Senator Scott. Thank you, Mr. Chairman.
    Chairman Crapo. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    So before the financial crisis, regulators treated 
dangerous mortgage-backed securities the same way they treated 
safe Treasury bonds when establishing capital requirements. The 
regulators badly misjudged the risk of those mortgage-backed 
securities. The result was that taxpayers were left holding the 
bag when the big banks did not have enough capital to withstand 
losses.
    So after Dodd-Frank Act, too-big-to-fail banks were 
required to have a certain amount of capital for each dollar in 
assets, regardless of the riskiness of those assets. Last week, 
the Fed proposed weakening this rule.
    So, Governor Quarles, this new rule will allow each and 
every too-big-to-fail bank to satisfy the non- risk-weighted 
capital requirement while holding less capital than the 
previous rule, right?
    Mr. Quarles. That is correct.
    Senator Warren. OK. So the Fed is rolling back capital 
requirements for the biggest banks, and it is not just a 
marginal rollback. The FDIC has estimated for this Committee 
that under the proposed rule, JPMorgan, Citigroup, and Morgan 
Stanley will be able to reduce their capital by more than 20 
percent at their bank subsidiaries and still meet their 
leverage capital requirements. Wells Fargo and Bank of America 
can each reduce their capital by more than 15 percent.
    The FDIC, which insures these banks and has to pay out if 
the banks fail, refused to join in this new proposal. Chairman 
Gruenberg said the leverage ratio requirements are ``among the 
most important postcrisis reforms'' and the existing ``simple 
approach has served well in addressing the excessive leverage 
that helped depend the financial crisis.'' And Governor 
Brainard voted no on the proposal, the first dissent since the 
Fed started making its votes public.
    So, Governor Quarles, why did you think it was all right to 
roll back capital requirements given this unprecedented level 
of opposition from both the FDIC and your fellow Governor at 
the Fed?
    Mr. Quarles. A number of reasons. One, our estimate of the 
actual capital effect of the rule is much smaller.
    Senator Warren. Do you think the FDIC does not know the 
numbers?
    Mr. Quarles. Our estimate is much smaller, and the 
incentive that is created when a leverage ratio is actually the 
binding ratio--I completely agree with you, Senator, that the 
crisis has shown us that leverage capital measures are an 
important element of capital regimes, and I have a much greater 
appreciation of that than I did before the crisis, because our 
risk assessments, there will always be idiosyncracies, mistakes 
in even the most careful and granular risk assessment.
    But if we set the leverage ratio so that it becomes the 
binding ratio, which at the level we had set it, it was for a 
number of institutions, and basically what we are saying to 
them is you will bear the same capital cost if you take on a 
very risky asset or if you take on a less risky asset.
    Senator Warren. You know, but what troubles me about this 
is--I believe the FDIC on their numbers. I have no reason not 
to. They have been in this business for a very long time, and 
they are the ones that pay out. But even more importantly, 
under Chair Yellen the Fed moved carefully and with consensus 
to strengthen capital requirements. In your first year, you 
have already started rolling back these requirements, despite 
significant opposition, and, you know, this is great for big 
banks already making record profits. But it is the taxpayers 
that end up on the hook for the risk.
    So I want to ask you a related question to this. The 
banking bill that just passed the Senate also eases capital 
requirements for institutions ``predominantly engaged in 
custody, safekeeping, and asset servicing activities.'' Now, 
this provision clearly applies to the so-called custody banks 
like Bank of New York Mellon. The question is whether JPMorgan 
and Citi can also cut their capital under this provision. The 
CBO says it is a 50-50 shot whether or not JPMorgan and Citi 
would qualify. You are the guy who will get to make that 
decision.
    So if the bill that just passed the Senate is written into 
law, will you interpret the custody bank provisions to include 
JPMorgan and Citi?
    Mr. Quarles. So although I am a lawyer, I am not appearing 
here as a lawyer, so I do not want to perform--a surgeon should 
not perform his own appendectomy, but my reading of that 
provision would be that the word ``predominantly'' would not 
include the activities of a firm such as Citi or JPMorgan.
    Senator Warren. So are you saying for certain that the 
language of the legislation cannot be interpreted to allow 
JPMorgan and Citi to reduce their capital by an estimated $30 
billion?
    Mr. Quarles. That would not be my view.
    Senator Warren. So it will not happen.
    Mr. Quarles. Well, I am one person on a Board that I hope 
soon has other members.
    Senator Warren. OK, good. You know, I am worried about this 
because I am worried about the cumulative effect of these 
rollbacks. Taken separately, each of the rollbacks, the 
rollbacks you have already done and the rollbacks under the 
bill, I believe are dangerous. But when they are taken 
together, they are downright reckless. The banking bill gives 
even more discretion to you, Mr. Quarles, so that you can help 
out giant banks and leave taxpayers holding the bag, and I just 
think that is the wrong direction for us to go.
    Thank you, Mr. Chair.
    Chairman Crapo. Senator Tillis.
    Senator Tillis. Thank you, Mr. Chairman. Mr. Quarles, thank 
you for being here.
    I believe it was Senator Corker that was talking about why 
our colleagues on the other side of the aisle should be really 
pounding the table for your confirmation to the 14-year term, 
and I would really recommend an article that was published back 
in October of last year titled, ``Does the new Fed Governor 
serve at the pleasure of the President?'' It was by Peter 
Conti-Brown, a Democrat who thinks that in this particular case 
we should be removing all the hurdles and get you on the agenda 
as quickly as possible and, like you said, get other members 
appointed so that you all can be independent and get a lot of 
work done that we need to get done.
    I do not remember the time, but I know you recently--maybe 
it back in January--spoke to the ABA.
    Mr. Quarles. Yes.
    Senator Tillis. And you talked about revisiting advanced 
approaches thresholds for identifying internationally active 
banks.
    First off, is it still your position that we should revisit 
the advanced approaches thresholds? Is it still a priority for 
you? And could you discuss your broader position on the issue 
and what lies ahead under your leadership?
    Mr. Quarles. Absolutely. Yes, that is a priority, and it is 
on the agenda. Because it is significantly related to 
legislative movement on the thresholds, at least for the 
moment, we have thought that the better part of valor has been 
to hold off until we see what direction the Congress goes 
there. But I think that wherever the legislative process 
settles, there will be an ability for us to continue to move 
the thresholds on the advanced approaches.
    Senator Tillis. I think you also recently talked about the 
Volcker rule and how it has been detrimental to capital markets 
and it has created a great deal of uncertainty. There was a 
House bill recently passed to streamline the Volcker rule. I 
believe it passed by a very big margin, 300-104. We have been 
working on the bill and trying to increase awareness in the 
Senate to move it forward at some point. But can you talk to me 
a little bit about the consequences of having five different 
regulators enforcing the rule and how the bill would be 
streamlined or how you could streamline it and maybe make that 
a little bit less problematic?
    Mr. Quarles. There is obviously a lot of coordination work 
that is involved to have five regulators to agree, even when we 
are all pulling in the same direction. I would----
    Senator Tillis. What is the rational basis for five of them 
being at the table, though? I mean, I want you to finish your 
thought, but cover that as well.
    Mr. Quarles. Well, each of them has sort of entity 
supervisory authority over entities that are affected by the 
Volcker rule. So there is a logic to the provision. There are 
logistical consequences to the provision. I would say that the 
cooperation that we have had since the beginning of the year on 
working on revising the Volcker rule has been very productive. 
The other regulators have worked together very closely with us 
in developing proposals to simplify that regulation, and it is 
actually moving fairly well, but it is moving fairly well for a 
five-headed process.
    Senator Tillis. I think you mentioned earlier you were--I 
know you were questioned yesterday over on the House side, and 
someone else mentioned already the insurance saving and loan 
holding corporations. I will review that for the record, but my 
staff told me you have already covered that question. I tend 
not to revisit questions already asked.
    So just on a final note in the minute left, you and I have 
had several discussions about regulatory right-sizing on a 
broader basis. Volcker is just one of them. But let us assume 
we fast forward, you have got your 14-year term. I know that 
there are certain limits about what you can talk about about 
precisely what you do on regs or reg repeals. But can you give 
me in broad strokes what your top two or three areas would be 
to look for opportunities to right-size regs?
    Mr. Quarles. I think that some of them--I think probably 
all of these I have talked about--that we have not proposed 
yet, you will see a proposal for, again, a much more 
transparent and codified framework for determining control 
under the Bank Holding Company Act, which really is not just an 
issue of interest to the lawyers, but really can be important 
for capital raising for community banks because of control 
issues that frequently come up in those contexts.
    Liquidity regulation for firms below the G-SIB level, kind 
of continuing to gradate that regulatory regime is something 
that I think that you will see.
    I think that as we finalize some of the transparency 
proposals that we have made, they will go farther than the 
initial proposals, and then as well the Volcker rule that we 
are working on.
    Senator Tillis. Thank you.
    Chairman Crapo. Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman. Welcome, Mr. 
Quarles.
    Mr. Quarles. Thank you.
    Senator Van Hollen. So I know my colleague Senator Schatz 
mentioned this issue, but I do want to emphasize that we all 
woke up to a headline in the Wall Street Journal the other day 
stating, ``The biggest U.S. banks made $2.5 billion from the 
tax law in one quarter.'' It talked about the four biggest 
banks. That certainly was not how the tax reform plan was 
advertised here on Capitol Hill, and I think Americans are 
waking up to the fact that since January 1st of this year, big 
corporations have spent $250 billion on stock buybacks. 
Apparently, they could not think of a good investment for the 
money within their corporation or did not want to use it to 
give the promised $4,000 pay increases to their employees, so 
they passed it on to the shareholders. And it is worth noting 
that 35 percent of their shareholders are foreigners--35 
percent of the stock out there is owned by foreigners. So out 
of the pockets of many middle-class American families into the 
bank accounts of foreigners. As someone at the Fed, I hope you 
will continue to monitor the impact of this tax bill in many 
different ways.
    I want to follow up with some of the questions that my 
colleague Senator Cortez Masto raised. I know in the House 
yesterday, or whenever you testified, you were asked about a 
recent Center for Investigative Reporting findings that 
redlining, discrimination in mortgage lending continues in a 
very real way. They looked at 31 million mortgage records and 
found evidence of discrimination in mortgage lending in 61 
metropolitan areas. And this, as you know, is not a new story. 
It goes back decades.
    In the lead-up to the financial crisis, there was a very 
big scandal in Baltimore City. The city of Baltimore sued Wells 
Fargo. Wells Fargo settled. Very clear documentation that many 
African Americans and people of color who had good credit 
ratings were being charged higher interest rates than their 
peers. And also predatory lending where people who had no 
documentation about income were granted loans that people knew 
that they would fail, they knew they could pass those loans up 
and not have to be held responsible.
    So this is an ongoing pattern, and we have a recent report 
here, and I was listening to your testimony and your answers 
with respect to Senator Catherine Cortez Masto, and here is 
what I would ask: Can you take a look at the report from the 
Center for Investigative Reporting--I do not know if you had a 
chance to look at it since your House----
    Mr. Quarles. To look at it, but certainly not to study it, 
and I can obviously commit to do so.
    Senator Van Hollen. Because I would like for you to take a 
look at it, and your colleagues, because you mentioned in your 
response that at the Fed you have lots of tools to get 
information. I mean you mentioned the publicly available HMDA 
information, but you went on to say you actually get a lot of 
additional information, correct?
    Mr. Quarles. That is correct.
    Senator Van Hollen. So the obvious question here is: Where 
is the breakdown in the system? If these reports are accurate--
and you have not looked at it, but it is a very well documented 
study. I have taken a look. If these reports are accurate, 
where is the system failing? Because we all, everyone on this 
Committee is committed to making sure we do not have 
discrimination in lending. But it is clearly still going on out 
there in the real world.
    So where is the breakdown? And I am going to ask you today, 
since you do have a lot of data beyond HMDA, I do not think we 
should have to wait for studies like that from the Center for 
Investigative Reporting to catch what is happening. We need you 
and the Fed and the OCC to be on the front lines.
    So can you take a deep dive into this report and get back 
to me and this Committee and let us know what your assessment 
is and what is broken in the system?
    Mr. Quarles. Absolutely. Very reasonable request. Of course 
we can.
    Senator Van Hollen. Because, you know, we keep hearing, 
again, that folks have the tools, but the tools do not seem to 
be working because we keep getting these reports. And it is 
very disturbing to see the continuing wealth gap, right? We 
have big income gaps----
    Mr. Quarles. Yes.
    Senator Van Hollen. ----we have big wealth gaps between the 
African American community and communities of color and others. 
And as you know, for most Americans that wealth is in their 
home.
    Mr. Quarles. Right.
    Senator Van Hollen. So if you cannot get a loan to get a 
home and build that wealth, that gap grows. So I just want your 
commitment to work with us to get to the bottom of this. There 
are these studies out there. We need your help.
    Mr. Quarles. You have that commitment.
    Senator Van Hollen. Thank you.
    Chairman Crapo. Senator Perdue.
    Senator Perdue. Thank you, Vice Chair, for being here 
today. I just have two quick questions.
    In your role as Vice Chair, you have a seat on the 
Financial Stability Board, I believe, as well as the Basel 
Committee on Banking Supervision. In those roles, give us your 
opinion about how well capitalized U.S. banks are in your 
opinion today.
    Mr. Quarles. Relative to sort of peer banks around the 
world, U.S. banks are extremely well capitalized.
    Senator Perdue. Given that and given the accelerated 
activity of our implementation of Basel III, particularly in 
relative terms to what the rest of the signatories have been 
doing, what are your thoughts about any further implementation 
of the Basel III agreement relative to what other people--
shouldn't we see further implementation or acceleration of 
implementation before we entertain further rules?
    Mr. Quarles. Well, I think that, assuring that we have that 
level playing field internationally is one of the reasons for 
those----
    Senator Perdue. Do we have that today?
    Mr. Quarles. I would say that we are ahead of many other 
jurisdictions.
    Senator Perdue. Yes, sir.
    Mr. Quarles. That is definitely something that we take into 
account, assuring that we maintain a level playing field both 
in encouraging others to come up to standard and as we think 
about the role of our own regulations.
    Senator Perdue. Under Senate bill 2155 that we just passed 
in Committee and passed in the Senate, the banking regulatory 
relief bill, if it becomes law, the Federal Reserve will have 
the responsibility to determine which banks between $100 and 
$250 billion in assets will be given relief for enhanced 
supervision. Senator McCaskill and I actually have a bill, 
Senate bill 1983, that would require the Federal Reserve to 
actually use the Basel five-part test in designating G-SIBs. 
Can you give us your opinion on that? And how do you feel about 
the current activity level or the current asset size-based 
approach versus the activity-based approach in determining risk 
for banks of this size?
    Mr. Quarles. I think that making those determinations is 
something that we should take a range of factors into account 
for. Size is one, but it is only one, and complexity and 
interconnectedness and, you know, the character of bank 
portfolios, I think all of that goes into an assessment of 
systemic significance. And so I definitely think that that is 
something that we ought to do.
    Senator Perdue. You do support moving more to a multi-based 
approach, multi-factor approach in terms of evaluating the risk 
of those banks?
    Mr. Quarles. Yes. I think we do that now. I certainly think 
we should.
    Senator Perdue. Good.
    Mr. Quarles. Yes.
    Senator Perdue. In your role, you evaluate emerging threats 
and so forth. Can you give us a brief summary, particularly 
with the size of the central banks in China, Japan, U.S., and 
Europe, the largest balance sheets we have ever seen, and we 
see the growth of debt really in emerging markets again within 
the $200 trillion universe of global debt. Can you give us just 
your thoughts today in your role here on emerging threats that 
may threaten the global financial system? How should we be 
thinking about that today?
    Mr. Quarles. For the global financial system generally, I 
would say that we view the risks to financial stability 
essentially as moderate, which is to say about in the middle of 
where we would expect them to be over a cycle.
    Senator Perdue. Is that down from 10 years ago?
    Mr. Quarles. Ten years before or after the crisis?
    Senator Perdue. Before.
    Mr. Quarles. That is probably about where it would have 
been 10 years ago, where we would have thought that it would 
have been 10 years ago. There are individual countries where we 
think the risks are elevated. Some of the issues that you have 
cited are issues that we certainly look at. But, in general, 
the risks to financial stability, both our domestic financial 
stability and global financial stability, we are in a reason 
spot right now. I would not say that they are low, but they are 
not excessively elevated either.
    Senator Perdue. Thank you.
    Thank you, Mr. Chair.
    Chairman Crapo. Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman. And thank you 
for your patience. I think I might be the last one here 
unless--oh, Jack. We have saved the best for last, and I guess 
that is not me.
    I want to just follow up on Senator Toomey's questions. He 
talked about a lack of Federal nominees, and I would just like 
to briefly comment on the lack of Federal Board of Governors' 
confirmations. Do you know the number of Board nominees that 
were denied a hearing under President Obama?
    Mr. Quarles. I do not.
    Senator Heitkamp. Yeah, well, that never gets talked about, 
but the answer is two. So I think we have to be really careful 
when we are pointing fingers about not having a full 
contingent, because this is not something new. It is something 
that needs to be addressed desperately here. But let us not 
paint like this is a brand-new problem that we have here.
    The other thing that I probably want to correct on the 
record is Senator Toomey said, you know, below 250 there is no 
SIFI designation under 2155. That is not true. Between 100 and 
250, the Fed has complete authority if you see an institution 
that presents systemic risk for whatever reason, and that is to 
respond to the concern about Countrywide and the risk that they 
presented. And this puts a burden on you, and I want to make 
sure that the Fed understands that this is not--at least this 
sponsor of 2155 did not in any way want to limit your ability 
to identify those institutions under 250 who present systemic 
risk. So I want to follow up on a couple quick questions on 
2155.
    As Vice Chair of Supervision, you will have a lot of 
responsibility for implementing the changes in that bill, 
should it be passed by the House and signed by the President, 
which we very much hope. Some of the opponents of the bill have 
claimed that the legislation will take us back to the state of 
play before the financial crisis. Specifically, they have 
argued that the bill could somehow open up widespread risk in 
the mortgage market and result in the kind of foreclosure 
crisis we saw in 2008.
    Do you agree that one of the main drivers of the 2008 
crisis was that firms were exporting mortgage credit risk and 
failing to perform appropriate and basic underwriting duties?
    Mr. Quarles. That was certainly an element, yes.
    Senator Heitkamp. Does this legislation do anything to 
change the strict mortgage lending requirements known as QM 
rule for larger institutions?
    Mr. Quarles. From my review of it, it does not.
    Senator Heitkamp. Does it change any of the QM requirements 
for community banks that do not keep that loan on portfolio?
    Mr. Quarles. I do not see that it does, no.
    Senator Heitkamp. Does the legislation do anything to 
change the risk retention rules put in place after the crisis?
    Mr. Quarles. I do not believe so.
    Senator Heitkamp. So in your view, would 2155 preserve the 
critical tools that were put in place after the crisis to 
prevent another mortgage foreclosure crisis?
    Mr. Quarles. I believe that it would, Senator.
    Senator Heitkamp. OK. During your time at Treasury, you 
worked quite a bit on housing reform, and obviously that is a 
topic that we are very interested in here, kind of that next 
turn the page after some of the credit union and small 
community bank reform that we did in 2155. So I am going to ask 
you some quick questions on mortgage reform.
    Mr. Quarles. Sure.
    Senator Heitkamp. With respect to Fannie and Freddie, do 
you think it is likely that one or both could fail again? That 
is probably not a quick question.
    Mr. Quarles. Exactly. I guess that would be a very 
difficult question to answer. I would have to dig deeper to----
    Senator Heitkamp. But is there a possibility that they 
could fail again?
    Mr. Quarles. I would think that there is a possibility.
    Senator Heitkamp. Do you think it is likely that one or 
both could take a substantial draw from their line of credit 
from Treasury in the near future?
    Mr. Quarles. Well, I know that when I was at the Treasury, 
we proposed strict controls on that, and the Treasury does have 
the ability to limit that. So a lot of that would depend on the 
Treasury.
    Senator Heitkamp. But you are saying--you cannot give a 
sense of likelihood, but there is a possibility, correct?
    Mr. Quarles. I think there is the legal possibility.
    Senator Heitkamp. So if Congress fails to take action, what 
long-term risk do you see in our financial system if our GSEs 
remain in conservatorship?
    Mr. Quarles. Well, you know, I think certainty is a benefit 
to the economy in general, and so for me, the principal benefit 
is to create certainty around what our system of housing 
finance is going to be going forward and to have that be sort 
of as private sector driven as possible.
    Senator Heitkamp. Do you believe that a Government backstop 
is essential to retaining the 30-year fixed-rate mortgage?
    Mr. Quarles. I would want to analyze that question more 
deeply before giving you a yes or no answer. My belief today is 
probably not, but I would really want to get back to you with a 
more considered----
    Senator Heitkamp. We would have to have a long conversation 
about that because I think that there are a number of people 
certainly in smaller and midsized institutions who believe that 
it would be very difficult to take a 30-year interest rate risk 
without some kind of assurance that they could offload that 
risk.
    Mr. Quarles. Fair enough.
    Senator Heitkamp. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman. And 
welcome, Chairman Quarles.
    Last time when Chairman Powell was here, we talked about 
the impact of technology on employment, which is increasingly 
both problematic and beneficial, so let us talk about the 
problems first. There is a real concern, I think, about 
people--and not just economic analysts, but people who are Main 
Street--who fear that their job will be automated away. That I 
think contributes to kind of the real concern that is out there 
despite fairly good economic news. And that raises the issue 
of, well, how do we respond to multiple ways? First, you know, 
technology is coming, we know that. Can education and training 
and more resources in that regard allow us to make the 
transition so that people can still work, they will not be sort 
of left behind?
    Mr. Quarles. I think that those are important factors. We 
need to put a lot of resources into education and training in a 
society that is innovating like ours, particularly innovating 
through technology.
    Senator Reed. I appreciate that. One of the battles we have 
perennially is putting resources into education. One could 
always be more efficient or aspire to be more efficient, but I 
think given this technological challenge, this automation 
challenge, the emphasis on training actually beginning in pre-K 
and STEM, et cetera, requires a huge investment. And this year 
we have done OK, but in the future we are going to look at some 
very difficult choices.
    The other issue this raises would be in terms of the full 
employment mandate, Mr. Vice Chairman, of the Fed, which is as 
technology displaces workers, do you factor that in as sort of 
the new norm, that, you know, our full employment is not X 
because those jobs do not exist anymore, and that creates kind 
of a dynamic where there are literally millions of Americans 
who have a job and we are at full employment?
    Mr. Quarles. We obviously look closely at the relationship 
between the unemployment rate and the labor participation rate 
and how that is passing through to inflation, and there have 
been changes in that relationship over the course of the last 
10, 15, 20 years that we do not understand well, that we are 
doing a lot of research in. Technology clearly has to be an 
element. I do not think it is the only element. How big of a 
driver it is, you know, I could not tell you. We really are 
still trying to figure out exactly why those relationships are 
changing relative to what they have been in the past.
    Senator Reed. And I think you would concur, this is a very 
important analysis because----
    Mr. Quarles. Incredibly important.
    Senator Reed. This phenomenon, you know, it is not 
something that 10 years from now we will deal with it. It seems 
with every week we are seeing more and more amazing 
applications of technology that just basically takes jobs away 
or changes them so dramatically.
    Mr. Quarles. Certainly changes the nature of the economy. 
Now, you know, our experience up to now in this country, 
globally, with technological advance, has been that jobs are 
created as jobs are removed. You know, and so I think the 
historical evidence would give us reason to think that we will 
see some of that effect here. But this is a pretty dramatic--
