[Senate Hearing 117-330]
[From the U.S. Government Publishing Office]


                                                      S. Hrg. 117-330


                  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 SEVENTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING HOW THE FEDERAL RESERVE CAN STAND UP FOR WORKERS AND FAMILIES 
        AND HELP CREATE A BETTER ECONOMY THAT WORKS FOR EVERYONE

                               __________

                              MAY 25, 2021

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                Available at: https: //www.govinfo.gov /

                                __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
48-250 PDF                 WASHINGTON : 2022                     
          
-----------------------------------------------------------------------------------  

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

             Corey Frayer, Senior Professional Staff Member

                 Dan Sullivan, Republican Chief Counsel

                 John Crews, Republican Policy Director

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, MAY 25, 2021

                                                                   Page

Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    27

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     3
        Prepared statement.......................................    28

                                WITNESS

Randal K. Quarles, Vice Chairman for Supervision, Board of 
  Governors of the Federal Reserve System........................     5
    Prepared statement...........................................    29
    Responses to written questions of:
        Chairman Brown...........................................    33
        Senator Toomey...........................................    35
        Senator Cortez Masto.....................................    36
        Senator Scott............................................    43
        Senator Rounds...........................................    46
        Senator Tillis...........................................    47

                                 (iii)

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

                              ----------                              


                         TUESDAY, MAY 25, 2021

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 a.m., via Webex, Hon. Sherrod 
Brown, Chairman of the Committee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Senate Committee on Banking, Housing, 
and Urban Affairs will come to order.
    This hearing is in the virtual format. For those joining 
remotely, a few reminders. Once you start speaking, there will 
be a slight delay before you are displayed on the screen. To 
minimize background noise, please click the mute button.
    You should all have one box on your screens labeled 
``Clock''. For all Senators, the 5-minute clock still applies 
for your questions. At 30 seconds remaining, you will hear a 
bell ring to remind you your time has almost expired. It will 
ring again when it has expired.
    If there is a tech issue, we will move to the next Senator 
until it is resolved. To simplify the speaking order process, 
Senator Toomey and I have agreed, as at other hearings, to go 
by seniority.
    A year ago today, we watched for 8 minutes and 46 seconds 
as police murdered George Floyd. Across the country, we saw 
Americans demand justice for the killings of too many Black and 
Brown Americans and an end to systemic racism in our country.
    Over the past year, the pandemic has taken half-a-million 
American lives, wreaked havoc on small businesses, pushed 
families into foreclosure or eviction, and forced millions of 
workers--many women and workers of color--out of the workforce.
    For most Americans, it has been an arduous, long, difficult 
year, a year that revealed what many of us already knew: that 
even before the pandemic, our economy was not working for most 
people.
    I have heard some people, including many of my conservative 
colleagues, say that we had the best economy in our lifetime 
before the coronavirus hit. Those people need to follow 
President Lincoln's admonition to go and out and get their 
public opinion baths.
    It certainly was not the greatest economy for most people 
in Senator Toomey's hometown in Rhode Island or my hometown of 
Mansfield, Ohio.
    Workers' wages have been flat for decades. Jobs continued 
to move overseas. In my hometown, companies like Westinghouse, 
Fisher-Body, Tappan Stove, and Mansfield Tire, employing 
literally tens of thousands of people, companies like that 
closed down, one after another. Those good union, mostly union 
jobs disappeared.
    They were not replaced by new investment. The ``creative 
DEstruction'' the market fundamentalists like to talk about was 
not followed by any CONstruction, creative or otherwise.
    Yet corporate profits continue to climb; CEO pay has 
soared.
    Those outcomes are, of course, connected, as we know.