some of the advances that we are seeing are pretty dramatic and 
could have significant effects. We are looking at that.
    Senator Reed. Just a final point. It is my understanding 
that in 26 States, the number one occupation is driving a 
vehicle of some kind, and every day we hear more and more--some 
good, but some bad, but mostly good--about autonomous vehicles 
and sophisticated AI systems in which driving will be something 
like blacksmithing, and that will have a huge impact. And it is 
years away. It is not decades away.
    Just a final topic, and I only have a few remaining 
seconds, and the Chairman and the Vice Chair have been very 
kind. There is an Advanced Notice of Proposed Rulemaking from 
the Fed, OCC, and FDIC on cyber, and this is another issue 
which cannot wait. So can you give us an update on where we 
are? I think we have got to get the rule out.
    One of the components of the rule is that at least raising 
the question whether board members of publicly held companies--
at least one member has to have some type of cybertraining or 
some arrangement in the company to include cybersensitivity. 
Can you comment?
    Mr. Quarles. I completely agree with you. Cyber is not only 
an important risk, it is probably the most important risk that 
is faced by the financial sector. I think that as regulators we 
need to step up the pace with which we are taking measures to 
help support the resiliency of the system.
    The ANPR that we put out is an example. The idea of having 
a board member with cyberexpertise, when I have been on boards 
that have had a board member with that kind of expertise, that 
has been extremely useful. That has not just been a nice thing 
to have. It has been extremely useful.
    But I also think that even beyond some of the issues that 
are in the ANPR, we really need to step up our work not just as 
regulatory agencies but across the Government in really 
thinking how we can support the resiliency of the financial 
sector to cyberrisk in ways that we are not yet. And I think 
that that needs to be a priority for us beyond even some of 
these regulatory measures, and that requires not just the 
banking agencies, but work, you know, across the various 
agencies of the Government because it is a serious issue for 
all of us.
    Senator Reed. Thank you, Mr. Vice Chairman.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Reed. And thank you, 
Governor Quarles, for being here today and the service you give 
us at the Federal Reserve Board.
    For Senators who wish to submit questions for the record, 
those questions are due on Thursday, April 26th, and I 
encourage you, Vice Chairman Quarles, if you receive questions, 
to please respond very promptly.
    Mr. Quarles. I will do so.
    Chairman Crapo. And with that, this hearing is adjourned.
    Mr. Quarles. Thank you very much.
    Chairman Crapo. Thank you.
    [Whereupon, at 11:25 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
                PREPARED STATEMENT OF RANDAL K. QUARLES
   Vice Chairman for Supervision, Board of Governors of the Federal 
                             Reserve System
                             April 19, 2018
    Chairman Crapo, Ranking Member Brown, and other Members of the 
Committee, I appreciate the opportunity to testify on the Federal 
Reserve's regulation and supervision of financial institutions.
    The Federal Reserve, along with the other U.S. banking agencies, 
has made substantial progress in building stronger regulatory and 
supervisory programs since the global financial crisis, especially with 
respect to the largest and most systemically important firms. These 
improvements have helped to build a more resilient financial system, 
one that is well positioned to provide American consumers, businesses, 
and communities access to the credit they need even under challenging 
economic conditions. At the same time, we are mindful that--just as 
there is a strong public interest in the safety and soundness of the 
financial system--there is a strong public interest in the efficiency 
of the financial system. Our financial sector is the critical mechanism 
for directing the flow of savings and investment in our economy in ways 
that support economic growth, and economic growth, in turn, is the 
fundamental precondition for the continuing improvement in the living 
standards of all our citizens that has been one of the outstanding 
achievements of our country. As a result, our regulation of that system 
should support and promote the system's efficiency just as it supports 
its safety.
    In fact, I believe that the supervisory objectives of safety, 
soundness, and efficiency are not incompatible, but rather are mutually 
reinforcing. Our job as regulators is to pursue each of these 
objectives. Moreover, our achievement of these objectives will be 
improved when we pursue them through processes that are as transparent 
as possible and through measures that are clear and simple, rather than 
needlessly complex. In doing this, we at the Federal Reserve intend to 
maintain the core elements of the postcrisis framework that have been 
put in place to protect the financial system's strength and resiliency, 
while also seeking ways to enhance its effectiveness.
    In my testimony today I will: (1) review the current condition of 
the Nation's banking institutions; (2) review our regulatory and 
supervisory agenda in light of the efficiency, transparency, and 
simplicity principles that enhance effectiveness; and (3) touch upon 
our engagement with foreign regulators.
Current Condition of Regulated Firms
    Before I discuss our regulatory and supervisory agenda in more 
detail, let me provide an update regarding the current condition of the 
Nation's banking institutions.
    Overall, the U.S. commercial banking system has strengthened 
considerably over the past decade. The largest U.S. banking 
organizations--those the failure of which would pose the greatest risk 
to the financial system and that are subject to the Federal Reserve's 
stress testing framework--have increased the dollar amount of their 
loss-absorbing common equity capital by more than $700 billion since 
2009, more than doubling their common equity capital ratios from 
approximately 5 percent to more than 12 percent. In addition, the eight 
U.S. global systemically important banking organizations, or G-SIBs, 
have developed significantly more stable funding positions as their 
reliance on short-term debt--including repurchase agreement, or repo, 
financing--has decreased by more than half since 2007 and now is equal 
to less than 15 percent of their total assets. The G-SIBs now also hold 
approximately $2.4 trillion in high-quality liquid assets, representing 
an increase of more than 60 percent since 2011.
    The financial condition of community banks also has strengthened 
significantly since the financial crisis. Aggregate reporting data from 
the more than 5,000 community-based holding companies subject to 
Federal Reserve oversight show marked improvements in profitability 
that have contributed to a strong overall capital position. Community 
banks reported net income of $20.6 billion during 2017, up 4 percent 
from 2016. They also experienced particularly strong loan activity, as 
their most recent year-over-year loan growth of 7.7 percent materially 
exceeded that of the banking industry as a whole.
    In the aggregate, banks realized profits of approximately $152 
billion during 2017. While total net income fell in 2017 compared with 
2016, this was largely a result of nonrecurring items. Total loans held 
by U.S. commercial banks grew roughly 5 percent during 2017 and 
currently exceeds the previous peak from 2008.
    While the overall position of the banking system is strong, the 
Federal Reserve continues to monitor ongoing risks that pose potential 
threats to banking firms of all sizes. It is often said that bad loans 
are made during good times. Therefore, more than 8 years into the 
recovery, we continue to emphasize the need for banking organizations 
to maintain underwriting discipline and strong risk-management 
practices. We are particularly focused on banking organizations that 
have or are developing concentrations in loan segments vulnerable to 
adverse economic developments. Banks generally would also be vulnerable 
to an unexpected and swift change in the shape of the yield curve.
    In addition, banks continue to innovate and keep pace with 
financial technology, or FinTech, developments. These innovations can 
present promising opportunities, and I believe our role as regulators 
is to allow that innovation to develop in a responsible way. These 
innovations can expand access to credit, including to underserved 
consumers and small businesses, which in turn can benefit the real 
economy. We must also acknowledge that these opportunities likely are 
not without risk. Our supervision regarding FinTech is therefore 
focused on ensuring that banks understand and manage these risks and 
that consumers remain protected.
    We are also very focused on the increased risk to all financial 
institutions of cyberattacks and are working with key public- and 
private-sector entities to strengthen the cyberresiliency of the 
financial sector. \1\ Cyberrisk continues to grow, driven by 
unprecedented technological innovation, the interconnectivity of the 
financial services sector, and inadequate or incomplete defenses. We 
also observe, and incorporate into our own supervisory approach, the 
reality that many of the most serious cybervulnerabilities are rooted 
in the basic challenges of managing large IT infrastructures. We 
continue to collaborate with other governmental agencies, and Federal 
Reserve supervisors are closely following each of these areas of 
concern.
---------------------------------------------------------------------------
     \1\ See Randal K. Quarles, ``Brief Thoughts on the Financial 
Regulatory System and Cybersecurity'', speech at the Financial Services 
Roundtable 2018 Spring Conference, Washington, February 26, 2018, 
www.federalreserve.gov/newsevents/speech/quarles20180226b.htm.
---------------------------------------------------------------------------
Regulatory and Supervisory Agenda
    The U.S. banking agencies' build-out of the regulatory and 
supervisory framework since the financial crisis has resulted in a 
substantially more resilient financial system, particularly at the 
largest firms. Stronger regulatory capital rules and the development of 
the Federal Reserve's stress testing regime have resulted in higher 
levels and quality of capital, new liquidity regulations and a 
heightened supervisory focus on liquidity have resulted in stronger 
liquidity positions, and resolution rules and living wills have 
contributed to improvements in the resolvability of systemically 
important firms.
    That said, this body of regulation is broad in scope and 
complicated in detail. It is inevitable that there will be ways to 
improve the framework, especially with the benefit of experience and 
hindsight, and--given the public interest in the financial system's 
efficiency--it is important that we pursue this task as assiduously as 
we can. I will turn now to highlighting some of the ways we have sought 
to improve the effectiveness of the postcrisis framework through 
increased efficiency, transparency, and simplicity.
Efficiency
    Efficiency of supervision and regulation means that if we have a 
choice between two methods that are equally effective in achieving a 
supervisory goal, we should strive to choose the one that is less 
burdensome. That can take many forms, including focusing the most 
stringent of supervisory standards and practices on the riskiest firms, 
as well as refining the calibration of specific requirements to make 
them more aligned with their original intent. I will briefly discuss a 
few recent measures that the Federal Reserve has taken designed to 
increase efficiency and thus improve the effectiveness of our 
regulation and supervision, such as the enhanced supplementary leverage 
ratio calibration proposal, the removal of midsized banking firms from 
the qualitative objection of our annual supervisory stress tests, and 
specific examination and supervisory process adjustments. I will also 
provide a few thoughts on where I believe additional improvements in 
efficiency can be made.
    The Board and the Office of the Comptroller of the Currency last 
week issued a proposal that would recalibrate the enhanced 
supplementary leverage ratio, or eSLR, applicable to G-SIBs and most of 
their insured depository institution subsidiaries. \2\ The proposal 
would help ensure that leverage capital requirements generally serve as 
a backstop to risk-based capital requirements. When the leverage ratio 
acts as a primary constraint, it can actually encourage excessive risk-
taking behavior because it does not distinguish between the capital 
cost of safer and that of riskier assets. The eSLR's current 
calibration has made it the primary capital constraint for some of the 
largest firms, which is inconsistent with its original purpose and 
provides an incentive for inappropriately risky behavior. The proposal 
would calibrate the eSLR so that it is less likely to act as a primary 
constraint while still continuing to serve as a meaningful backstop. 
The proposal also would enhance efficiency by making each firm's 
leverage surcharge a function of its individual systemic footprint. 
Last year, the Board also adopted a rule that reduced the burden 
associated with the qualitative aspects of the Federal Reserve's 
Comprehensive Capital Analysis and Review, or CCAR, for midsized firms 
that pose less systemic risk. Under that rule, the Board will no longer 
object to the capital plans of firms with total consolidated assets 
between $50 billion and $250 billion because of deficiencies in their 
capital planning process; rather, any deficiencies in their capital 
planning processes will be addressed in the normal course of 
supervision. \3\ Recently, we have solicited comment on whether that 
approach should be applied to a broader range of firms. I believe that 
our supervisory goal of ensuring a robust capital planning process at 
most firms can be achieved using our normal supervisory program 
combined with targeted horizontal assessments without compromising the 
safety and soundness of the financial system.
---------------------------------------------------------------------------
     \2\ Board of Governors of the Federal Reserve System, ``Rule 
Proposed To Tailor `Enhanced Supplementary Leverage Ratio' 
Requirements'', news release, April 11, 2018, www.federalreserve.gov/
newsevents/pressreleases/bcreg20180411a.htm.
     \3\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board Announces Finalized Stress Testing Rules Removing 
Noncomplex Firms From Qualitative Aspect of CCAR Effective for 2017'', 
news release, January 30, 2017, www.federalreserve.gov/newsevents/
pressreleases/bcreg20170130a.htm.
---------------------------------------------------------------------------
    I also believe that there are additional tailoring opportunities 
with respect to large firms that are not G-SIBs to ensure that 
applicable regulation matches their risk. In this regard, I support 
congressional efforts regarding tailoring, as offered in both the House 
and Senate, which have proposed prudent modifications. In addition to 
this potential legislation, I believe there are further measures we can 
take to match the content of our regulation to the character and risk 
of the institutions being regulated. Liquidity regulation, for example, 
does not have a G-SIB versus non- G-SIB gradation. In particular, the 
full liquidity coverage ratio requirement of enhanced prudential 
standards apply to large, non- G-SIB banks in the same way that they 
apply to G-SIBs. I believe it is time to take concrete steps toward 
calibrating liquidity requirements differently for non- G-SIBs than for 
G-SIBs.
    I believe that we can also improve the efficiency of our regulation 
with respect to our requirements regarding living wills. In light of 
the substantial progress made by firms over the past few years with 
their resolution planning processes, I believe that we should adopt a 
permanent extension of submission cycles from annually to once every 2 
years, and that we can again reduce burden for firms with less 
significant systemic footprints by reducing specific information 
requirements.
    The U.S. banking agencies have also taken a number of steps to 
advance more efficient and effective supervisory programs. For example, 
in response to feedback from banks in the context of the review 
required by the Economic Growth and Regulatory Paperwork Reduction Act 
of 1996, the agencies recently increased the threshold for requiring an 
appraisal on commercial real estate loans from $250,000 to $500,000, 
determining that the increased threshold will not pose a threat to the 
safety and soundness of supervised financial institutions. \4\
---------------------------------------------------------------------------
     \4\ Board of Governors of the Federal Reserve System, ``Federal 
Banking Agencies Issue Final Rule to Exempt Commercial Real Estate 
Transactions of $500,000 or Less From Appraisal Requirements'', news 
release, April 2, 2017, www.federalreserve.gov/newsevents/
pressreleases/bcreg20180402a.htm.
---------------------------------------------------------------------------
    Over the past several years, the Federal Reserve has also 
instituted various measures to clarify and streamline its overall 
approach to the supervision of community and regional banks in 
particular. For example, the Federal Reserve implemented a program it 
calls Bank Exams Tailored to Risk, or the BETR program. BETR uses 
financial metrics to differentiate the level of risk between banks 
before exams and ensure that examiners tailor examination procedures to 
minimize the regulatory burden for firms that engage in low-risk 
activities, while subjecting higher-risk activities to more testing and 
review. The Federal Reserve has also shifted a significant amount of 
its examination activity offsite to address concerns from community 
banks about burden.
    We have also implemented less complex and burdensome examination 
approaches in the supervision of regional banking organizations with 
assets between $10 and $50 billion. For example, we have streamlined 
procedures to reduce the burden associated with assessing compliance 
with Dodd-Frank Wall Street Reform and Consumer Protection Act company-
run stress testing requirements and decreased reporting burden by 
refining our tools for assessing liquidity positions at these banking 
organizations and eliminating the quarterly FR Y2052(b) liquidity 
report.
    Finally, the Board has begun a broad review to identify ways to 
increase the efficiency of the applications process, which we expect to 
reduce processing times for certain types of applications.
Transparency
    Transparency is central to the Federal Reserve's mission, in 
supervision no less than in monetary policy. In addition to 
transparency being a core requirement for accountability to the public, 
there are valuable, practical benefits to transparency around 
rulemaking: even good ideas can improve as a result of exposure to a 
variety of perspectives.
    A prime example of the Board's efforts to increase transparency was 
its release for public comment of an enhanced stress testing 
transparency package late last year. \5\ The Board issued the package 
in response to feedback from firms that there should be greater 
visibility into the supervisory models that often determine their 
binding capital constraints, as well as questions from analysts, 
investors, academics, and others who want to better understand details 
of how the Federal Reserve's supervisory stress tests work in practice. 
We are continuing to think about how we can make the stress testing 
process more transparent without lowering the strength of the test 
itself or undermining the usefulness of the supervisory stress test. I 
personally believe that our stress testing disclosures can go further, 
and that we should consider additional measures, such as putting our 
stress scenarios out for comment. My colleagues and I on the Board will 
be paying particularly close attention to comments on how we might 
improve the current proposal.
---------------------------------------------------------------------------
     \5\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board Requests Comment on Package of Proposals That Would 
Increase the Transparency of Its Stress Testing Program'', news 
release, December 7, 2017, www.federalreserve.gov/newsevents/
pressreleases/bcreg20171207a.htm.
---------------------------------------------------------------------------
    Looking ahead, we are also in the process of developing a revised 
framework for determining ``control'' under the Bank Holding Company 
Act. This framework would be more transparent, simpler to understand, 
easier to apply, and would liberalize some existing limitations. A 
clearer set of standardized rules should facilitate the raising of 
capital by banks, particularly community banks where control issues are 
generally more prevalent, and noncontrolling investments by banking 
organizations in nonbanking companies.
Simplicity
    The third principle that should guide an assessment of our current 
framework, simplicity, is about promoting public understanding and 
compliance by the industry with regulation. Confusion and compliance 
burden that results from overly complex regulation does not advance the 
goal of a safe financial system. The Federal Reserve has worked to 
simplify the vast and often complex postcrisis regulatory framework in 
several different ways. The most recent example was the issuance of the 
proposed stress capital buffer rulemaking just last week. \6\ The 
proposal would effectively integrate the results of the supervisory 
stress test into the Board's nonstress capital requirements. Doing so 
would result in a much simpler capital framework overall while 
maintaining its risk-sensitivity. For example, for the largest bank 
holding companies, the number of required loss absorbency ratios would 
be reduced from 24 to 14. While the proposal would result in burden 
reduction for both firms and supervisors, the proposed changes would 
generally maintain or increase the minimum risk-based capital required 
for G-SIBs (although no firm would be required to raise capital, since 
all firms currently maintain capital above these minimum levels) and 
generally modestly decrease the amount of risk-based capital required 
for most non- G-SIBs. Note, however, that a firm's stressed capital 
requirement is expected to vary in size throughout the economic cycle.
---------------------------------------------------------------------------
     \6\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board Seeks Comment on Proposal To Simplify Its Capital Rules 
for Large Banks While Preserving Strong Capital Levels That Would 
Maintain Their Ability To Lend Under Stressful Conditions'', news 
release, April 10, 2018, www.federalreserve.gov/newsevents/
pressreleases/bcreg20180410a.htm.
---------------------------------------------------------------------------
    Let me turn to the Volcker rule. Many within and outside of the 
industry have said that this is an example of a complex regulation that 
is not working well. While the fundamental premise of the rule is 
simple, the implementing regulation is exceedingly complex. Our fellow 
regulators are working actively with the Federal Reserve in seeking 
ways to further tailor implementation of the Volcker rule and to reduce 
burden, particularly for firms that do not have large trading 
operations and do not engage in the sorts of activities that may give 
rise to proprietary trading.
    Also with regard to large financial institutions, last year we 
issued for comment a proposal that would simplify the Board's ratings 
system by reducing the number of ratings. The proposed ratings system 
would be better aligned with the Board's postcrisis supervisory program 
for large financial institutions, which will allow us to target our 
supervisory messaging to those areas of greatest concern. \7\
---------------------------------------------------------------------------
     \7\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board Invites Public Comment on Two Proposals; Corporate 
Governance and Rating System for Large Financial Institutions'', news 
release, August 3, 2017, www.federalreserve.gov/newsevents/
pressreleases/bcreg20170803a.htm.
---------------------------------------------------------------------------
    Our simplification efforts have, of course, also extended to our 
supervision and regulation of smaller community banks. For example, in 
its continuing efforts to reduce data reporting and other burdens for 
small financial institutions, the U.S. banking agencies implemented a 
new streamlined Call Report form for small financial institutions in 
2017. \8\ Applicable to financial institutions with less than $1 
billion in total assets, the streamlined reporting form removed 
approximately 40 percent of the nearly 2,400 data items previously 
included. The agencies have also proposed further streamlining of this 
Call Report. The cumulative effect would implement burden-reducing 
revisions to approximately 51 percent of the data items previously 
reported by small banks.
---------------------------------------------------------------------------
     \8\ Federal Financial Institutions Examination Council (FFIEC), 
``FFIEC Finalizes June 2017 Proposed Revisions To Streamline the Call 
Report'', news release, January 3, 2018, www.ffiec.gov/press/
pr010318.htm.
---------------------------------------------------------------------------
International Engagement
    Finally, I would like to briefly touch upon the Federal Reserve's 
engagement with our foreign counterparts. As the supervisor of both 
U.S. banks operating overseas and foreign banks operating in the United 
States, we continue to maintain effective working relationships with 
our foreign supervisory counterparts, including through our 
participation in the Financial Stability Board (FSB) and the Basel 
Committee on Banking Supervision (BCBS). Our engagement with foreign 
bank regulators aids in promoting global financial stability and a more 
level playing field for our supervised firms. Let me note that I 
believe transparency in these process is important, and I support the 
BCBS's efforts to increase the transparency of its international 
standard setting. With respect to more specific initiatives of each of 
these bodies, I also expect to implement the BCBS's recently completed 
package of reforms, which conclude its postcrisis capital standard 
reforms. I also want draw the Committee's attention to the FSB's recent 
statement, which I fully support, that now is the appropriate time to 
pivot focus from new policy development toward evaluating policies that 
have been implemented to ensure the reforms are efficient and effective 
and to address any unintended consequences.
Conclusion
    The reforms we have adopted since the financial crisis represent a 
substantial strengthening of the Federal Reserve's regulatory framework 
and should help ensure that the U.S. financial system remains able to 
fulfill its vital role of supporting the economy. As I have outlined, 
the Board has already taken steps to increase the effectiveness of the 
framework currently in place by improving its efficiency, transparency, 
and simplicity. There are other areas where I believe that we can 
increase the framework's effectiveness, and we will look to do so where 
we are confident that we still have all appropriate tools needed to 
maintain the gains in safety and soundness made over the past several 
years.
    At the same time, it is critical that we continue to monitor for 
emerging risks affecting the financial system. This calls for better 
analysis and more agility by supervisors in identifying emerging risks, 
as well as vigilance against complacency. We will do everything we can 
to fulfill the responsibility that has been entrusted to us by the 
Congress and the American people.
    Thank you again for the opportunity to testify before you this 
morning, and I look forward to answering your questions.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                     FROM RANDAL K. QUARLES