    Corporations lay off workers or cut pay and benefits to 
juice their stock price. Companies close down factories and 
move good-paying union jobs abroad to cut costs. Big banks keep 
getting bigger, fueling the concentration of corporate power in 
every part of our economy--from agriculture to health care to 
manufacturing.
    The economy of the past few decades may have looked good 
from the big windows of corporate board rooms figuratively or 
literally looking down on Wall Street, or from the Dirksen 
Senate Office Building.
    But the economy has not looked great in a long time when 
looking out from the small towns and rural communities that the 
big banks have left behind in search of higher profits. And it 
has never looked all that great for the Black and Brown 
families who lost their homes and wealth in the wake of the 
Great Recession, barely getting back on their feet before the 
next crisis hit.
    When I talk to Ohioans, I hear a constant refrain: People 
do not trust banks, especially the biggest banks. They have 
been burned by predatory mortgages, high overdraft fees, and 
expensive second-chance accounts.
    They have watched Wall Street reward themselves despite 
scandal after scandal. They remember how Wall Street bounced 
back after they wrecked our economy. They know Washington 
allowed that destruction to happen, and they certainly remember 
that taxpayers were forced to foot the bill.
    Tomorrow, for the first time ever, this Committee will 
bring the CEOs of the six largest banks in the country to 
testify in front of us. Our job is to hold accountable the 
institutions that for far too long have had outsized power in 
our economy--power that only continues to grow.
    Today we will hear testimony from the Federal Reserve's 
Vice Chair for Supervision, the person responsible for 
supervising these banks.
    Mr. Quarles, checking Wall Street's power is supposed to be 
your job, too.
    It is your responsibility to enforce the law and to hold 
banks accountable for misdeeds with meaningful punishments--not 
slaps on the wrist, not paltry fines that do not make a dent. 
For gargantuan Wall Street firms, a fine is just a minor cost 
of doing business.
    It is your job to stand up for the people who do not have 
corporate lobbyists, who do not make millions of dollars a 
year, who do not get bailouts.
    But as far as I can tell, you do not view standing up to 
Wall Street as part of your job. You have rolled back rule 
after rule--rules that are supposed to be a check on the power 
of the biggest banks and supposed to ensure they invest in the 
real economy, not in themselves.
    Instead of investments in job creation and wages and new 
technology, they continue to pour so much extra cash into 
riskier and riskier bets and buying back more of their own 
stock.
    Good for them--but not so good for America.
    We need, you need, to bring the focus back to the people 
who make this country work.
    We need, you need, to make sure banks are taking into 
account climate risk. We need, and you need, to make sure that 
volatile, unregulated cryptocurrencies do not crash the economy 
and harm consumers.
    We need to make sure workers' wages keep up with the cost 
of living: housing, childcare, prescription drugs, all the 
expenses that have been rising for decades now.
    We need to close the racial wealth gap and income gap that 
keeps getting wider and wider and wider.
    It is our responsibility to work on solving these 
problems--not for the biggest banks, but for the people whom we 
serve.
    If we want an economy that reflects our values, we cannot 
let Wall Street write the rules. We cannot tell the regulators 
how to do their jobs, for that matter. Our financial watchdogs 
should not be doing favors for the biggest banks.
    Vice Chair Quarles, you work for the American people. I 
want to hear how you are going to stand up for workers and 
families and help create a better economy that works for 
everyone.
    Senator Toomey.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman, and welcome Vice 
Chairman Quarles.
    Congress has provided the Fed with a great deal of 
independence in order to isolate it from political influence. 
However, Congress has also given the Fed narrowly defined 
monetary and regulatory missions.
    In the regulatory domain, the Fed has the authority to 
ensure the safety and soundness of the financial institutions 
that it regulates. It does not have the authority to seek out 
and address political or theoretical risks in the distant 
future.
    The Fed's recent actions raise concerns that it is losing 
sight of this constraint. Consider its increasing focus on the 
supposed risks of global warming to the financial system. In 
March, John Cochrane, a distinguished economist at Stanford 
University, powerfully argued before this Committee that, and I 
quote, ``climate change poses no measurable risk to the 
financial system.''
    Put simply, neither the warming of the Earth's temperature 
nor severe weather events are a threat to the stability of the 