Q.1. Would removing the Supplemental Leverage Ratio (SLR) from 
the Comprehensive Capital Analysis and Review (CCAR), as 
proposed in the Board of Governors of the Federal Reserve 
System's (Fed) Stress Capital Buffer (SCB) proposal, \1\ shift 
the binding constraint on capital distributions from leverage 
capital to risk-based capital for any of the domestic Global 
Systemically Important Banks (G-SIBs)?
---------------------------------------------------------------------------
     \1\ https://www.federalreserve.gov/newsevents/pressreleases/files/
bcreg20180410a2.pdf
---------------------------------------------------------------------------
    If so, which ones?

A.1. As a general matter, leverage capital requirements should 
serve as a backstop to risk-based capital requirements in order 
to reduce incentives for firms to increase their exposure to 
riskier assets. The Federal Reserve Board's (Board) stress 
capital buffer (SCB) proposal would currently extend the 
proposed stress buffer concept to the tier I leverage ratio, 
but not to the supplementary leverage ratio (SLR). The Board is 
seeking public comment on the advantages and disadvantages of 
both of these specific aspects of the proposal (i.e., the 
elimination of the post stress SLR but retention of the tier 1 
leverage ratio; see questions 1 and 3 in the preamble of the 
proposed rulemaking). \2\
---------------------------------------------------------------------------
     \2\ See 83 FR 18160, 18166-7 (April 25, 2018).
---------------------------------------------------------------------------
    The Board included an impact analysis as part of the 
proposal. Due to the confidential nature of certain data (e.g., 
firms' future capital distribution plans) that were used to 
develop the impact analysis, the proposal only describes the 
aggregate impact. The impact of the proposal on individual 
firms would vary based on each firm's individual risk profile 
and planned distributions, as well as across time based on the 
severely adverse stress scenario used in the supervisory stress 
test.

Q.2. How would common equity tier 1 (CET1) capital and total 
distributable capital change for each of the domestic G-SIBs 
under the Fed's proposed SCB rule? Please provide firm by firm 
numbers.

A.2. As noted in the response to Question 1 above, due to the 
confidential nature of the supervisory data included in the 
projected impact of the proposal on individual firms, the Board 
is not in a position to provide firm-specific estimates.
    The proposal would generally maintain or in some cases 
increase common equity tier 1 (CET1) capital requirements for 
global systemically important banks (G-SIBs). The estimated 
increase for G-SIBs would occur because the capital 
conservation buffer requirement under the proposal--which, for 
a G-SIB, includes both the SCB requirement and the G-SIB 
surcharge--would be greater than the capital required under the 
current supervisory poststress capital assessment.
    Based on data from Comprehensive Analysis and Reviews 
(CCAR) in 2015, 2016, and 2017, CET1 capital requirements for 
G-SIBs are projected to increase by approximately $10 billion 
to $50 billion in aggregate. Had the proposal been in effect 
during recent CCAR exercises, analysis of those CCAR results 
and the current level of capital at the G-SIBs indicates that 
no such firm would have needed to raise additional capital in 
order to avoid the proposal's limitations on capital 
distributions.

Q.3. Please review the attached analysis from Goldman Sachs 
equity research. Does the Fed agree that the SCB proposal would 
lead to an excess capital increase of $54 billion across the 
large banks the research report considered?

A.3. For firms with over $50 billion in assets that are not G-
SIBs, the Board estimates that the proposal would generally 
result in a reduction in the required level of capital to avoid 
capital distribution limitations relative to what is required 
today. This estimated reduction is attributable to the 
proposal's modified assumptions regarding balance sheet growth 
and capital distributions. While these assumptions would more 
appropriately reflect the expected performance of bank 
portfolios under stress, they would be somewhat less stringent 
than the assumptions currently used in the supervisory stress 
test. As noted above, for G-SIBs, the proposal would generally 
maintain or in some cases increase CET1 capital requirements.
    The impact of the proposal would vary through the economic 
and credit cycle based on the risk profile and planned capital 
distributions of individual firms, as well as on the specific 
severely adverse stress scenario used in the supervisory stress 
test. Based on data from CCAR 2015, 2016, and 2017, the impact 
of the proposal would range from an aggregate reduction in CET1 
capital requirements of about $35 billion (based on 2017 data) 
to an aggregate increase in CET1 capital requirements of about 
$40 billion (based on 2015 data). More specifically, G-SIBs 
would have experienced an increase in CET1 capital requirements 
ranging from $10 billion to $50 billion, while non- G-SIBs 
would have experienced a decrease in CET1 capital requirements 
ranging from $10 billion to $45 billion. Had the proposal been 
in effect during recent CCAR exercises, analysis of those CCAR 
results indicates that participating firms would not have 
needed to raise additional capital in order to avoid 
limitations on capital distributions.
    The analysis from Goldman Sachs seems to make additional 
assumptions about how banks might respond to the SCB proposal. 
Our estimates describe the changes in the actual level of 
capital that would be required under the proposal.

Q.4. If the goal of the Fed's SCB proposal is to integrate CCAR 
with ongoing capital requirements, please provide the Fed's 
rationale for excluding the SLR as a binding constraint in the 
SCB proposal.

A.4. Leverage capital measures work best when they serve as a 
backstop to risk-based capital measures in the context of a 
comprehensive capital regime. When leverage measures are 
binding constraints, they serve as an incentive for regulated 
institutions to increase the risk in their portfolios (because 
the capital cost for each additional asset will be the same 
whether the asset is risky or safe--institutions will thus have 
an incentive to add high risk/high return assets because the 
capital cost of those assets is the same as that of lower 
return but safer assets). We should try to ensure that the 
capital regime does not only result in the retention of a 
robust amount of capital, but also that the structure of the 
regime does not create unintended incentives for firms to take 
on risk.
    The SCB proposal currently proposes to introduce a stress 
leverage buffer requirement on top of the 4 percent minimum 
tier 1 leverage ratio requirement but not extend the stress 
buffer requirement to the SLR. As noted in the response to 
question 1 above, the Board is seeking comment on the 
advantages and disadvantages of these specific aspects of the 
proposal.

Q.5. Why did the Fed choose not to include the enhanced SLR 
(eSLR) in the SCB proposal?

A.5. The enhanced supplementary leverage ratio (eSLR) standards 
apply in the Board's regulatory capital rule to G-SIBs and 
their insured depository institution (IDI) subsidiaries. Under 
the current CCAR program, the Board evaluates the ability of 
each of the largest bank holding companies to maintain capital 
above minimum regulatory capital requirements under expected 
and stressful conditions, assuming that a firm makes all 
planned capital actions that are in its capital plan. As it is 
a buffer concept, the eSLR standards are not, and have never 
been, included in the Federal Reserve's stress testing 
framework.
    With regard to the Board's SCB proposal not extending the 
stress buffer concept to the supplementary leverage ratio, 
please see the response to Question 4 above.

Q.6. The Fed's eSLR proposal would reduce the amount of tier 1 
capital required across the lead insured depository institution 
(IDI) subsidiaries of the G-SIBs by approximately $121 billion. 
\3\
---------------------------------------------------------------------------
     \3\ https://www.gpo.gov/fdsys/pkg/FR-2018-04-19/pdf/2018-08066.pdf
---------------------------------------------------------------------------
    How would that $121 billion be deployed by bank holding 
companies if this proposal were enacted?

A.6. The Board estimates that, taking into account the capital 
constraints imposed by the supervisory stress tests and the 
Board's regulatory capital rules, the proposed changes to the 
eSLR standards would reduce the amount of tier 1 capital 
required across the U.S. G-SIBs on a consolidated basis by 
approximately $400 million. Thus, nearly all of the $121 
billion would be required to remain within the consolidated 
banking organization, as the G-SIBs would not be able to 
distribute the capital released at the IDI level. Each 
individual G-SIB would be able to determine how to reallocate 
capital, based on its business model or needs within the 
organization. For example, each G-SIB could continue to hold 
the capital at the IDI, deploy that capital to nonbank 
subsidiaries, or hold that capital at the holding company level 
to use as needed.

Q.7. The proposed rulemaking for the Fed's eSLR proposal asks 
commenters for their views on excluding central bank deposits 
from the denominator of the SLR, but unlike section 402 of S. 
2155, does not narrow the question strictly to custody banks.
    Is the Fed considering excluding central bank deposits from 
the denominator of the SLR for all banks (custody and 
noncustody)?

A.7. The Board and the Office of the Comptroller of the 
Currency's (OCC) eSLR proposal is based on the current 
definitions of tier 1 capital and total leverage exposure, 
which include central bank deposits in the denominator of the 
SLR. However, the Board and the OCC thought it appropriate 
generally to seek commenters' views on alternatives to the 
proposal, including the exclusion of central bank deposits from 
the denominator. The Board will consider all comments received 
in connection with the proposal.

Q.8. Please provide firm-by-firm analysis for each domestic G-
SIB on the combined impact on total distributable capital 
related to both the SCB and eSLR proposals.

A.8. As noted in the response to question I above, due to the 
confidential nature of the supervisory data included in the 
projected impact of the proposals on individual firms, the 
Board has made only aggregate impact data publicly available. 
The estimated impacts of the SCB proposal and of the eSLR 
proposal across G-SIBs are described above in the response to 
Question 2 and Question 6, respectively.
    While the discussion in each of the SCB proposal and the 
eSLR proposal reflects the estimated impact of those individual 
proposals relative to current requirements, in developing the 
proposals; the combined impact was also considered. Factoring 
the relatively immaterial estimated reduction in required tier 
1 capital across G-SIBs under the eSLR proposal ($400 million, 
as noted above in response to Question 6) into the estimated 
impact of the SCB proposal across G-SIBs does not meaningfully 
affect the estimates.

Q.9. During your testimony before the House Financial Services 
Committee, you indicated a desire to change the G-SIB surcharge 
methodology, perhaps based on the result of a bank holding 
company's living will submission.
    Can you elaborate on this idea? \4\
---------------------------------------------------------------------------
     \4\ Response to a question from Congressman Hollingsworth. House 
Financial Services Committee Hearing. ``Semi-Annual Testimony on the 
Federal Reserve's Supervision and Regulation of the Financial System''. 
April 17, 2017.

A.9. The G-SIB surcharge was calibrated so that each G-SIB 
would hold enough capital to lower its probability of failure 
so that the expected impact of its failure would be 
approximately equal to that of a non- G-SIB. The Board monitors 
the impact of its regulations after implementation to assess 
whether the regulations continue to function as intended. As I 
have noted more broadly, such a review should have as a goal 
not only maintaining safety and soundness and financial 
stability, but also efficiency, transparency, and simplicity. 
In the preamble to the G-SIB surcharge final rule, the Board 
indicated that it would be appropriate to reevaluate 
---------------------------------------------------------------------------
periodically the fixed coefficients used in the rule.

Q.10. Has the Fed considered the potential interaction between 
this idea, the proposed rule changing the eSLR, and the Fed's 
intention to make living will submissions required every other 
year, rather than annually? \5\
---------------------------------------------------------------------------
     \5\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20171219a.htm

A.10. The Board's capital rules have been designed to 
significantly reduce the likelihood and severity of future 
financial crises by reducing both the probability of failure of 
a large banking organization and the consequences of such a 
failure were it to occur. Capital rules and other prudential 
requirements for large banking organizations should be set at a 
level that protects financial stability and maximizes long-
term, through-the-cycle, credit availability and economic 
growth. At the same time, the Board recognizes that prudential 
requirements should be tailored to the size, risk, and 
complexity of the firms subject to those requirements. In this 
regard, the Board is considering additional potential 
modifications to its rules, including both the capital rule and 
the living will rule, to simplify the rules and reduce 
unnecessary regulatory burden without compromising safety and 
---------------------------------------------------------------------------
soundness.

Q.11. Earlier this year in Tokyo, you gave a speech describing 
the strength of the U.S. economy, noting growing optimism, 
solid bank earnings, the tax bill, and the strong labor market. 
\6\
---------------------------------------------------------------------------
     \6\ https://www.federalreserve.gov/newsevents/speech/files/
quarles20180222a.pdf
---------------------------------------------------------------------------
    If the economy is strong, isn't now the time to impose a 
Countercyclical Capital Buffer that banks can draw on when the 
economy eventually gets tough?

A.11. The countercyclical capital buffer (CCyB) is an important 
element of the system of capital regulation that applies to 
U.S. bank holding companies with more than $250 billion in 
total assets or more than $10 billion in foreign assets, as 
well as intermediate holding companies of foreign banking 
organizations with more than $50 billion in total assets.
    In 2016, the Federal Reserve issued a policy statement on 
the CCyB, in which we spelled out a comprehensive framework for 
setting its level. The framework incorporates the Board's 
judgment of not only asset valuations and risk appetite, but 
also the level of three other key financial vulnerabilities--
financial leverage, nonfinancial leverage, and maturity and 
liquidity transformation--and how all five of those 
vulnerabilities interact. In this assessment, the Board 
considers a wide array of economic and financial indicators, as 
well as a number of statistical models developed by staff. 
Several of those models are cited in the policy statement. As 
indicated in the policy statement, the CCyB is intended to 
address elevated risks from activity that is not well-supported 
by underlying economic fundamentals. As such, the Board expects 
the CCyB to be nonzero if overall vulnerabilities were judged 
to have risen to a level that was ``meaningfully above 
normal.''
    Within that framework, the runup in asset prices that we 
have seen in recent years is certainly a key consideration, but 
we view that run up in the context of the levels of other 
vulnerabilities, importantly including leverage and maturity 
transformation in the financial system. Bank capital ratios and 
liquidity buffers are now substantially higher than they were a 
decade ago. The stress tests ensure that the largest banks can 
continue to support economic activity even in the face of a 
severe recession--importantly, one characterized by extreme 
declines in asset prices. Outside the banking system, leverage 
of other financial firms does not appear to have risen to 
elevated levels, and the risks associated with maturity 
transformation by money-market mutual funds is much reduced 
from the levels seen a decade ago. Thus, we believe that 
overall vulnerabilities in the financial system remain moderate 
and near their normal range.

Q.12. Do you agree that procyclical regulation has contributed 
to past downturns in the economy?
    If so, why not make bank regulations more stringent during 
a time when risk appetites in the banking sector are growing? 
\7\
---------------------------------------------------------------------------
     \7\ https://www.wsj.com/articles/financial-deregulation-throws-
fuel-on-already-hot-economy1524654001#comments_sector

A.12. Procyclical regulation certainly may have contributed to 
boom and bust cycles in the past. For instance, as house prices 
rose from 2000 to 2006, the maximum loan amount of residential 
mortgages that could be guaranteed by the Government-sponsored 
mortgage enterprises, Fannie Mae and Freddie Mac, increased 
from $252,700 to $417,000. In addition, research by Federal 
Reserve economists has shown that there is a procyclical 
pattern in the assignment of CAMELS ratings to banks by the 
Federal banking agencies. Our reforms to bank supervision after 
the financial crisis, such as the establishment of the Large 
Institution Supervisory Coordinating Committee and the 
collection of granular data on loan and securities portfolios, 
are designed to better identify and push back against such 
tendencies in the future.
    Further, to guard against the tendency for lenders to 
become less cautious during good economic times, the Federal 
Reserve and the other Federal banking agencies have implemented 
robust structural capital and liquidity regulation regimes. In 
addition to requiring higher ratios of capital to total assets 
and to risk-weighted assets, U.S. capital rules have narrowed 
the types of instruments that qualified as tier 1 capital, in 
order to increase loss absorbency. Likewise, capital rules 
place caps on volatile assets, like mortgage servicing rights 
and deferred tax assets, above which their amounts must be 
deducted from capital. Further, the postcrisis capital rules 
increased the risk weights on certain assets, such as high-
volatility commercial real estate, which can be highly 
procyclical.
    Another feature of the U.S. implementation of the new 
capital and liquidity regimes is that the changes were phased 
in gradually over several years starting in 2013 in order to 
give banks time to adjust to the more-stringent regulations 
without unduly influencing credit availability while the 
expansion was still relatively weak. Thus, the minimum 
requirements have indeed been increasing each year, though most 
U.S. banks have been compliant with the fully phased-in 
requirements for some time. Most of the requirements will be 
fully phased in by January 1, 2019, providing a much stronger 
structural backstop than previously against any excesses that 
emerge in this and future financial cycles.
    Finally, the annual stress tests (that is, CCAR) are based 
on macroeconomic scenarios that, in line with the Board's 
policy statement on scenario design, become more adverse as 
macroeconomic conditions improve. The increased severity of 
scenarios in the stress tests during buoyant times is designed 
to limit the procyclicality of regulation.

Q.13. Does the Fed have any plans to change the total 
consolidated asset threshold above which CCAR applies to bank 
holding companies?

A.13. We are considering a number of potential changes to our 
regulatory framework in light of the passage of S. 2155, 
including raising the asset threshold for CCAR.

Q.14. Will this at all change if S. 2155 is enacted?

A.14. As noted, we are considering potential changes to our 
regulatory framework in light of the passage of S. 2155.

Q.15. How often does the Fed plan to require Dodd-Frank Act 
supervisory stress tests for banks with total consolidated 
assets between $100 billion and $250 billion if the change from 
``annual'' to ``periodic'' is enacted pursuant to S. 2155?

A.15. Supervisory stress tests are one of our most valuable 
tools to ensure that large banking firms have sufficient 
capital to continue to lend and operate, even in a severely 
adverse macroeconomic scenario. Continuing to conduct the 
supervisory stress tests for institutions with more than $100 
billion in assets will provide the Federal Reserve with 
valuable insight into the state of the American economy.
    The dynamic nature of banks and the risks they face could 
render the results of stress tests stale within a short 
timeframe. Accordingly, we believe there are safety and 
soundness and financial stability benefits in conducting 
capital stress tests regularly. We plan to consider the 
appropriate timing of stress tests for banks with total 
consolidated assets between $100 billion and $250 billion as we 
consider other potential changes to our regulatory framework 
for the largest and most complex banks.

Q.16. How often does the Fed plan to require company-run stress 
tests for banks with total consolidated assets of more than 
$250 billion if the change from ``semi-annual'' to ``periodic' 
is enacted pursuant to S. 2155?

A.16. Company-run stress tests have served as a useful 
complement to supervisory stress tests. They are another tool 
to assess whether banks sufficient capital to continue 
operations throughout times of economic and financial stress. 
In our experience, there are safety and soundness and financial 
stability benefits in conducting capital stress tests 
regularly.
    As with supervisory stress tests, the dynamic nature of 
banks and the risks they face could render the results of 
stress tests stale within a short timeframe. Accordingly, as we 
implement S. 2155, we will consider the appropriate timing of 
company run stress tests for banks with more than $250 billion 
in consolidated assets. We would take into account the tradeoff 
between firms having less recent information about their risks 
and their resilience to economic stress, and the reduced burden 
of less frequent stress tests.

Q.17. In testimony before the House Financial Services 
Committee, you proposed subjecting CCAR stress scenarios to 
notice and comment, but noted that a formal process under the 
Administrative Procedures Act (APA) may be unworkable. How does 
the Fed contemplate putting CCAR scenarios out for comment 
without following a formal APA process? \8\
---------------------------------------------------------------------------
     \8\ Response to a question from Congressman Barr. House Financial 
Services Committee Hearing. ``Semi-Annual Testimony on the Federal 
Reserve's Supervision and Regulation of the Financial System''. April 
17, 2017.

A.17. The Board regularly considers feedback on its stress 
testing process and scenario design, including through the 
public notice and comment process, and we're currently 
reviewing comments on proposed amendments to the policy 
statement on scenario design.
    In addition, the Board publishes a summary of its stress 
testing methodologies each year. The methodology has included 
information about the supervisory scenarios, analytical 
framework, and information about the models employed in the 
stress test. The Board has sought comment on a policy statement 
on the overall approach to stress testing as well as a 
description of our model risk management and governance 
framework. The Federal Reserve is considering how best to 
publish the CCAR scenarios for public comment in a manner that 
is consistent with the rulemaking procedures in the 
Administrative Procedure Act and the timelines set forth in the 
Federal Reserve's capital plan and stress testing rules.

Q.18. What problem would putting CCAR scenarios out for comment 
solve?

A.18. The Federal Reserve remains committed to finding ways to 
continue to enhance transparency in a manner that appropriately 
balances the benefits and risks of releasing more information 
about supervisory models and scenarios used in CCAR.
    Putting the CCAR scenarios out for comment would provide an 
opportunity for the Federal Reserve to learn about unintended 
consequences of the scenarios and ways of improving the overall 
stress testing process.

Q.19. In a speech, you said that the Fed should ``revisit'' the 
so-called advanced approaches threshold, which identifies 
certain large banks whose failure could inflict especially 
significant damage on the U.S. economy. \9\ In the Senate 
Banking Committee hearing, you told the Committee that you 
would hold off on revising the advanced approaches threshold 
until Congress moves. \10\
---------------------------------------------------------------------------
     \9\ https://www.federalreserve.gov/newsevents/speech/
quarles20180119a.htm
     \10\ Response to a question from Senator Tillis. Senate Banking, 
Housing, and Urban Affairs Committee Hearing. ``Semi-Annual Testimony 
on the Federal Reserve's Supervision and Regulation of the Financial 
System''. April 19, 2017.
---------------------------------------------------------------------------
    How could enactment of S. 2155 affect the Fed's decision to 
revise the advanced approaches threshold?
    Is the Fed considering raising the advanced approaches 
asset threshold to a level that is higher than $250 billion?
    What changes to the foreign exposure threshold is the Fed 
considering?

A.19. The advanced approaches threshold was established on an 
interagency basis with the Federal Deposit Insurance 
Corporation (FDIC) and OCC, and is relevant for multiple 
elements of the Board's regulatory framework, including capital 
requirements, the liquidity coverage ratio rule, and related 
reporting requirements. The Board believes that capital and 
other prudential requirements for large banking organizations 
should be set at a level that protects financial stability and 
maximizes long-term, through-the-cycle credit availability and 
economic growth. At the same time, the Board recognizes that 
prudential requirements should be tailored to the size, risk, 
and complexity of the firms subject to those requirements and 
is considering ways to adjust its regulations that will 
simplify rules and reduce unnecessary regulatory burden without 
compromising safety and soundness. We currently are considering 
ways to better align the advanced approaches threshold with 
these objectives, which could include changing both the total 
asset and foreign exposure thresholds, and would take S. 2155 
into account. Any proposed changes to the threshold would be 
issued for public notice and comment after consultation with 
the FDIC and OCC.

Q.20. Is it your opinion that the domestic asset threshold 
above which foreign banking organizations (FBOs) must establish 
an Intermediate Holding Company (IHC) should increase from $50 
billion?
    If so, what is the appropriate threshold?

A.20. The Board monitors the impact of its regulations after 
implementation to assess whether the regulations continue to 
function as intended. In implementing enhanced prudential 
standards for foreign banking organizations (FBOs) with a large 
U.S. presence, the Board sought to ensure that FBOs hold 
capital and liquidity in the United States--and have a risk 
management infrastructure--commensurate with the risks in their 
U.S. operations. As a result of the intermediate holding 
company requirement with the current threshold, these firms 
have become less fragmented, hold capital and liquidity buffers 
in the United States that align with their U.S. footprint, and 
operate on more equal regulatory footing with their domestic 
counterparts and we should ensure that these results continue.

Q.21. The Fed in 2016 proposed a rule to limit some of banks' 
activities in commodities markets, with the rationale being 
that banks' owning, trading, and moving commodities might post 
a safety and soundness risk to individual banks or to the 
banking system. \11\
---------------------------------------------------------------------------
     \11\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20160923a.htm
---------------------------------------------------------------------------
    Does the Fed plan to finalize the 2016 commodities 
proposal?
    If not, why not?
    If so, when?

A.21. The Board began its review of the physical commodities 
activities of financial holding companies after a substantial 
increase in these activities among financial holding companies 
during the financial crisis. In January 2014, the Board invited 
public comment on a range of issues related to these activities 
through an Advance Notice of Proposed Rulemaking. In response, 
the Board received a large number of comments from a variety of 
perspectives. The Board considered those comments in developing 
the proposed rulemaking that was issued in September 2016. 
After providing an extended comment period (150 days) to allow 
commenters time to understand and address the important and 
complex issues raised by the proposal, the Board again received 
a large number of comments from a variety of perspectives, 
including Members of Congress, academics, users and producers 
of physical commodities, and banking organizations. The Board 
continues to consider the proposal in light of the many 
comments received (and to monitor the physical commodities 
activities of financial holding companies).

Q.22. S&P Global warned earlier this month that leveraged 
lending standards were deteriorating, and that underwriting 
standards in this $1 trillion market continue to get weaker and 
weaker. \12\ Previously, guidance was in place to protect 
banking organizations from leveraged lending risks, but while 
at the OCC, Acting Comptroller Noreika rescinded it. You have 
also said that this guidance, because it was declared a rule by 
the GAO, is ``not something that should be cited in supervisory 
action or taken into account by examiner.'' \13\
---------------------------------------------------------------------------
     \12\ https://www.ft.com/content/680953c0-3e2a-11e8-b9f9-
de94fa33a81e
     \13\ https://www.americanbanker.com/news/feds-quarles-to-seek-
more-tailoring-of-large-bank-rules
---------------------------------------------------------------------------
    How do you plan to protect banks from systemic risk 
stemming from leveraged lending if you're telling supervisors 
to ignore this guidance?
    Does the Fed have plans to replace the leveraged lending 
guidance with a proposed rule?

A.22. The Board has broad authority to supervise and regulate 
banking organizations to promote their safety and soundness. As 
part of that authority, Federal Reserve supervisors and 
examiners assess credit and other risks to the safe and sound 
operations of firms, including risks that may be posed by 
leveraged lending, and to direct the films to address such 
risks as appropriate. As part of assessing credit and other 
risks, Federal Reserve examiners routinely evaluated the 
underwriting of leveraged loans prior to the issuance of the 
most recent leveraged lending guidance, and they continue to do 
so. The guidance was issued to provide clarity regarding safety 
and soundness issues that may be present in making such loans. 
The guidance was not issued as a regulation that would be 
enforceable, and therefore the guidance itself should not be 
used as the basis for an enforcement or supervisory action. 
Rather, banking organizations should use it to better 
understand and manage the risks they are taking, and 
supervisors should assess a bank's standing under comprehensive 
principles of safety and soundness rather than pursuant to 
informal guidance.
    Thus, ensuring the guidance is being used in the manner 
always intended is not telling examiners to ``ignore'' the 
guidance nor is it changing the safety and soundness standard 
that has always governed the evaluation of a bank's loan 
portfolio. To the contrary, we continue to expect that 
examiners will evaluate leveraged loans to determine whether 
they are posing undesirable amounts of risk in a bank's 
portfolio.
    The Board, FDIC, and OCC are discussing whether it would be 
appropriate to again solicit public comment on the guidance 
with a view to improving the clarity and reducing any 
unnecessary burden.

Q.23. Publicly you asserted that you believe the Volcker Rule 
has damaged financial markets. \14\
---------------------------------------------------------------------------
     \14\ https://www.marketwatch.com/story/volcker-rule-is-harmful-to-
capital-markets-feds-top-regulator-says-2018-04-17
---------------------------------------------------------------------------
    What evidence can you point to that indicates the Volcker 
Rule has had a causal impact on liquidity?
    Is there a range of optimal liquidity?

A.23. Federal Reserve staff and a variety of other researchers 
have performed substantial analyses of the recent state of 
financial markets and liquidity in particular. While overall 
results of these studies are mixed, there are findings 
suggesting that the Volcker Rule has had an impact on 
liquidity. For example, one recent study finds evidence that 
cost of trading distressed corporate bonds (i.e., bonds 
recently downgraded to below investment-grade ratings) is 
higher since implementation of the Volcker Rule. \15\ 
Furthermore, the paper finds that broker dealers subject to the 
Volcker Rule appear less willing to hold inventories of 
corporate bonds relative to other broker dealers. Taken 
together, these results indicate that the Volcker Rule has had 
an adverse impact on the liquidity of distressed corporate 
bonds. Other studies indicating a causal relationship between 
the Volcker Rule and reduced liquidity in some markets or for 
some instruments include Dick-Nielsen and Rossi (2016); Choi 
and Huh (2016); Bessembinder, Jacobsen, Maxwell, and 
Venkataraman (2016); and Adrian, Boyarchenko, and Shachar 
(2016). \16\
---------------------------------------------------------------------------
     \15\ Bao, Jack, and O'Hara, Maureen, and Zhou, Xing (Alex), ``The 
Volcker Rule and Market-Making in Times of Stress'' (December 8, 2016). 
Journal of Financial Economics (JFE), Forthcoming; Fourth Annual 
Conference on Financial Market Regulation. Available at SSRN: https://
ssrn.corn/abstract=2836714 or http://dx.doi.org/10.2139/ssrn.2836714.
     \16\ Dick-Nielsen, J., and M. Rossi (2016), ``The Cost of 
Immediacy for Corporate Bonds'', Copenhagen Business School Working 
Paper; Choi, J., and Y. Huh (2016), ``Customer Liquidity Provision: 
Implications for Corporate Bond Transaction Costs'', Bessembinder, H., 
S. Jacobsen, W. Maxwell, and K. Venkataraman (2016), ``Capital 
Commitment and Illiquidity in Corporate Bonds'', Working Paper, 
Southern Methodist University; Adrian, T., N. Boyarchenko, and O. 
Shachar (2016), ``Dealer Balance Sheets and Bond Liquidity Provision'', 
Federal Reserve Bank of New York Staff Report, 803.
---------------------------------------------------------------------------
    The Federal Reserve and the four other Volcker regulatory 
agencies (OCC, FDIC, the Securities and Exchange Commission and 
the Commodity Futures Trading Commission) recently issued a 
proposal that would simplify and streamline the rule to further 
tailor and reduce burden for firms. For example, the proposal 
would simplify compliance for a banking entity engaged in 
market-making, by establishing a presumption that trading 
activity within appropriately set risk limits is permissible 
market making. By reducing the current compliance burden 
associated with the rule and improving the availability of key 
exemptions like market-making, the simplified proposal, if 
finalized, should promote increased market liquidity.

Q.24. Without disclosure of any data regarding the metrics or 
banks' positions in covered funds, the public, Congress, and 
the markets can do little to confirm that covered banking 
entities are complying with the Volcker Rule.
    Can the Federal Reserve and the other four regulators 
charged with enforcement of the Volcker Rule provide for 
greater transparency on the implementation and enforcement of 
the Volcker Rule's prohibitions on proprietary trading by 
banking institutions?

A.24. The Federal Reserve, along with the four other Volcker 
agencies, released rules implementing the statutory 
requirements of the Volcker rule in December 2013. These 
implementing rules included a number of provisions designed to 
ensure compliance by firms, including specific provisions 
related to the need for a compliance program, and the 
requirement that certain firms report metrics information. The 
agencies recently proposed significant revisions to the 
regulations implementing the Volcker Rule, including 
simplifying the compliance program standards applicable to most 
banking entities, and refining the requirements for firms with 
large trading operations to report trade-related metrics to the 
agencies.
    The quantitative trading metrics are an important component 
of the agencies' supervisory work to monitor compliance with 
the Volcker Rule. The metrics are intended to aid the staffs of 
the Agencies in designing and conducting their examinations of 
firms' compliance programs and activities subject to the final 
rules. The metrics do not, on their own, indicate a violation 
of the Volcker Rule. The staffs of the agencies use these 
metrics as a tool to help identify instances that may warrant 
further investigation to determine whether a violation of the 
Volcker Rule has occurred or whether the activity is within a 
permitted exemption, such as market making or hedging.
    The final rule does not include a provision for public 
disclosure of metrics data. Nonetheless, we appreciate the 
value of transparency and public accountability, while striking 
an appropriate balance between public disclosure and protecting 
confidential information. Toward that end, the Federal Reserve 
and the four other Volcker regulatory agencies proposed a 
simplified and streamlined version of the rule that would 
further tailor and reduce burden for firms. The proposal 
requested comment regarding the required compliance program and 
metrics, in addition to a general request for comment regarding 
whether certain types of quantitative metrics information 
should be made publicly available. We look forward to 
considering all comments received on the proposal.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
                     FROM RANDAL K. QUARLES

Q.1. I'd like to discuss how the Federal Reserve can encourage 
innovation in the financial system. On October 18, 2017, now-
Federal Reserve Chairman Powell gave a speech entitled 
``Financial Innovation: A World in Transition'', where he 
articulated the promise and the peril of new financial 
technologies:

        [T]he challenge is to embrace technology as a means of 
        improving convenience and speed in the delivery of 
        financial services, while also assuring the security 
        and privacy necessary to sustain the public's trust . . 
        . Rapidly changing technology is providing a historic 
        opportunity to transform our daily lives, including the 
        way we pay. FinTech firms and banks are embracing this 
        change, as they strive to address consumer demands for 
        more timely and convenient payments. A range of 
        innovative products that seamlessly integrate with 
        other services is now available at our fingertips. It 
        is essential, however, that this innovation not come at 
        the cost of a safe and secure payment system that 
        retains the confidence of its end users.

    To this end, what is the Federal Reserve exploring or doing 
to encourage innovation in the financial system in a 
responsible but effective manner? This is particularly 
important given new innovations in from FinTech companies in 
digital currency, the payments systems, artificial 
intelligence, and more. For example, could the Federal Reserve 
increase the use of no action letters or--as the SEC has done--
authorize limited pilot tests, to gather data on new 
technologies or regulatory innovations? Do any of these changes 
need statutory authorization?