financial system. Experience bears this out. In the last 11 
years--a time period that included four of the five costliest 
hurricanes in U.S. history--we have not found one bank failure 
caused by any weather event. In fact, we are not aware of any 
bank failure in the modern era due to weather.
    Nevertheless, the Fed recently joined the Network of 
Central Banks and Supervisors for Greening the Financial 
System. The network's stated aim is to use financial regulation 
to ``mobilize mainstream finance to support the transition 
toward a sustainable economy.'' In other words, to direct 
credit away from fossil fuels.
    Such actions are not consistent with the Fed's mandate and 
authorities. As Chair Powell himself has said, and this is a 
quote, ``society's broad response to climate change is for 
others to decide--in particular, elected leaders.''
    It is my view that if Congress believes current 
environmental laws do not adequately address global warming 
risks, then changes should be enacted through the legislative 
process by those who are accountable to voters--not by 
financial regulators who have neither expertise nor 
accountability.
    This principle extends to other issues as well. I am 
troubled that regional Fed banks are focusing on politically 
charged issues, like racial justice activism, that are also 
outside the Fed's mission and expertise. This week I sent 
letters to three regional Federal Reserve Banks about this 
behavior and requested information from them.
    Instead of seeking to tackle issues that are outside the 
Fed's mandate and authorities, the Fed should focus on 
supervising the risks within its domain. For example, the Fed's 
recent Financial Stability Report highlights several risks that 
should be monitored, including high asset prices. However, the 
report fails to consider a primary cause of these risks--that 
is, the Fed's own excessively accommodative monetary policy.
    Our economy experienced a tremendous shock last year, but 
it was met with unprecedented monetary and fiscal support. And 
the economy is now in full recovery mode. As a result, I do not 
understand the justification for the Fed maintaining its policy 
of near-zero interest rates and $1.4 trillion in bond purchases 
per year, amounting to roughly half of all new Treasury debt 
issuance since the beginning of the pandemic. Let us not kid 
ourselves: We are effectively monetizing about $1 trillion of 
Federal debt per year.
    And this is especially troubling because the warning signs 
of inflation have been getting louder. We may be seeing asset 
bubbles forming already, and history is replete with examples 
where the bursting of bubbles led to financial instability. As 
President Clinton's Treasury Secretary Larry Summers noted 
yesterday, the Fed needs to start, and I quote, ``explicitly 
recognizing that overheating, and not excessive slack, is the 
predominant near-term risk for the economy.''
    I am concerned that the Fed's current approach almost 
guarantees that it will be behind the curve if inflation does 
become problematic and persistent--for two reasons. First, the 
Fed has announced it will allow inflation to run above its 2-
percent target level for some indefinite period. And, second, 
the Fed insists that the inflation we are experiencing now is 
just transitory. But you can only know something is transitory 
when it has come to an end. What if it does not come to an end?
    Another side effect of the Fed's asset purchases is the 
regulatory implications of such an abundance of reserves in the 
banking system. When the Fed purchases Treasurys or agency 
securities, the aggregate level of reserves rises 
correspondingly. As a result, reserves in the banking system 
have risen by over $2 trillion, and bank leverage ratios have 
experienced pressure from absorbing these riskless reserves 
that the Fed is creating.
    Last year, the Fed recognized this problem and issued 
temporary relief that allowed banks to accommodate a surge of 
reserves. That relief has expired, and there are signs that it 
was needed. The Fed recently stated that it will address this 
problem on a permanent basis. Mr. Vice Chairman, I hope you 
will do so swiftly.
    Let me conclude with this: The Fed does not need to exceed 
its mandate and authorities to find risks to address. The siren 
calls of politically charged endeavors should be ignored, in 
order to preserve the credibility and independence of the Fed. 
There are plenty of risks within its reach, including those to 
which it may be contributing.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    I will now introduce today's witness. We will hear from 
Federal Reserve Vice Chair for Supervision Randal Quarles on 
the Fed's supervision and regulation of banks and financial 
firms. The Federal Reserve, as we know, plays a key role in 
making sure we have a strong financial system that works for 
all Americans.
    Vice Chair Quarles, thank you for your service, thank you 
for testifying today. You are recognized. Thank you.