A.1. The Federal Reserve's general approach to innovation is 
that first and foremost, we have a responsibility to ensure 
that the institutions subject to our supervision operate in a 
safe and sound manner, and that they comply with applicable 
statutes and regulations. Within that framework, we have a 
strong interest in encouraging socially beneficial innovations 
to flourish, while ensuring the risks that they may present are 
appropriately managed. We do not want to unnecessarily restrict 
innovations that can benefit consumers and small businesses 
through expanded access to financial services or greater 
efficiency, convenience, and reduced transaction costs.
    The Federal Reserve System (System) has generally not 
relied on authorizing pilot projects for private entities or 
no-action letters, in part due to the necessarily shared nature 
of many of our regulatory authorities and mandates, although I 
think this is something we should give greater consideration to 
in the future. However, within our legal authorities, the 
System has sought to encourage responsible innovation in the 
financial sector on a number of fronts.
    For example, with respect to payment innovation, in 2015 we 
issued a call to action for ``Strategies for Improving the U.S. 
Payment System''. In the following 2\1/2\ years, hundreds of 
organizations and individuals came together in the Federal 
Reserve's Faster and Secure Payments Task Forces, to 
collaborate on strategies for bringing about a payment system 
that features fast, secure, and efficient cross-border 
payments. System staff also focus on specific topic areas in 
the payment space to help facilitate innovation, such as mobile 
payments or distributed ledger technology. In so doing, System 
groups routinely engage innovators from the private sector and, 
in limited cases, have joined public-private consortia to 
deepen the potential for learning.
    From an international perspective, the System engages 
international organizations that have collaborated on FinTech 
issues, such as: the Financial Stability Board (and its 
Financial Innovation Network); the Bank for International 
Settlements (and related work through its Committee on Payments 
and Market Infrastructures, Markets Committee, Committee on the 
Global Financial System, and Basel Committee on Banking 
Supervision's Task Force on Financial Technology); the 
International Organization of Securities Commissions; and the 
Financial Action Task Force.
    From a domestic bank supervision perspective, the System 
has also convened an Interagency FinTech Discussion Forum to 
facilitate information sharing between Federal banking 
regulators on FinTech consumer protection issues and 
supervisory outcomes. System staff have used the Federal 
Reserve's publications, such as our ``Consumer Compliance 
Outlook'' bulletin, to offer financial institutions and FinTech 
firms general guideposts for evaluating risks when considering 
the adoption of new technologies.
    Most recently, the System has organized two Systemwide 
teams of experts tasked with monitoring FinTech and related 
emerging technology trends as they relate to our supervisory 
and payment system mandates, respectively. The new teams 
include representation from all of the Federal Reserve Banks 
and has leadership from Federal Reserve Board staff. These 
teams routinely meet with banks, large and small nonbank 
innovators who may partner with supervised institutions, and 
domestic and foreign regulators to gather data on new 
technologies and regulatory innovation.
    These two new Systemwide teams share the goal of ensuring 
that FinTech-related information is disseminated across the 
System and informs relevant supervisory, policy, and outreach 
strategies.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
                     FROM RANDAL K. QUARLES

Q.1. In South Dakota, many farmers, ranchers, and manufacturers 
use the regulated derivatives markets to manage their risk of 
price variations. It is important that they are able to access 
these derivative markets in a cost effective manner. Many of 
the service providers for these farmers, ranchers, and 
manufacturers are banks.
    When an end user accesses the cleared markets through a 
bank, it must provide margin, in the form of highly liquid 
assets, such as cash, that is kept in the name of the client 
for use in the event the client cannot meet its payment 
obligations.
    Margin collected from the end user for the purpose of 
clearing their derivatives is thus exposure reducing for the 
banks, yet the leverage ratio still does not recognize it as 
such.
    Do you plan to recognize initial margin as offsetting under 
the leverage ratio?

A.1. We understand that this offset is proposed for European 
banks.

Q.2. Won't a lack of offset potentially put U.S. banks at a 
disadvantage for the client clearing businesses?

A.2. Clearing improves safety for end users and has been 
recognized by policymakers as such.

Q.3. Wouldn't recognizing client margin under the leverage 
ratio incentive clearing?

A.3. Leverage capital requirements, such as the supplementary 
leverage ratio, require banking organizations to hold a minimum 
amount of capital against all on-balance sheet assets and 
certain off-balance sheet exposures. Many banks hold cash 
customer margin on their own balance sheet. Leverage capital 
requirements by design cap the debt-to-equity ratio at a bank 
without regard to the risk of individual exposures, and this 
practice of banks placing initial margin on their own balance 
sheets results in a capital charge against those assets.
    Nevertheless, the purpose of, and protections around, the 
funds used as initial margin does indicate that we should look 
closely at adjusting the treatment of initial margin under the 
leverage ratio. In my view, this is less because those assets 
are not risky--the whole point of the leverage ratio is that it 
applies regardless of risk--but rather because in a number of 
important ways those assets are not really the bank's assets at 
all, notwithstanding being placed on the balance sheet. 
Finally, the Federal Reserve Board (Board) believes that it is 
important for leverage capital requirements generally to act as 
a backstop to risk-based capital requirements. To help ensure 
that this relationship is maintained, the Board recently issued 
a proposal to recalibrate its enhanced leverage capital 
requirements for the largest and most complex banking 
organizations. This should reduce the capital cost of client 
clearing, and thus the disincentives to these businesses, while 
we continue to address the issues identified above.
    The exact way in which to adjust the leverage ratio to 
reflect this status is complex, however, and is one of a number 
of issues that our current capital regime raises for business 
involving centrally cleared products. To address potential 
unintended consequences of the leverage ratio on client 
clearing, in December 2017, the Basel Committee on Banking 
Supervision, of which the Board is a member, announced that it 
would monitor the impact of the leverage ratio's treatment of 
client cleared derivative transactions and review the impact of 
the leverage ratio on banks' provision of clearing services and 
its effect on central counterparty clearing. The review 
involves surveying client clearing market participants to 
understand the impact of the leverage ratio on incentives to 
centrally clear over-the-counter derivatives.

Q.4. As I wrote to you in my letter dated October 25, 2017, it 
is widely accepted that the Current Exposure Method (CEM) is 
risk insensitive and does not appropriately measure the 
economic exposure of a listed option contract.
    Not surprisingly, the Treasury Report on Capital Markets 
recommended both a longer term move to the Standardized 
Approach for Counterparty Credit Risk (SA-CCR), as well as a 
``near-term'' solution. At a hearing held by the House 
Financial Services Committee on April 17, 2018, you indicated 
that the Federal Reserve was working on the longer term 
solution of a rulemaking to replace CEM with SA-CCR.
    Although I believe the Federal Reserve should be working on 
a near-term solution in addition to a rulemaking, can you 
provide a date by which the rulemaking will be proposed and 
when the move to SA-CCR will be effective?

A.4. The Board is working expeditiously to implement the 
standardized approach for measuring counterparty credit risk 
(SA-CCR) in the United States. Our aim is to issue a SA-CCR 
proposal for public comment, jointly with the Federal Deposit 
Insurance Corporation and the Office of the Comptroller of the 
Currency as soon as feasible. SA-CCR has many benefits. SA-CCR, 
as compared to the current exposure method, would allow for 
increased recognition of netting and margin and results in a 
more risk-sensitive exposure amount for listed option 
contracts. We continue to believe that the best way to address 
these issues is through a proposal to incorporate SA-CCR into 
the Board's regulatory capital rule. The rulemaking process 
would allow a wide variety of market participants to consider 
the potential impact of SA-CCR and would open the way for its 
potential benefits to apply to a wide range of derivative 
products.

Q.5. During your confirmation hearing last July I asked you 
whether you would support reexamining bank capital standards, 
particularly the Supplementary Leverage Ratio or SLR, so that 
we can simplify and properly calibrate these capital 
regulations.
    Reading the proposals the Federal Reserve made on these 
issues recently, I want to thank you for taking those concerns 
to heart.
    The changes the Fed made, particularly the clear message it 
sent that the leverage capital standards should not become a 
binding capital constraint, will help right-size capital 
regulations and allow banks to make loans and service their 
customers. As you continue to examine capital regulations, I 
want to raise two issues of concern.
    First: The proposed capital framework introduces a new 
``stress leverage buffer'' for the tier 1 leverage ratio. Like 
the SLR, the tier 1 leverage ratio is not tied to the relative 
risk of a firm's assets. If the stress leverage buffer becomes 
a binding constraint, then it could create incentives for banks 
to take on riskier assets and penalize banks with safe balance 
sheets.
    Second: Currently, stress testing is not subject to public 
notice-and-comment rulemaking and changes year-to-year, making 
capital planning unpredictable for firms and the market.
    I think we would agree that predictable capital standards 
and tailoring capital regulations to risk increases the 
stability of the financial system.
    To that end, will you commit to reviewing the role of 
leverage in stress testing and to examine how stress testing 
transparency could make capital regulations more predictable?

A.5. The proposed Stress Capital Buffer would not include one 
poststress leverage measure (the poststress supplemental 
leverage ratio) but, as you note, would include another (the 
poststress tier 1 leverage ratio). This feature of the proposal 
raises a number of questions, and we are eager for public input 
on them. We are currently seeking comments on the proposal, and 
will carefully consider any comments we receive, including 
those on the stress leverage buffer.
    With respect to the publication of the supervisory stress 
test models, stress tests are designed to ensure that banks are 
holding sufficient capital to not only survive a severe 
recession but also continue to lend to creditworthy borrowers 
during the stressful period. There is a degree of uncertainty 
in forward-looking capital planning. Both the financial system 
and the public benefit when firms' capital allocation decisions 
account for the possibility of severe but plausible 
macroeconomic outcomes.
    The Federal Reserve is committed to further increasing the 
transparency of the stress testing process to improve the 
public's understanding of the supervisory stress test.

Q.6. Custodial banks, which provide safekeeping and related 
services to pension funds, mutual funds, endowments, and other 
institutional investors, have engaged in substantial dialogue 
with the Federal Reserve in recent years to develop a new 
standardized capital methodology for agency securities lending 
services provided to clients. These discussions have led to the 
inclusion of technical changes to these capital rules in the 
finalization of the Basel Committee's postcrisis capital 
reforms agreed to by the Federal Reserve in December 2017.
    When does the Federal Reserve plan to adopt these technical 
changes to the capital rules for securities financing 
transactions?
    Is there an opportunity for the Federal Reserve to propose 
rules to implement these technical changes, and perhaps others, 
separately and ahead of its longer range plan to solicit public 
input on the broader and more substantive capital changes later 
this year through the Advanced Notice of Proposed Rulemaking 
process?

A.6. As you noted, changes to the capital treatment for 
securities financing transactions are included in the Basel 
Committee on Banking Supervision's document ``Basel III: 
Finalizing Post-Crisis Reforms'' that was issued in December 
2017. This document contains a large number of capital changes 
that the Basel Committee has stated should be implemented by 
2022. The Federal Reserve is aware of the importance of the 
changes for securities financing transactions for custodian 
banks, as well as for banking organizations that are active in 
repo and securities lending markets. The revised treatment of 
securities financing transactions in the December 2017 document 
is a significant part of the revised framework that would 
affect many institutions and their customers.
    The Federal Reserve is reviewing the changes with the other 
banking agencies to determine the extent to which 
implementation in the United States would be appropriate. Any 
regulatory changes would occur through the notice and comment 
process under the Administrative Procedure Act. As part of this 
process, the Federal Reserve will consider how best to 
implement any revisions to the United States regulatory capital 
framework, including in the order in which changes are made and 
whether certain changes are most appropriate as a package with 
other changes or separately.

Q.7. South Dakota has long been a leader in the financial 
services industry. Given this time of innovation in our banking 
system, with many new types of lenders and ``FinTech'' reducing 
barriers to entry by expanding financial services products, 
emerging companies may need capital investments from entities 
that could be impacted by the Volcker rule if those entities 
were owned by or partnered with a bank.
    Based on comments you made during your testimony before the 
House Financial Services Committee on April 17, I understand 
that you agree on the need to limit the potential unintended 
consequences of the Volcker Rule such that it doesn't limit 
private capital's ability help to expand financial services 
offerings to consumers.
    As you work to refine and update the scope of the Volcker 
rule through your notice of proposed rulemaking and other 
regulatory efforts, will please you keep new technologies in 
mind and keep my colleagues and I on the Senate Banking 
Committee updated about your efforts?

A.7. With FinTech, as with any other emerging financial product 
or service, the Federal Reserve is closely watching 
developments and considering its implications for our 
supervisory approach. The Federal Reserve has established a 
multidisciplinary working group that is engaged in a 360-degree 
analysis of FinTech innovation. We are also engaging with 
various FinTech firms to learn more about the industry, its 
business models, its technologies, and the opportunities that 
it presents. Through these efforts, we continuously assess the 
impact of technological development on the Federal Reserve's 
responsibilities, including our role as a regulator.
    The Federal Reserve and the four other Volcker regulatory 
agencies recently issued a Notice of Proposed Rulemaking that 
would simplify and streamline the rule to further tailor and 
reduce burdens for firms. Throughout that rulemaking process, 
we will certainly consider developments in FinTech as well as 
all other financial products and services.

Q.8. I appreciate you putting increased attention at the 
Federal Reserve on the heightened risk we are facing from 
potential cyberattacks. I am encouraged to hear that you are 
working with the private-sector to help provide solutions that 
will protect our financial sector as a whole. We must be 
diligent in protecting our financial institutions and the 
customers they serve, and I believe that the best solutions we 
can arrive at can be achieved through collaboration.
    Can you discuss any steps the Fed has taken to strengthen 
the cyberinfrastructure of the financial sector?

A.8. The Federal Reserve is responsible for supervising a 
subset of the financial firms that operate the critical 
infrastructure. Our supervisory program is primarily designed 
to ensure these firms operate in a safe and sound manner. 
However, as a member of the Financial and Banking Information 
Infrastructure Committee (FBIIC), the Federal Reserve also 
evaluates the resiliency of these firms to cyber and other 
operational risks that could negatively impact the resiliency 
of the financial services sector. The Federal Reserve engages 
in interagency activities with other FBIIC members to improve 
the cyberresiliency of the financial services sector. The FBIIC 
holds periodic cyberincident response simulations, commonly 
referred to as exercises, with the FBIIC members, law 
enforcement, and industry in order to identify areas of concern 
and develop the appropriate means to address them. The 
exercises have led to the creation of a number of private-
sector run and public-sector supplied initiatives to enhance 
the sector's cyberresiliency, including the development of 
incident management and information sharing protocols that 
encompass a large percentage of private sector entities. 
Additionally, through participation in these exercises, the 
Federal Reserve has improved its ability to respond, in 
coordination with other financial regulators, to potential 
operational disruption in the financial sector's critical 
infrastructure.
    The Federal Reserve works with other financial regulators, 
through the Federal Financial Institutions Examination Council 
(FFIEC) and other interagency bodies, to strengthen the 
resilience of the financial sector and reduce the potential 
impact of a significant cyberincident. The Federal banking 
agencies have issued supervisory guidance to help the 
institutions under our supervision to become more resilient to 
cyberthreats. In addition, the member agencies of the FFIEC 
regularly update the FFIEC Information Technology Examination 
Handbook, which includes appropriate practices on cyberrisk 
management and operational resiliency that can be tailored to 
an individual institution's risk profile.
    Due to the high degree of interconnection between the U.S. 
financial system and global financial system, the Federal 
Reserve has been an active participant and leader in 
international forums addressing the cyberresiliency of the 
global financial sector. Most recently, the Federal Reserve 
played a leadership role in the Committee on Payments and 
Market Infrastructures (CPMI) development of a strategy for 
reducing the risk of wholesale payments fraud related to 
endpoint security. The CPMI strategy report, ``Reducing the 
Risk of Wholesale Payments Fraud Related to Endpoint 
Security'', outlines seven elements that are designed to work 
holistically to address all areas relevant to preventing, 
detecting, responding to, and communicating about, fraud. The 
Federal Reserve made significant contributions to the 
``Stocktake of Publicly Released Cybersecurity Regulations, 
Guidance and Supervisory Practices'' published by Financial 
Stability Board (FSB) and is leading the FSB's efforts to 
develop a common cyberlexicon. The Federal Reserve also has a 
leadership role in the efforts underway at the Basel Committee 
on Banking Supervision to improve the cyberresiliency at 
internationally active banks.
    At the G7, the Federal Reserve engaged in an initiative to 
identify a core set of cyberresilience measures expected across 
the global financial sector, which led to the publication of 
the G7 ``Fundamental Elements of Cybersecurity for the 
Financial Sector''. The publication identifies key elements as 
the building blocks upon which an entity can design and 
implement its cybersecurity strategy and operating framework. 
The Federal Reserve also played a leadership role in the 
development of cyberresilience guidance for financial market 
infrastructures (FMIs) by CPMI and the International 
Organization of Securities Commissions (IOSCO). The CPMI-IOSCO 
``Guidance on Cyber Resilience for FMIs'' outlines an 
expectation that FMIs must be prepared for the eventuality of 
successful attacks and make preparations to respond and recover 
critical services safely and promptly.
    With regard to the payments infrastructure, the Federal 
Reserve is continuing its efforts to identify and provide 
information related to fraud risks and advance the safety, 
security, and resiliency of the payment system. The Federal 
Reserve, in partnership with Boston Consulting Group, is 
conducting a study designed to inform industry security-
improvement efforts. The study analyzes payment fraud and 
payment system security vulnerabilities. In addition, the 
Reserve Banks, as operators of critical financial services such 
as Fed wire, continue to advance initiatives aimed at enhancing 
the resiliency of the payments system. For example, the Reserve 
Banks have implemented risk-mitigating processes, controls, and 
technology highly aligned with the aforementioned CPMI strategy 
to reduce payments fraud emanating from weak security at the 
endpoint (see https://www.newyorkfed.org/newsevents/speeches/
2018/dzi180418).

Q.9. Are there any areas where Congress can be helpful on this 
front?

A.9. The Federal Reserve appreciates the heightened focus on 
this issue by Congress and recognizes our strong, mutual 
interest in the cyberresilience of the financial sector. The 
sector's resilience and cyberincident preparedness is evolving 
rapidly as more firms join information sharing organizations 
and participate in the sector exercise program, allowing them 
to develop and test incident protocols and improve their 
processes and practices. Through the continued work programs of 
interagency groups like the FFIEC and FBIIC, as well as our 
partnership with the private sector through the Financial 
Services Sector Coordinating Council and the Financial Sector 
Information and Analysis Center, the Federal Reserve continues 
to advocate for and drive initiatives that strengthen the 
financial sector's critical infrastructure. Since the financial 
sector has critical dependencies with the energy and 
telecommunication sectors, it would be helpful for Congress to 
support legislative and other effort to strengthen the 
resiliency of these sectors. It would also be helpful for 
Congress to support collaborative efforts between these 
critical sectors and the intelligence community that are 
intended to coordinate our resiliency to cyberthreats posed by 
foreign and domestic perpetrators. We would be pleased to 
discuss with you further details of the collaboration that is 
currently underway and these suggestions.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                     FROM RANDAL K. QUARLES

Q.1. Countercyclical Capital Buffer. The IMF Global Financial 
Stability Report said that short-term financial stability risks 
have been increasing, including vulnerabilities within banks, 
funding risks, concerns about a trade war, and the risks of a 
too-sharp monetary policy tightening. At the same time, we're 
seeing robust global growth and strong corporate earnings, and 
credit continues to be widely available. One of the lessons of 
the crisis is just how procyclical credit provision can be. As 
important as stress testing and risk-based capital requirements 
are, they can underestimate weaknesses in underwriting and 
other cyclical behaviors that are revealed during bad economic 
times.
    Given where we are in the economic cycle, and the 
significant run up in asset prices that we've seen in recent 
years, under what circumstances would you support an increase 
in the countercyclical capital buffer from zero?

A.1. The countercyclical capital buffer (CCyB) is an important 
element of the system of capital regulation that applies to 
U.S. bank holding companies with more than $250 billion in 
total assets or more than $10 billion in foreign assets, as 
well as intermediate holding companies of foreign banking 
organizations with more than $50 billion in total assets.
    In 2016, the Federal Reserve issued a policy statement on 
the CCyB, in which we spelled out a comprehensive framework for 
setting its level. The framework incorporates the Federal 
Reserve Board's (Board) judgment of not only asset valuations 
and risk appetite, but also the level of three other key 
financial vulnerabilities--financial leverage, nonfinancial 
leverage, and maturity and liquidity transformation--and how 
all five of those vulnerabilities interact. In this assessment, 
the Board considers a wide array of economic and financial 
indicators, as well as a number of statistical models developed 
by staff. Several of those models are cited in the policy 
statement. As indicated in the policy statement, the CCyB is 
intended to address elevated risks from activity that is not 
well-supported by underlying economic fundamentals. As such, 
the Board expects the CCyB to be nonzero if overall 
vulnerabilities were judged to have risen to a level that was 
``meaningfully above normal.''
    Within that framework, the runup in asset prices that we 
have seen in recent years is certainly a key consideration, but 
we view that runup in the context of the levels of other 
vulnerabilities, importantly including leverage and maturity 
transformation in the financial system. Bank capital ratios and 
liquidity buffers are now substantially higher than they were a 
decade ago. The stress tests ensure that the largest banks can 
continue to support economic activity even in the face of a 
severe recession--importantly, one characterized by extreme 
declines in asset prices. Outside the banking system, leverage 
of other financial firms does not appear to have risen to 
elevated levels, and the risks associated with maturity 
transformation by money-market mutual funds is much reduced 
from the levels seen a decade ago. Thus, we believe that 
overall vulnerabilities in the financial system remain moderate 
and near their normal range.

Q.2. The key criteria for whether to raise the countercyclical 
capital buffer is an assessment that financial risks are in the 
upper third of their historical distribution.
    What is your assessment of current financial risks versus 
their historical distribution?

A.2. As emphasized in our policy statement, a nonzero 
countercyclical capital buffer is appropriate when risks are 
judged to be meaningfully above normal. As you noted in your 
previous question, asset valuations across a number of 
important markets are elevated, and if that were the only 
criterion for activation of the CCyB, it would be appropriate 
to consider increasing the CCyB now. However, we also believe 
that the financial system is quite resilient, with the 
institutions at the core of the system well-capitalized, run 
risk well below earlier levels, and central clearing of 
derivatives limiting the amount of contagion from the distress 
of an institution. Therefore, our comprehensive assessment is 
that overall vulnerabilities are moderate, or about at the 
midpoint of their historical range, and therefore do not meet 
the criteria of being ``meaningfully above normal'' set in the 
policy statement. However, we are carefully assessing 
developments. If asset valuation pressures were to continue to 
build, especially if they were accompanied by increased 
leverage or increased maturity and liquidity transformation, 
activation of the CCyB could promote additional resilience 
among the largest U.S. banks.

Q.3. Recent eSLR and Capital Rule Proposals. The Board recently 
proposed rules on the calibration of the eSLR and the 
introduction of a stress capital buffer. Each proposal includes 
an analysis of the expected changes in required tier 1 capital 
if the proposal were to be adopted as proposed. The eSLR 
proposal assesses the effect of the proposal if it were 
adopted, assuming no changes to the CCAR process; and the 
stress capital buffer proposal assess the effect of the 
proposal if it were adopted, assuming no changes to the current 
eSLR. Neither proposed rule, however, analyzes the cumulative 
effect on required tier 1 capital at the holding company level 
were both proposals adopted as proposed.
    Before proposing the two rules, did the Board analyzed the 
effect on tier 1 capital if both proposals were adopted as 
proposed?
    What would the cumulative effect on required tier 1 capital 
at the holding company level be for G-SIBs if both proposals 
were adopted as proposed?

A.3. While the discussion in each of the stress capital buffer 
proposal and the enhanced supplementary leverage ratio (eSLR) 
proposal reflects the estimated impact of those individual 
proposals relative to current requirements, the Board also 
considered the potential combined impact in developing the 
proposals. Factoring the relatively immaterial estimated 
reduction in required tier 1 capital across global systemically 
important banks (G-SIBs) under the eSLR proposal (approximately 
$400 million) into the estimated impact of the stress capital 
buffer proposal across G-SIBs does not meaningfully affect the 
estimates.

Q.4. Community Reinvestment Act. You stated before the House 
Financial Services Committee that the Community Reinvestment 
Act (CRA) is ``a little formulaic and ossified'' and you 
advocated for giving banks greater flexibility in helping their 
communities. The Treasury Department recently issued a formal 
memorandum to bank regulators suggesting changes to the CRA and 
its implementation. I agree that the CRA needs to be 
modernized--I think there's widespread agreement that that's 
the case since the regulations have not been meaningfully 
updated since 1995. But I am concerned that some of the 
recommendations in the Treasury memo, depending on their 
implementation, could weaken one of the stronger tools we have 
to ensure access to credit for the underserved and investment 
in communities that have been left behind while others prosper.
    One change that seems overdue, and is recommended in the 
Treasury report, is the need to recognize that, in this digital 
age, physical branches do not accurately reflect a bank's 
business footprint.
    Do you support reflecting this shift to the age of online 
banking by updating existing assessment areas?

A.4. The Federal Reserve is deeply committed to the Community 
Reinvestment Act's (CRA) goal of encouraging banks to meet 
their affirmative obligation to serve their entire community, 
and in particular, the credit needs of low- and moderate-income 
communities. When banks are inclusive in their lending, it 
helps low- and moderate-income communities to thrive by 
providing opportunities for community members to buy and 
improve their homes and to start and expand small businesses.
    I agree that it is time to review changes to the definition 
of ``assessment area,'' which is the area in which a bank's CRA 
performance is evaluated. The banking environment has changed 
since CRA was enacted and the current CRA regulations were 
adopted. Banks may now serve consumers in areas far from their 
physical branches. Therefore, it is sensible for the agencies 
to consider expanding the assessment area definition to reflect 
the local communities that banks serve through delivery systems 
other than branches. Additional thought and analysis on this 
matter will be needed to determine how best to define such 
assessment areas and how to evaluate performance in those 
areas.

Q.5. One Treasury recommendation that concerns me is 
deemphasizing a bank's branch network in its CRA assessment. 
While technology has certainly helped expand access to credit 
through alternative delivery systems, studies continue to show 
that physical branches still provide a significant boost to 
access to credit to their surrounding community.
    Will you support keeping a bank's footprint as a critical 
factor in a bank's service test in its CRA assessment?

A.5. Yes, we are confident that there are ways to expand the 
area where we evaluate a bank's CRA performance without losing 
the regulation's consideration of the role banks play in 
meeting local credit needs and providing services through their 
branch networks. Treasury's recommendation that the Federal 
banking agencies revisit the regulations to allow CRA 
consideration for a bank's activities in its assessment area, 
as currently delineated around branches and deposit-taking 
automated teller machines, as well as in low- and moderate-
income areas outside that branch footprint, is a reasonable 
place to start our interagency discussions. Further, CRA 
provides an incentive to bankers and community stakeholders to 
work together to identify needs, create investment 
opportunities, and improve local communities, particularly low- 
and moderate-income or underserved rural areas.

Q.6. Anti-Money Laundering (AML). One criticism I've heard 
about anti-money laundering enforcement is that the banking 
regulators view AML-compliance as a check-the-box exercise that 
encourages banks to defensively file SARs that may not truly 
reflect suspicious activity instead of spending resources to 
catch bad guys.
    Do you believe there is a check-the-box mentality among 
bank examiners regarding AML compliance? If so, do you believe 
it is a problem, and if so what do you plan to do to address 
it?

A.6. Under current law and regulations implementing the Bank 
Secrecy Act (BSA), insured depository institutions and other 
banking organizations must maintain a system for identifying 
and reporting to the Government transactions involving known or 
suspected illegal activities that generally exceed certain 
dollar thresholds (known as a ``Suspicious Activity Report'' or 
``SAR''). The Federal Reserve and the other Federal banking 
agencies review an institution's compliance with this and other 
anti-money laundering (AML) requirements through the 
examination process.
    The interagency examination manual that was developed 
jointly among the Federal Reserve and the other members of the 
Federal Financial Institutions Examination Council (FFIEC) in 
consultation with Treasury's Financial Crimes Enforcement 
Network (FinCEN) describes the regulatory expectations for 
banking industry compliance with the suspicious activity 
reporting requirements and explains how examinations will be 
performed. The examination manual recognizes that the decision 
to file a SAR under the reporting requirement is an inherently 
subjective judgment. The manual directs examiners to focus on 
whether the institution has an effective SAR decision-making 
process, not individual SAR decisions. The Federal Reserve, 
along with the other Federal banking agencies, provides ongoing 
training opportunities to its examiners regarding BSA topics 
and various aspects of the BSA examination process.
    The Federal Reserve recognizes that existing regulatory 
requirements governing the filing of SARs have prompted 
criticism due to the concern that they encourage institutions 
to report transactions that are unlikely to identify unlawful 
conduct, so-called defensive SARs. Recently, the Federal 
Reserve and the other Federal banking agencies completed a 
review consistent with the statutory mandate under the Economic 
Growth and Regulatory Paperwork Reduction Act. As part of this 
review, several commenters suggested regulatory changes to the 
SAR and other reporting requirements, which were referred to 
FinCEN. FinCEN is the delegated administrator of the BSA, and 
any changes to the SAR or other reporting requirements would 
require a change in FinCEN's regulations.

Q.7. Some have suggested that having FinCEN retake 
responsibility for some AML compliance reviews is a good way to 
realign the compliance incentives--the agency trying to catch 
the bad guys would be the same agency that's inspecting a 
bank's AML program.
    What do you think about that approach?

A.7. The Federal Reserve and the other Federal banking agencies 
are required by statute to review the BSA/AML compliance 
program of the banks we supervise at each examination. \1\ 
Thus, unless this requirement is changed by Congress, banking 
agencies must continue to examine for BSA compliance at banking 
institutions.
---------------------------------------------------------------------------
     \1\ See Anti-Drug Abuse Act of 1986, H.R. 5484, 99th Cong. 1359 
(1986).
---------------------------------------------------------------------------
    There are important benefits that arise from these 
statutorily mandated reviews by the banking agencies. A review 
of an institution's compliance with the BSA is integrally 
related to our assessment of an institution's safety and 
soundness. The Federal Reserve expects the institutions we 
supervise to identify, measure, monitor, and control the risks 
of an institution's activities. The inability to properly 
manage legal and compliance risk, for example, can compromise a 
bank's safety-and-soundness by reducing the confidence of its 
customers and counterparties and result in loss of capital, 
lower earnings, and weakened financial condition.
    Currently, the Federal Reserve and the other Federal 
banking agencies routinely coordinate with FinCEN on a range of 
BSA matters. The FFIEC BSA/AML Working Group, which includes 
representatives of the banking agencies and FinCEN, meets 
regularly to share information among its members about various 
BSA/AML initiatives. This forum can encourage the sharing of 
information developed by FinCEN related to specific types of 
money laundering typologies and other relevant data that would 
help prioritize the ongoing examination efforts by the banking 
agencies.

Q.8. It seems another way we can build a more effective 
compliance regime is to facilitate more information sharing 
among banks and between the Government and banks.
    What role do you think the Federal Reserve should have in 
facilitating this increased information flow?

A.8. Effective implementation of the BSA requires coordination 
among the different Government agencies and regulated 
institutions. The Federal Reserve takes seriously its 
obligation to coordinate with FinCEN and the Federal banking 
agencies to ensure that banking organizations operate in a safe 
and sound manner and in compliance with the law. In particular, 
we participate in the Bank Secrecy Act Advisory Group, a 
public-private partnership established by Congress for the 
purpose of soliciting advice on the administration of the BSA, 
which facilitates sharing of information on regulatory policies 
and initiatives, industry developments, and emerging money-
laundering threats.
    As you know, the Federal banking agencies do not have the 
authority to conduct criminal investigations or to prosecute 
criminal cases. Rather, the Federal banking agencies ensure 
that suspected criminal activity is referred to the appropriate 
criminal authorities for prosecution and the BSA rules are 
intended to achieve this purpose. Accordingly, the Federal 
Reserve relies on the Department of Justice and other law 
enforcement agencies to communicate whether the reporting 
obligations of banks are furthering law enforcement's 
objectives. Indeed, communication from law enforcement to 
regulators and the banking industry is vitally important.
    Finally, in terms of information sharing between financial 
institutions, the primary means of communication related to BSA 
is governed by Section 314(b) of the USA PATRIOT Act, which 
encourages financial institutions and associations of financial 
institutions located in the United States to share information 
in order to identify and report activities that may involve 
terrorist activity or money laundering. FinCEN is the agency 
with the responsibility and authority to facilitate information 
sharing under the regulation. As part of the ongoing 
initiatives with FinCEN and the other Federal banking agencies 
described above, the Federal Reserve has encouraged FinCEN to 
further consider ways to facilitate financial institutions' 
ability to share information.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                     FROM RANDAL K. QUARLES

Q.1. During our exchange, you referenced an analysis that the 
Fed conducted about how much the less capital each G-SIB would 
be required to hold under the new Enhanced Supplementary 
Leverage Ratio rule recently proposed by the Fed. You noted 
that the Fed's calculations differed from the FDIC's analysis, 
which I cited.
    Could you please provide the Fed's analysis that you 
referenced and an explanation of the divergence between the Fed 
and the FDIC?

A.1. The Federal Reserve Board (Board) estimated that, taking 
into account the capital constraints imposed by the supervisory 
stress tests and the Board's regulatory capital rules, the 
proposed changes to the enhanced supplementary leverage ratio 
(eSLR) standards would reduce the amount of tier 1 capital 
required across the U.S. global systemically important bank 
holding companies (G-SIBs) by approximately $400 million. That 
figure is approximately 0.04 percent of the amount of tier 1 
capital held by the G-SIBs as of the third quarter of 2017. The 
Federal Deposit Insurance Corporation's analysis of April 11, 
2018, cites the Board's and the Office of the Comptroller of 
the Currency's estimate that the proposal would reduce the 
amount of tier 1 capital required across the lead bank 
subsidiaries of the G-SIBs by approximately $121 billion. The 
$121 billion figure represents the potential reduction in tier 
1 capital required across the lead insured depository 
institution subsidiaries of the G-SIBs; however, these firms 
are wholly owned by their parent holding companies. On a 
consolidated basis, G-SIBs would continue to be subject to 
risk-based capital requirements, supervisory stress testing 
constraints, and other limitations applicable at the holding 
company level that would restrict the amount of capital that 
such firms may distribute to investors. Thus, due to these 
limitations at the holding company level, the G-SIBs would be 
required to retain nearly all of the $121 billion amount and 
would not be able to distribute it to third parties.

Q.2. During the hearing, you told me that in your view, Section 
402 of S. 2155, which recently passed the Senate and allows 
banks ``predominantly engaged in custody, safekeeping, and 
asset servicing activities'' to have less capital, could not be 
interpreted to include JPMorgan Chase and Citigroup.
    Would that analysis hold if those banks created 
intermediate holding companies to house their custody services?

A.2. Because an intermediate holding company would be 
disregarded in financial consolidation, the creation of an 
intermediate holding company to house custody services would 
not affect the analysis of whether the consolidated 
organization was ``predominantly engaged in custody, 
safekeeping, and asset servicing activities.''

Q.3. Will the Fed alter the Enhanced Supplementary Leverage 
Ratio proposal if S. 2155 passes?
    In what way?

A.3. The proposal is based on the current regulatory 
definitions of tier 1 capital (the numerator of the ratio) and 
total leverage exposure (the denominator of the ratio), which 
include central bank deposits in the denominator. As noted in 
the preamble to the proposed rule, significant changes to 
either of the components of the supplementary leverage ratio 
would likely necessitate reconsideration of the proposal so 
that the eSLR standards continue to require an appropriate 
level of capital. We are considering potential ways that the 
regulation could be adjusted to account for the changes to the 
eSLR due to the enactment of S. 2155 into law.

Q.4. Why is a reduction in capital requirements necessary at 
this point in the business cycle?

A.4. The proposal would not represent a material reduction in 
the amount of capital held by firms subject to the eSLR. Taking 
into account the capital constraints imposed by the Board's 
supervisory stress testing requirements, as well as the Board's 
regulatory capital rules, we estimate that the proposal would 
reduce the amount of tier 1 capital required across the G-SIBs 
by approximately $400 million. That figure is approximately 
0.04 percent of the amount of tier 1 capital held by the G-SIBs 
as of the third quarter of 2017.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
                     FROM RANDAL K. QUARLES

Q.1. In response to my question about whether a Government 
backstop is essential to retaining the 30-year fixed-rate 
mortgage, you responded, ``probably not'' but added that you 
would need more time to analyze the question.
    Can you elaborate on your views regarding the connection 
between a Government guarantee and the availability of the 30-
year fixed-rate mortgage in all credit cycles?
    Do you believe that Government guarantees promote or 
detract from housing market stability?
    During the 2000s, as private-label securitization grew to 
dominate the U.S. housing finance system, we saw very clearly 
the tendency of nonguaranteed mortgage financing to shun the 
30-year fixed-rate mortgage. Indeed, during the period from 
2001-2008, private-label securitization displayed a remarkable 
bias toward adjustable-rate products. Do you believe that 
nonguaranteed financing and its tendency towards adjustable 
rates would provide affordable access to credit for American 
families? In a housing downturn, do you believe that 
nonguaranteed mortgage financing could provide consumers with 
similar access to affordable, long-term housing credit?

A.1. The 30-year fixed-rate mortgage is a very popular product 
in this country and for decades has been associated with a 
credit guarantee. Without a guarantee, it is still likely to be 
available throughout the credit cycle. However, the cost and 
availability of the product could vary significantly.
    The jumbo-conforming spread, which measures the price 
difference between private mortgage financing and Government-
guaranteed mortgage financing, has varied greatly over time and 
has tended to increase sharply during times of financial 
stress. For instance, the jumbo-conforming spread averaged 
about 10 basis points prior to the financial crisis (2005 
through mid-2007), 30-40 basis points during the early stages 
of the crisis (mid-2007 through mid-2008), and over 75 basis 
points during the depths of the crisis (mid-2008 through mid-
2009). The jumbo-conforming spread has since declined to about 
10-15 basis points during the 2016-2017 time period.
    A 30-year horizon for a financial asset is a long horizon, 
particularly an asset with credit risk. Households with such 
mortgages are likely to encounter periods of financial turmoil 
over this horizon, sometimes with little equity in their home. 
In addition, the 30-year fixed-rate mortgage is usually 
prepayable and thus a household can refinance and withdraw any 
home equity it has accumulated from the house. As a result of 
these two factors, managing the credit risk for this mortgage 
product can be difficult for certain mortgage investors.
    Secondary market traders of financial assets usually manage 
interest-rate risk and avoid assets with credit risks. Thus, 
the 30-year fixed-rate mortgage can be difficult to trade 
without a substantial financial premium for traders if it has 
credit risk. A Government guarantee for the credit risk allows 
the 30-year fixed-rate mortgage to be more easily used in 
secondary market trading.
    Ultimately, the question of the Government's role in 
housing finance is an issue for Congress. If Congress does 
choose to provide a guarantee for mortgages, I would urge that 
the guarantee be explicit and transparent, done in a manner 
that protects taxpayers, and apply to securities not 
institutions.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
                     FROM RANDAL K. QUARLES

Q.1. During the March meeting of the Federal Open Market 
Committee, the Fed discussed the expected impacts of the recent 
tax cuts: according to the minutes, ``participants generally 
regarded the magnitude and timing of the economic effects of 
the fiscal policy changes as uncertain, partly because there 
have been few historical examples of expansionary fiscal policy 
being implemented when the economy was operating at a high 
level of resource utilization.''
    There are few historical examples of expansionary fiscal 
policy being implemented when the economy is so strong because 
it is bad economics. Mainstream economists agree that it is 
harmful for an economy to enact fiscal stimulus when the 
economy is operating at or near maximum capacity because it 
creates strong inflationary pressure.
    Do you agree?
    Is it good economy policy to enact massive fiscal stimulus 
when the economy is operating at a high level of resource 
utilization?

A.1. As noted in the March Minutes, because there have been few 
historical examples of expansionary fiscal policy being 
implemented when the economy was operating at a high level of 
resource utilization, the magnitude and timing of the economic 
effects of recent changes in fiscal policy are uncertain. While 
the Congress and the President are solely responsible for 
determining the timing and contours of fiscal policy changes, I 
will note that Federal fiscal policy is not currently on a 
sustainable trajectory. Over the coming decades, a large and 
growing Federal Government debt, relative to the size of the 
economy, would have negative effects on the economy. In 
particular, a rising Federal debt burden would reduce national 
saving, all else equal, and put upward pressure on longer-term 
rates.

Q.2. Bank holding companies under the Fed's supervision have 
been fined more than $174 billion since the financial crisis 
for deceptive practices, anti-money laundering violations, and 
glaring consumer abuses. The egregious practices at Wells Fargo 
led the Fed to cap the bank's growth and resulted in hundreds 
of millions in fines, with more to come.
    What these fines demonstrate is that our largest financial 
institutions are either intentionally and repeatedly breaking 
the law, or they are too large to be properly managed.
    Which do you think it is?

A.2. Since 2008, the Federal Reserve has assessed civil money 
penalties totaling approximately $5.7 billion against 35 
institutions of varying asset sizes. Most commonly, these fines 
were focused on an institution's unsafe or unsound practices 
that resulted from breakdowns in the institution's oversight, 
controls, and risk management related to particular regulatory 
frameworks, for example the Bank Secrecy Act, U.S. sanctions 
requirements, the application of antitrust law to individual 
financial markets, such as foreign exchange trading, and 
servicing and foreclosing on residential mortgage loans.
    The enforcement actions taken by the Federal Reserve 
invariably supplemented the monetary penalty by also requiring 
the institutions to develop and implement acceptable plans, 
policies, and programs to remedy the managerial, operational, 
or compliance deficiencies that were the basis for the actions. 
Before the remedial requirements of such an enforcement action 
can be terminated, the Federal Reserve must be assured that the 
institution has implemented a sustainable, long-term solution 
to the problem that led to the enforcement action. To that end, 
the relevant Federal Reserve Bank reviews the plans and 
programs and the progress reports developed in response to the 
enforcement action, and provides feedback to senior management. 
The Federal Reserve also conducts a broader annual supervisory 
assessment of the institution that includes a review of the 
institution's compliance with any outstanding enforcement 
action to ensure the institution addresses the underlying 
issues.

Q.3. Why should we think about lightening prudential 
requirements on institutions that have such serious legal 
compliance problems?

A.3. The institutions subject to enforcement actions described 
above were required as part of the actions to fully correct 
these defective programs. The improvements in regulatory 
effectiveness, efficiency, and transparency currently being 
considered by the Federal Reserve should not in any way detract 
from the obligation of all regulated institutions to maintain 
comprehensive and effective compliance programs.

Q.4. Does the fact that banks have paid record fines at a time 
when they have made record profits mean that banks have just 
baked the cost of fines into their business plan?
    Are these fines accomplishing anything?

A.4. It is the experience of the Federal Reserve that, 
enforcement actions that impose substantial penalties also tend 
to serve a deterrent purpose. In addition, effective 
accountability for institutional misconduct can also be 
achieved by taking appropriate enforcement actions against 
culpable individuals who are responsible for the misconduct. 
Pursuing such actions against culpable insiders, where supplied 
by the record, is an important priority for the Federal 
Reserve. In addition, in cases of pervasive and persistent 
institutional misconduct, such as the Board's recent 
enforcement action against Wells Fargo & Company, the Federal 
Reserve did not impose a fine but restricted the institution's 
asset growth until the firm accomplishes effective remediation.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
          SENATOR CORTEZ MASTO FROM RANDAL K. QUARLES

Q.1. Following up on my questions to you, I am very concerned 
that cost-benefit analysis fails to capture the human and 
economic cost of massive financial system failure. For example, 
in 2009, when I was Attorney General, Nevada had 165,983 people 
unemployed. That year, in a State of 3 million people, we had 
28,223 personal bankruptcies, 366,606 mortgage delinquencies 
and 421,445 credit card delinquencies. In addition, 121,000 
Nevada children's lives and educations were disrupted by the 
foreclosure crisis. We had more than 219,000 foreclosures 
between 2007 and 2016.
    Do you believe that cost-benefit analysis 
disproportionately benefits industry, since the costs of 
compliance are easier to calculate, while the benefits of a 
sound financial system are more difficult to measure?
    You noted that the Federal Reserve underestimated the human 
costs of a potential financial crisis prior to 2008? Please 
describe some of the ways that Fed underestimated the costs of 
the Crisis and how you would have assessed them knowing what 
you know now?
    How will the Federal Reserve's new ``policy effectiveness 
and assessment'' unit consider the benefits of avoiding a 
future financial crises? How many people work in the unit? Who 
are they and what is their background and expertise?
    If they were employed at the Federal Reserve prior to the 
Financial Crisis, what was their role?
    If they published anything on the stability or risks in the 
financial sector between 2004-2008, please provide those 
documents.

A.1. Cost-benefit analysis is intended to provide an objective 
assessment of the net costs and benefits to society from a 
pending regulation. This takes into account the myriad impacts 
of a regulation, including those on consumers, businesses and 
financial intermediaries. The fact that some of these impacts, 
such as the cost of compliance, are easier to quantify does not 
imply that the cost-benefit analysis will favor any particular 
group.
    As I noted in my testimony, the Federal Reserve 
underestimated the likelihood of a crisis prior to the 
financial crisis. Indeed, it is in response to these 
shortcomings that the Federal Reserve has worked with other 
agencies to significantly raise prudential standards, such as 
capital and liquidity of financial institutions, thus lowering 
the probability of another crisis.
    The Policy Effectiveness and Assessment section will follow 
established methods and consider the benefit of avoiding a 
financial crisis by considering the impact of increased safety 
and soundness on the reduced probability of a crisis, and the 
economic losses given a crisis.
    Currently, the section has a manager in place (an economist 
by training) and the team consists of a small number of Ph.D. 
economists and support staff. As with all Federal Reserve 
economists, their professional profile and publications are 
available on our public website at https://
www.federalreserve.gov/econres/theeconomists.htm. In addition, 
we recently hired additional Ph.D. economists, and these 
individuals will be joining the team in the coming months.

Q.2. Under S. 2155, the Federal Reserve would have the 
discretion to apply financial stability rules to banks with 
between $100 billion and $250 billion in assets. Such 
discretion especially requiring tailored rules to each 
institutions--opens up banking regulators to lawsuits. For 
example, SIFMA sued the CFTC over the definition of ``as 
appropriate'' when it came to setting position limits.
    Are you concerned that giving the Federal Reserve 
discretionary authority to implement financial stability rules 
for banks--rather than relying on a bright line threshold from 
Congress--will open the Fed to lawsuits by banks that are 
selected for additional oversight?

A.2. The Federal Reserve Board (Board) has developed experience 
in tailoring its prudential regulations and supervisory 
programs based on factors such as the size, systemic footprint, 
and the risk profile of individual institutions.
    The Board remains committed to transparency in its 
rulemaking process and believes it is important to provide the 
public with an adequate justification for its rules. The public 
would have the opportunity to comment on any proposed rule, 
which would provide the Federal Reserve with important 
information, focus, and feedback, including whether the 
proposal is appropriately tailored to its intended purpose.

Q.3. Former Deputy Treasury Secretary--and Fed Governor--Sarah 
Bloom Raskin called this ``reach down'' authority afforded to 
the Fed, ``legislative fool's gold.'' She knows the Fed will 
wait until it's too late to regulate banks in the $100 to $250 
billion band.
    What do you think of her comments?

A.3. In the absence of Enhanced Prudential Standards for 
institutions under $250 billion, the Federal Reserve maintains 
broad supervisory and regulatory tools to ensure firms continue 
to adhere to prudential safety and soundness standards. These 
tools include a rigorous supervisory program with standards for 
internal stress testing of capital and liquidity as well as 
risk management frameworks. A firm with $100 billion to $250 
billion in assets is still expected to ensure that the 
consolidated organization and its core business lines can 
survive under a broad range of internal and external stresses 
and that it maintains sufficient capital and liquidity, as well 
as operational resilience, through effective corporate 
governance and risk management. Moreover, under the Economic 
Growth, Regulatory Relief, and Consumer Protection Act, the 
Federal Reserve has discretion to determine which enhanced 
standards to apply to an institution between $100 billion and 
$250 billion. I expect that the Board will seek public comment 
on the application of those standards to this group of 
institutions.

Q.4. As of 2016, the financial sector accounted for 20 percent 
of the GDP and 25 percent of corporate profits. Do you believe 
that the financial sector's outsized grasp on profits has a 
chokehold on the overall economy?

A.4. Our responsibilities with regard to the financial sector 
are to ensure that the financial entities we supervise operate 
in a safe and sound manner, and to promote financial stability. 
We take these responsibilities very seriously. Currently, we 
see financial conditions as generally supportive of continued 
economic expansion, consistent with the attainment of maximum 
employment and price stability.

Q.5. As your team addresses and analyzes the cost-benefit 
analysis of any proposed rule, how will they calculate the cost 
of having a financial sector with outsized and increasing 
power, influence, and wealth?

A.5. As part of the rulemaking process, the Board considers the 
economic impact, including costs and benefits, of its proposed 
and final rules. As part of this evaluation, staff will take 
into account the benefits accruing from improvements in the 
safety and soundness of Board-regulated institutions and U.S. 
financial stability, the costs imposed on the regulated 
entities, as well as potential effects on the overall economy. 
In addition, the Board provides an analysis of the costs to 
small depository organizations of its rulemaking consistent 
with the Regulatory Flexibility Act \1\ and computes the 
anticipated cost of paperwork consistent with the Paperwork 
Reduction Act. \2\ In adopting the final rule, the Board seeks 
to adopt a regulatory option that faithfully reflects the 
statutory provisions and the intent of Congress, while 
minimizing regulatory burden.
---------------------------------------------------------------------------
     \1\ 5 U.S.C. 601.
     \2\ 12 U.S.C. 3506.

Q.6. I represent Nevada, which is within the San Francisco 
Federal Reserve District. We are one of the most diverse 
districts in the Nation--with many Latino and Asian Pacific 
American families. We value that diversity because it leads to 
innovation, economic growth, and stronger connections with 
other nations in our globally connected world.
    A recent report by Fed Up, ``Working People Still Need a 
Voice at the Fed: 2018 Diversity Analysis of Federal Reserve 
Bank Directors'', found that there is inadequate diversity at 
the Federal Reserve. It specifically cited the San Francisco 
Federal Reserve as one of system's least diverse regional 
banks. The report states, ``Despite covering some of the most 
demographically diverse counties in the United States, 100 
percent of the San Francisco Fed's Board of Directors come from 
the banking and financial sector. The directors are 78 percent 
white and 78 percent male.''
    As the Vice Chair of Supervision, what steps have you taken 
to promote diversity with the Fed's supervisory, regulatory and 
enforcement staff?

A.6. The Board's action to approve the Diversity and Inclusion 
Strategic Plan 2016-2019 reflects the Board's strategic 
initiative on diversity, inclusion, and equality. The 
implementation of the plan involves the active involvement of 
leaders throughout the Board. In support of the Board's 
strategic objectives and commitment to attract, hire, develop, 
promote and retain a highly diverse workforce, each division is 
required to establish a diversity and inclusion scorecard. The 
purpose of the scorecard provides a process that helps us 
organize and develop a systematic effort in support of the 
diversity and inclusion strategic plan. I am firmly committed 
to addressing the division of Supervision and Regulation's and 
related divisions' challenges and achievement of their goals.

Q.7. What steps can the Fed take to promote diversity within 
the financial system, especially with respect to the firms the 
Fed regulates?

A.7. As directed by section 342 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act), the Board 
continues to request from the entities we regulate a submission 
of information that supports the diversity policies and 
practices of their institutions. The assessment of submissions 
provides an opportunity to strengthen and promote transparency 
of organizational diversity and inclusion within the entities' 
U.S. operations and provides opportunities to discuss leading 
practices and challenges in addressing diversity in the 
financial services industry. In an effort to increase the 
submission of diversity information, the Board is collaborating 
with the other financial regulatory agencies to develop 
symposiums, webinars, and other support initiatives to provide 
a variety of forums to address what is needed to advance 
diversity in the financial and banking industry.

Q.8. How closely do you work with the Fed's Office of Diversity 
and Inclusion? Please give a couple of examples.

A.8. In my role as Governor and Vice Chairman of Supervision, I 
am available to the Director of the Office of Minority and 
Women Inclusion (OMWI) to meet and discuss cultivating 
diversity and inclusion in all aspects of employment. The OMWI 
Director is involved in the appointment process of official 
staff to ensure that the Board's leadership nomination criteria 
and process are inclusive. Additionally, a meeting schedule has 
been established for the OMWI Director and Deputy Director of 
Supervision Policy to discuss a range of issues within the OMWI 
purview.

Q.9. How will you work to end the outsized representation and 
influence of the banking and business sectors among the 
Regional Bank Boards of Directors?
    Have you identified directors with nonprofit, academic, and 
labor backgrounds that could also serve?

A.9. I, and my colleagues on the Board, are committed to 
increasing diversity throughout the Federal Reserve System 
(System). The Board focuses particular attention on increasing 
gender, racial, and sector diversity among Reserve Bank and 
Branch directors because we believe that the System's boards 
function most effectively when they are constituted in a manner 
that encourages a variety of perspectives and viewpoints. 
Monetary policymaking also benefits from having directors who 
effectively represent the communities they serve because we 
rely on directors to provide meaningful grassroots economic 
intelligence.
    In vetting candidates for Class C and Board-appointed 
Branch director vacancies, the Board considers factors such as 
professional experience, leadership skills, and community 
engagement. The Board also evaluates a candidate's ability to 
contribute meaningful insights into economic conditions of 
significance to the District and the Nation as a whole. As part 
of this process, the Board focuses considerable attention on 
whether a candidate is likely to provide the perspective of 
historically under-represented groups, such as consumer, 
community, and labor organizations, minorities, and women.
    Although there is room for improvement, the System has made 
significant progress in recent years in recruiting highly 
qualified, diverse candidates for Reserve Bank and Branch 
director positions. For example, in 2018, approximately 56 
percent of all System directors are diverse in terms of gender 
and/or race, which represents a 16 percentage point increase in 
the share of directors since 2014.
    As previously mentioned, in addition to gender and racial 
diversity, the Board also seeks candidates from a wide range of 
sectors and industries to serve as Reserve Bank and Branch 
directors. We currently have consumer/community and labor 
leaders serving on boards throughout the System, and we gain 
invaluable insight from directors who are affiliated with other 
types of organizations, including major health care providers, 
universities and colleges, and regional chambers of commerce, 
among others.

Q.10. If the Consumer Financial Protection Bureau continues to 
drop lawsuits against predatory online loan companies, like 
Golden Valley Lending or drop investigations against companies 
like World Acceptance Corporation, one of the biggest payday 
lenders, does the Federal Reserve have the enforcement 
authorities and resources that would allow its staff pick up 
the slack and protect people from unfair, deceptive and abusive 
lending practices?

A.10. As prescribed by the Dodd-Frank Act, the Federal Reserve 
has supervisory and enforcement authority for compliance with 
section 5 of the Federal Trade Commission Act (FTC Act), which 
prohibits unfair or deceptive acts or practices (UDAP), for all 
State member banks, regardless of asset size. The Federal 
Reserve is committed to ensuring that the institutions we have 
authority to supervise comply fully with the prohibition on 
unfair or deceptive acts or practices as outlined in the FTC 
Act.
    Under the Dodd-Frank Act, Congress granted supervision and 
enforcement authority to the Consumer Financial Protection 
Bureau (CFPB) for all other banks, thrifts, and credit unions 
with assets over $10 billion, and their affiliates, as well as 
nonbank mortgage originators and servicers, payday lenders, and 
private student lenders. As such, the Federal Reserve cannot 
supervise or enforce consumer protection laws and regulations 
with respect to institutions that are not within our statutory 
authority.

Q.11. Mick Mulvaney, the OMB Director and the CFPB Acting 
Director appointed--illegally--by President Trump, has received 
more than $60,000 in campaign contributions from payday 
lenders. You recused yourself from any case involving Wells 
Fargo because of your ``wife's family's historical 
connection.''
    Do you think Acting Director Mulvaney should recuse himself 
from any decision on litigation or enforcement for any firm 
that has provided him significant campaign contributions?

A.11. It is not our practice to comment on a non- Federal 
Reserve official's decision to participate in or recuse himself 
or herself from a particular matter that does not involve the 
Federal Reserve. I have no comment on recusal decisions made by 
other Government officials.

Q.12. If the Consumer Financial Protection Bureau's political 
appointees refuses to police the consumer markets, will you let 
us know if predatory and deceptive practices are going 
unaddressed and increasing risks in the financial system?

A.12. The Federal Reserve takes seriously our responsibility to 
supervise and enforce laws that guard consumers against UDAP in 
the banks for which we have statutory authority. As granted by 
the Dodd-Frank Act, the Federal Reserve supervises for 
compliance with the section 5 of the FTC Act, which sets forth 
consumer protections for UDAP, in State member banks, 
regardless of asset size. For these banks, we conduct UDAP 
reviews regularly within the supervisory cycle. Further, 
examiners may conduct a UDAP review outside of the usual 
supervisory cycle, if warranted by findings of a risk 
assessment. When Federal Reserve examiners find evidence of 
potential discrimination or potential UDAP violations, they 
work closely with the Board's Division of Consumer and 
Community Affairs (DCCA) for additional legal and statistical 
expertise and ensure that fair lending and UDAP laws are 
enforced consistently and rigorously throughout the System.
    When violations are identified, the Federal Reserve 
frequently uses informal supervisory tools (such as memoranda 
of understanding between banks' boards of directors and the 
Federal Reserve Banks, or board resolutions) to ensure that 
violations are corrected. In these instances, the supervisory 
information is confidential and cannot be shared with parties 
outside of the institution and supervisory agencies.
    Just as the Federal Reserve cannot share confidential 
supervisory information with respect to the banks that we 
supervise, neither can we share confidential supervisory 
findings of other supervisory agencies.
    However, the Federal Reserve has addressed unfair and 
deceptive practices through public enforcement actions that 
have collectively benefited hundreds of thousands of consumers 
and provided millions of dollars in restitution. In 2014 and 
2015, we brought two enforcement actions requiring restitution 
for students who were not given full information about the 
potential fees and limitations associated with opening deposit 
accounts for their financial aid refunds.
    In 2017, the Board brought two public enforcement actions 
for UDAP violations. In October, the Board issued a consent 
order against a bank for deceptive practices related to balance 
transfer credit cards issued to consumers through third 
parties. The order required the bank to pay approximately $5 
million in restitution to nearly 21,000 consumers and to take 
other corrective actions. In November, the Board issued another 
consent order against a bank for deceptive residential mortgage 
origination practices when it had given borrowers the option to 
pay an additional amount to purchase discount points to lower 
their mortgage interest rate, but that did not actually provide 
the reduced rate to many of those borrowers. The enforcement 
action required the bank to pay approximately $2.8 million into 
an account to provide restitution to these borrowers. These are 
a few examples. The Board reports its general overview of UDAP 
and enforcement actions in our Annual Report to Congress.

Q.13. Has the Federal Reserve leadership--either directly or 
through the Financial Stability Oversight Council--weighed in 
on the impact from the Trump appointed leadership at the CFPB's 
decision to weaken fair lending enforcement, suspend the civil 
penalties fund and stop investigating into firms such as the 
hack of 147 million people's information held by Equifax?

A.13. As you know, Title X of the Dodd-Frank Act transferred 
rulemaking authority for a number of consumer financial 
protection laws from seven Federal agencies to the CFPB. With 
regard to rules for which the CFPB is responsible for 
promulgating, such as those implementing the Fair Credit 
Reporting Act, the Board's role in the process is on a 
consultative basis. We do coordinate in institution 
examinations as appropriate. The Federal Reserve does not have 
any oversight of the CFPB's enforcement priorities, nor 
decisions regarding its organizational or structural design. 
These matters are solely the purview of CFPB's leadership.

Q.14. The Treasury Department, as you know, has released 
several extensive reports that include dozens and dozens of 
recommendations to revise the rules governing banks.
    Do you think there should be penalties for banks that fail 
to comply with the Community Reinvestment Act?
    What should they be?

A.14. The Community Reinvestment Act (CRA) requires the 
regulators to encourage banks to help meet the credit need of 
their local communities. We do so by conducting CRA 
examinations, publishing CRA ratings and performance 
evaluations on our public website, and considering a bank's CRA 
performance when evaluating applications for mergers, 
acquisitions, and opening branches.
    The applications process serves as a means of enforcing 
CRA. CRA requires that the appropriate Federal supervisory 
agency consider a depository institution's record of helping to 
meet the credit needs of its local communities and to take that 
record and public comments into account in evaluating 
applications for deposit-taking facilities, such as for 
mergers, acquisitions, and branches. An institution's most 
recent CRA record is a particularly important consideration in 
the applications process because it represents a detailed on-
site evaluation of the institution's performance under the CRA. 
The public nature of the ratings and the agencies' 
consideration of CRA performance in the application process 
creates an incentive for financial institutions to work with 
its community to help meet its needs.

Q.15. Which, if any, recommendations from the Treasury 
Department related to CRA do you disagree with?

A.15. The Board's staff is continuing to analyze the 
recommendations made by the Department of Treasury. I share 
Treasury's goal of improving the current supervisory and 
regulatory framework for CRA based on feedback from industry 
and community stakeholders. I agree that many of the issues and 
potential solutions they raised are worthy of consideration. 
The Board is open to considering ways to make the CRA more 
effective and believes there are ways to expand the area where 
we evaluate a bank's CRA performance without losing the 
regulation's focus on the unique role banks play in meeting 
local credit needs.
    For example, I agree that it is time to review changes to 
the definition of ``assessment area,'' which is the area in 
which a bank's CRA performance is evaluated. The banking 
environment has changed since CRA was enacted and the current 
CRA regulation was adopted. Banks may now serve consumers in 
areas far from their physical branches. Therefore, it is 
sensible for the agencies to consider expanding the assessment 
area definition to reflect the communities that banks serve, 
while retaining the core focus on place.

Q.16. Fed Chair Powell recently said that the Fed's 
requirements for the largest banks are ``very high and they're 
going to remain very high.'' \3\ He continued, ``As you look 
around the world, U.S. banks are competing very, very 
successfully. They're very profitable. They're earning good 
returns on capital. Their stock prices are doing well. So I'm 
looking for the case, for some kind of evidence that--and I'm 
open to this--some kind of evidence that regulation is holding 
them back, and I'm not really seeing that case as made at this 
point.'' \4\
---------------------------------------------------------------------------
     \3\ https://www.federalreserve.gov/newsevents/speech/
powell20180406a.htm
     \4\ Politico Pro, ``Powell Doesn't See Need To Loosen Rules on 
Biggest Banks'', April 6, 2018.
---------------------------------------------------------------------------
    Why did the Fed issue a proposal last week that would 
revise the enhanced Supplementary Leverage Ratio (eSLR), which 
according to the FDIC, would reduce bank capital by more than 
$120 billion at the Nation's largest banks?
    With banks making big profits, why would the Fed propose to 
reduce capital in a significant way that diminishes protections 
for taxpayers and the economy?
    If we are seeing regulations being weakened while the 
banking sector is very strong economically, what do you expect 
to see regarding banking regulations during an actual downturn 
or recession?

A.16. The proposed recalibration of the enhanced supplementary 
leverage ratio (eSLR) standards is an example of the Board's 
efforts to ensure that the postcrisis financial regulations are 
working as intended. Core aspects of postcrisis financial 
regulation have resulted in critical gains to the financial 
system, including higher and better quality capital, a robust 
stress testing regime, new liquidity regulation, and 
improvements in the resolvability of large firms. The financial 
system is stronger and more resilient as a result, helping 
banks to lend through the business cycle. With the revised 
regulatory framework in place, the Board is assessing the 
effect of those efforts. In undertaking this review and 
assessment, the Board is mindful of the need for the 
regulations not only to be effective for maintaining safety and 
soundness and financial stability, but also to be efficient, 
transparent, and simple.
    The purpose of the eSLR proposal is to recalibrate our 
capital standards for banking organizations such that the ratio 
generally serves as a backstop to risk-based capital 
requirements and not as a binding constraint. Over the past few 
years, concerns have arisen that, in certain cases, the SLR has 
become a generally binding constraint rather than a backstop to 
the risk-based requirements. If a leverage ratio is calibrated 
at a level that makes it generally binding, it can create 
incentives for banking organizations to reduce their 
participation in business activities with lower risks and 
returns, such as repo financing, central clearing services for 
market participants, and taking custody deposits, even when 
there is client demand for those generally low-risk services 
and to actually increase the risk in its portfolio since it 
bears the same capital cost for a risky asset as for a safe and 
sound one.
    I do not believe that the proposal would materially change 
the amount of capital held by U.S. global systemically 
important bank holding companies (G-SIBs). The $121 billion 
figure noted in the proposal represents the potential reduction 
in tier 1 capital required across the lead insured depository 
institution subsidiaries of the G-SIBs; however, these firms 
all are wholly owned by their parent holding companies. On a 
consolidated basis, G-SIBs would continue to be subject to 
risk-based capital requirements, supervisory stress testing 
constraints, and other limitations applicable at the holding 
company level that would restrict the amount of capital that 
such firms may distribute to investors. Due to these 
limitations at the holding company level, the G-SIBs would be 
required to retain the vast majority of the $121 billion amount 
and would not be able to distribute it to third parties. The 
Board estimates that the proposal would reduce the amount of 
tier 1 capital required across the G-SIBs by approximately $400 
million. That figure is approximately 0.04 percent of the 
amount of tier 1 capital held by the G-SIBs as of the third 
quarter of 2017.

Q.17. Mr. Quarles, you have repeatedly said that since it has 
been a decade since the 2008 financial crisis, it is time to 
review and revisit all of the postcrisis financial rules to 
seek improvements.
    Will these modifications to postcrisis reforms be one-sided 
with a focus on deregulating the rules protecting people from 
dangerous behaviors from the financial sector?

A.17. Core elements of the postcrisis financial regulatory 
reforms have made our financial system stronger and more 
resilient: higher and better-quality capital, an innovative 
stress testing regime, new liquidity requirements, and 
improvements in the resolvability of large firms. The reforms 
to regulation and supervision that have been put in place since 
the financial crisis have contributed to a financial system 
that better supports lending to borrowers and protects 
consumers.
    That said, it is the responsibility of financial regulators 
to review and revisit postcrisis regulations to ensure not only 
that they are effective, but also to see if the same outcomes 
can be achieved, where appropriate, in ways that are more 
efficient, transparent, and simple. More specifically, 
regulators should continue to tailor rules to the different 
risks of different firms and ensure that our supervisory 
program is as efficient as possible, including work to reduce 
unnecessary burden on community and regional banks, while 
simultaneously holding our largest, most complex firms to 
heightened regulatory standards. As we consider possible 
changes to the postcrisis structure of regulation and 
supervision, we will remain focused on promoting the strength 
and resilience of the financial system.

Q.18. Chair Powell has said not a single big bank rule requires 
strengthening.
    Do you agree?

A.18. At this point, regulators have completed the bulk of the 
work of implementing postcrisis regulatory reforms, with an 
important exception being the U.S. implementation of the 
recently concluded international agreement on bank capital 
standards. Due in significant part to gains from core 
postcrisis reforms around capital, stress testing, liquidity, 
and resolution, we undoubtedly have a stronger and more 
resilient financial system.
    I believe that now is the time to step back and assess 
whether postcrisis regulations are working as intended and 
determine ways to improve them, not only to ensure that we are 
satisfied with their effectiveness, but also to explore 
opportunities as appropriate to improve the efficiency, 
transparency, and simplicity of these regulations, while 
maintaining the resiliency of the current system.

Q.19. Do you believe the Fed failed, as many of us do, at 
implementing and enforcing our consumer financial protections 
laws prior to the creation of the Consumer Financial Protection 
Bureau?

A.19. The financial crisis revealed the need to address 
fundamental problems across the financial system in both the 
private and public sectors, including failures of risk 
management in many financial firms, deficiencies in Government 
regulation of financial institutions and markets. In response, 
Congress enacted the Dodd-Frank Act to address the weaknesses 
that had emerged in various areas of the mortgage market, 
including underwriting standards, capitalization, and 
securitization, as well as consumer protection. As you know, 
prior to the passage of the Dodd-Frank Act in 2010, the Board 
had responsibility for writing regulations to implement many 
consumer protection laws. The Dodd-Frank Act transferred most 
of these responsibilities to the CFPB, and considerably 
expanded its consumer protection statutory authorities for 
supervision and enforcement, and granted the CFPB broad 
authorities to promulgate consumer protections regulations 
covering banks and nonbanking entities.
    Although the Board no longer has rulewriting authority for 
most consumer protection regulation, we remain committed to 
strong consumer protection to promote a fair and transparent 
financial marketplace, as we have for more than 40 years, 
through the Board's Division of Consumer and Community Affairs 
(DCCA), which is solely dedicated to consumer compliance 
supervision, community development, and consumer-focused 
research, analysis, and outreach. Through this division, we 
oversee the Federal Reserve System's supervision and 
examination policies and programs for the banks under our 
supervisory authority to ensure consumer financial protection 
and promote community reinvestment.
    The Dodd-Frank Act established the CFPB as a dedicated 
agency not only to consumer financial rulemaking, but also 
supervision for banks, thrifts, and credit unions with assets 
over $10 billion, as well as their affiliates, and for nonbank 
mortgage originators and servicers, payday lenders, and private 
student lenders of all sizes.
    Despite responsibilities for supervision that were 
transferred to the CFPB, the Federal Reserve continues to be 
dedicated to consumer protection and community reinvestment in 
carrying out our supervisory and enforcement responsibilities 
for the financial institutions and for the laws and regulations 
under our authority. We supervise all State member banks for 
compliance with the Fair Housing Act and Equal Credit 
Opportunity Act, as well as for other consumer protection rules 
for State member banks of $10 billion or less. Federal Reserve 
staff coordinate with the prudential regulators and the CFPB as 
part of the supervisory coordination requirements under the 
Dodd-Frank Act to ensure that consumer compliance risk is 
appropriately incorporated into the consolidated risk-
management program of the approximately 135 bank and financial 
holding companies with assets over $10 billion.
    The Federal Reserve is committed to ensuring that the 
financial institutions under our jurisdiction fully comply with 
all applicable Federal consumer protection laws and 
regulations. For example, in the last few years, the Federal 
Reserve has addressed unfair and deceptive practices through 
public enforcement actions that have collectively benefited 
hundreds of thousands of consumers and provided millions of 
dollars in restitution. In addition, our examiners evaluate 
fair lending risk at every consumer compliance exam. Pursuant 
to the Equal Credit Opportunity Act, if we determine that a 
bank has engaged in a pattern or practice of discrimination, we 
refer the matter to the Department of Justice (DOJ). Federal 
Reserve referrals have resulted in DOJ public actions in 
critical areas, such as redlining and mortgage-pricing 
discrimination.
    At the Board, DCCA staff provide oversight for the Reserve 
Bank consumer compliance supervision and examination of 
approximately 800 State member banks and bank holding companies 
(BHCs) through its policy development, examiner training, and 
supervision oversight programs, including for banks' 
performance under the CRA; conducting oversight of and 
providing guidance to Reserve Bank staff on consumer compliance 
in BHC matters; assessment of compliance with and enforcement 
of a wide range of consumer protection laws and regulations 
including those related to fair lending, UDAP, and flood 
insurance; analysis of bank and BHC applications in regard to 
consumer protection, convenience and needs, and the CRA; and 
processing of consumer complaints. DCCA also monitors trends in 
consumer products to inform the risk-based supervisory planning 
process. Quantitative risk metrics and screening systems use 
data to assess market activity, consumer complaints, and 
supervisory findings to assist with the determination of risk 
levels at firms.

Q.20. The Administration has proposed in a November report 
stripping FSOC of its power to designate nonbank SIFIs--like 
AIG--for heightened supervision by the Fed. The report said 
this authority was too ``blunt'' of an instrument.
    Has the Fed acted as a blunt instrument in its supervision 
of nonbank SIFIs?

A.20. As consolidated supervisor of nonbank financial companies 
designated by the Financial Stability Oversight Council (FSOC), 
the Board's primary objectives encompass ensuring 
enterprisewide safety and soundness and mitigating threats to 
financial stability. The Board continues to strive for a 
tailored approach that reflects, among other things, the size, 
complexity, and business model of the supervised firm. When 
supervising firms significantly engaged in insurance 
activities, the Board conducts its consolidated supervision in 
coordination with State and foreign insurance regulators, 
collaborating through mechanisms including discussions of 
supervisory plans and examination findings, as well as 
supervisory colleges. We additionally have hosted multiple 
crisis management groups that included a variety of 
participants including State insurance departments, the Federal 
Insurance Office, and the Federal Deposit Insurance 
Corporation.

Q.21. Or has the Financial Stability Oversight Council, or 
FSOC, helped to eliminate regulatory gaps in our financial 
regulatory system?

A.21. Prior to the creation of the FSOC, the U.S. financial 
regulatory framework focused narrowly on individual 
institutions and markets and no single regulator had the 
responsibility for monitoring and assessing overall risks to 
financial stability, which could involve different types of 
financial films operating across multiple markets. The FSOC 
established a venue to facilitate the sharing of regulatory 
information and coordination to help minimize potential gaps 
and weaknesses.
    Notably, the FSOC must publish a financial stability report 
each year, signed by the voting members. Past reports have 
highlighted vulnerabilities such as prime money market mutual 
funds that benefit investors who withdraw their funds first--
with the potential for destabilizing runs of the kind that 
stressed the financial system in September 2008. Subsequent 
reports have noted that the Securities and Exchange 
Commission's (SEC) regulatory reforms, which took effect in 
late 2016, were instituted to mitigate the risk of runs on 
money funds, and led to significant structural changes in the 
industry, with assets flowing to funds that held only assets 
guaranteed by the Government.

Q.22. S&P Global warned earlier this month that leveraged 
lending standards were deteriorating, and that underwriting 
standards in this $1 trillion market continue to get weaker and 
weaker. One PIMCO analyst said, ``I'm not sure the market can 
tolerate much worse.'' \5\ There used to be guidance in place 
to protect against these risks, but while at the OCC, Acting 
Comptroller Noreika withdrew its guidance on leveraged lending. 
And you have said that this guidance, because it was declared a 
rule by the GAO, is ``not something that should be cited in 
supervisory action or taken into account by examiner.'' \6\
---------------------------------------------------------------------------
     \5\ https://www.ft.com/content/680953c0-3e2a-11e8-b9f9-
de94fa33a81e
     \6\ https ://www.americanbanker.com/news/feds-quarles-to-seek-
more-tailoring-of-large-bank-rules
---------------------------------------------------------------------------
    So judging by your comment, the Republicans' assault on 
banking guidance has already had a chilling effect on the Fed's 
ability to constrain emerging risks, is that right?
    How do you plan to protect the market from systemic risk if 
you're telling supervisors to ignore this guidance? What does 
the Fed plan to replace this guidance with?

A.22. The Board has broad authority to supervise and regulate 
banking organizations to promote their safety and soundness. As 
part of that authority, Federal Reserve supervisors and 
examiners assess credit and other risks to the safe and sound 
operations of firms, including risks that may be posed by 
leveraged lending, and to direct the firms to address such 
risks as appropriate. As part of assessing credit and other 
risks, Federal Reserve examiners routinely evaluated the 
underwriting of leveraged loans prior to the issuance of the 
most recent leveraged lending guidance. The guidance was issued 
to provide clarity regarding safety and soundness issues that 
may be present in making such loans. The guidance was not 
issued as a regulation that would be enforceable. Rather, 
banking organizations should use it to better understand and 
manage the risks they are taking.
    The Board, Federal Deposit Insurance Corporation (FDIC), 
and OCC are discussing whether it would be appropriate to again 
solicit public comment on the guidance with a view to improving 
the clarity and reducing any unnecessary burden.

Q.23. The Fed in 2016 proposed a rule to limit some of banks' 
activities in commodities markets, with the rationale being 
that banks' owning, trading, and moving commodities might post 
a safety and soundness risk to the banking system or allow 
banks to wield outsized power in certain markets.
    How does the Fed have time to revisit so many rules that 
aren't even fully phased in yet--the Volcker Rule, the leverage 
ratio, risk-based capital rules--when you haven't even 
completed work from the recent past that was based on years and 
years of study?
    Since the election we have heard nothing about this rule 
being finalized or about any progress on the rule. Has this 
rule been abandoned, and if so, why?

A.23. The Board began its review of the physical commodities 
activities of financial holding companies after a substantial 
increase in these activities among financial holding companies 
during the financial crisis. In January 2014, the Board invited 
public comment on a range of issues related to these activities 
through an Advance Notice of Proposed Rulemaking. In response, 
the Board received a large number of comments from a variety of 
perspectives. The Board considered those comments in developing 
the proposed rulemaking that was issued in September 2016. 
After providing an extended comment period (150 days) to allow 
commenters time to understand and address the important and 
complex issues raised by the proposal, the Board again received 
a large number of comments from a variety of perspectives, 
including Members of Congress, academics, users and producers 
of physical commodities, and banking organizations. The Board 
continues to consider the proposal in light of the many 
comments received and to monitor the physical commodities 
activities of financial holding companies.

Q.24. A recent NY State Comptroller report reported that Wall 
Street bonuses showed a dramatic 17 percent increase from last 
year. Bonuses have increased by 34 percent over the last 2 
years, and the average bonus for Wall Street traders is now at 
the second highest level ever recorded--behind only 2006, the 
year before the financial crisis began.
    We also know, from the Financial Crisis Inquiry Commission 
and other sources, that out-of-control bonus practices were a 
major driver of the 2008 financial crisis. Top executives at 
Bear Stearns and Lehman took out almost $2.5 billion in bonuses 
in the years before those two companies failed, and never had 
to repay a dime. After the crisis, multiple surveys showed that 
more than 80 percent of financial market participants agreed 
that irresponsible bonus practices were a major contributor to 
the short-term risk taking that brought down the financial 
system.
    Section 956 of the Dodd-Frank Act instructed bank 
regulators to reform bonuses at financial institutions, by 
eliminating ``take the money and run'' bonus practices that 
encouraged irresponsible risk-taking. Prior to your 
confirmation, regulators were close to completing rules that 
would have placed new limits on big bank bonuses. Yet to all 
appearances the Federal Reserve and other regulators appear to 
have abandoned that effort completely, even as bonuses 
skyrocket back to precrisis levels.
    When will the Federal Reserve implement Section 956 of 
Dodd-Frank and reform bonuses? Why has this rule been delayed 
so long?

A.24. In June 2016, the Board, OCC, FDIC, the SEC, National 
Credit Union Administration, and Federal Housing Finance Agency 
(the Agencies), jointly published and requested comment on a 
proposed rule under section 956 of the Dodd-Frank Act. This 
joint effort proposed several requirements to address incentive 
compensation arrangements. The Agencies received over 100 
comments on the 2016 proposed rule and are considering the 
comments. I do not have a projected date for completion of this 
rulemaking.
    The Federal Reserve, along with the other Federal banking 
agencies, issued Guidance on Sound Incentive Compensation 
Policies in June 2010 to address incentive compensation 
programs at financial institutions. This guidance is intended 
to assist regulated firms in developing appropriate incentive 
compensation programs that do not encourage inappropriate or 
excessive risk taking.
    The Federal Reserve continues to evaluate incentive 
compensation practices as a part of ongoing supervision. This 
supervision has focused on: the design of incentive 
compensation arrangements; deferral and risk adjustment 
practices (including forfeiture and clawback mechanisms); 
governance; and the involvement of the firm's controls and 
control function groups in various aspects of incentive 
compensation arrangements.
    Supervision focuses on ensuring robust risk management and 
governance around incentive compensation practices rather than 
prescribing amounts and types of pay and compensation.

                                  [all]