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

    Mr. Quarles. Thank you. Thank you, Chairman Brown, Ranking 
Member Toomey, Members of the Committee. Thank you for the 
invitation to testify today.
    Last May, I came before you to discuss our actions to 
maintain a strong banking sector as a source of support for 
consumers, households, and businesses. My remarks at that time 
came after the onset of sudden and pervasive financial stress. 
Early turmoil in overseas markets quickly crossed borders and, 
within days, had reached almost every asset class and corner of 
the financial system. And a year ago, the full implications of 
the COVID event remained unclear, and the costs would continue 
to mount.
    Today the storm waters are receding. The economy is 
beginning a strong recovery to the other side of the COVID 
event.
    As the Federal Reserve's recent reports detail, banking 
organizations have remained an important source of strength in 
this recovery. Higher levels of capital and liquidity, better 
risk management, and more robust systems let banking 
organizations absorb an unprecedented shock, while providing 
refuge from market instability, delivering essential public 
aid, and working constructively to support borrowers and 
communities.
    In short, the full set of post-2008 reforms--as refined and 
recalibrated by the work of the last 4 years--ensured that this 
time would truly be different than the last. Today the U.S. 
banking system is actually more liquid and better capitalized 
than it was a year ago, but on top of that has over $100 
billion in additional loan loss reserves, leaving it well 
positioned to weather future shocks.
    While a strong recovery is underway, it is not yet 
complete. Our role as the policymakers is to support the 
financial system and the economy through the end of this 
transition back to normal operations. Our challenge, however, 
is to do so as circumstances change and the Nation's need for 
that support evolves.
    Most immediately, we have worked to align our emergency 
actions with other relief efforts, as the economic situation 
improves, maintaining or extending some of measures, where 
appropriate, to preserve household assistance and promote 
continued access to credit, and starting the transition back to 
our normal activities, our normal supervisory posture, and our 
normal rule book.
    However, our role and responsibility extend much further 
than merely returning to normal. We also have an obligation to 
look closely at the last year, to understand how the financial 
system came to experience such severe stress, and to identify 
and act on any lessons we find.
    Any list of lessons must begin with the strong performance 
of supervisory stress testing. The stress-testing program not 
only prepared banks for a period of prolonged hardship; it also 
clarified their health and resilience as the COVID event 
progressed. This role affirmed the ways that stress testing has 
evolved in recent years, into a more flexible, more transparent 
anchor for the Federal Reserve's broader capital program.
    For example, while it was sensible, given that this was the 
first real-world test of the post-2008 system--for us to impose 
temporary capital distribution restrictions beyond those that 
are built into the system, we now know that the system works, 
especially when supplemented and informed by a real-time 
stress-testing regime. In the future, having learned the 
lessons of this real-world test, we will be able to rely on the 
automatic restrictions of our carefully developed framework 
rather than impose ad hoc and roughly improvised limitations.
    Other areas, however, are ripe for closer examination. 
These include strains in short-term funding markets and the 
second destabilizing run on prime money market mutual funds in 
roughly a decade: Treasury markets, where last year's selling 
pressures overwhelmed dealers' ability or willingness to 
intermediate, and changing patterns in the use of financial 
services by consumers and businesses. These trends predate the 
COVID event, but the past year accelerated them dramatically, 
with important implications for financial stability, safety and 
soundness, consumer protection, and underserved communities' 
access to safe and fair financial services.
    In our work to understand each of these trends, we have 
valuable and willing partners in our fellow regulators, in 
other agencies, and in our colleagues abroad, and we are 
committed to keeping Congress closely and actively informed of 
our efforts.
    This work is critical, but only in service of a more 
fundamental goal: a safe, transparent, and efficient approach 
to supervision and regulation, which ensures the financial 
system can withstand even historic shocks. Those values are of 
perennial importance; they continue to be the bedrock of the 
Federal Reserve's work, animating two of our highest priorities 
for this year: finalizing the postcrisis Basel III reforms and 
completing the long-overdue transition away from LIBOR.
    The COVID event is not behind us, and the vulnerabilities 
it exposed are not gone. But as we now follow the path out from 
this event, the Fed is working to ensure the financial system 
is resilient enough to support consumers, households, and 
businesses, and recommit ourselves to supporting the economy 
through the completion of the recovery.
    Thank you, and I look forward to your questions.
    Chairman Brown. Thank you very much, Mr. Vice Chair. I 
appreciate your comments.
    After George Floyd's funeral, Chair Powell acknowledged, 
``This tragic event put a spotlight on the pain of racial 
injustice in this country.'' He went on to say, ``There is no 
place in the Federal Reserve for racism, and there should be no 
place for it in our society.''
    Do you agree with that statement, Vice Chair Quarles?
    Mr. Quarles. Wholeheartedly.
    Chairman Brown. Thank you.
    When we say ``systemic racism,'' we mean all the decisions 
people and institutions make that hold people in communities of 
color back. You have issued rules that make it easier for the 
biggest banks to make risky bets instead of investing in the 
real economy. You failed to take action against banks for 
lending discrimination. Don't these decisions contribute to 
systemic racism?
    Mr. Quarles. Well, I am not sure what instances you are 
referring to that we failed to take action on lending 
violations. We are quite aggressive in pursuing fair lending 
violations and other sorts of discriminatory behavior in the 
banking industry.
    Chairman Brown. Well, read the history of the Fed, read the 
history of housing discrimination, and we see this Federal 
Reserve, with you as Vice Chair, have not really stepped up. It 
is not just a moral issue. It is an economic one. According to 
the San Francisco Fed study, our economy has lost $70 trillion 
over the past 30 years because of racial inequities. We will 
continue to hold back our economic growth and competitiveness 
if we do not unleash all of America's potential.
    Let me move somewhere else. You said that banks are in 
strong financial conditions, more liquid, better capitalized 
than a year ago, with $100 billion in loan loss reserves. Is 
that correct?
    Mr. Quarles. That is correct.
    Chairman Brown. Thank you. To me, it is why it is even more 
troubling that banks are fighting the $4 billion debt relief 
plan to Black and Brown farmers who, as you know, in your 
understanding of history of the Fed and history of the banking 
system and the financial system, those farmers have struggled 
to get loans and Government grants, for generations were 
systemically denied USDA loans that should have been granted. 
Banks are going to get back every penny of money they lent plus 
20 percent on top of that. These USDA loans are guaranteed at 
95 percent, yet banks are still fighting this. The only 
explanation I can come up with is that they will block anything 
that might cut into their profits even a cent.
    Let me ask a second question. As big banks vie for 
competition and then close local branches, many rural 
communities are left 30, 40, 50 miles from a place to deposit a 
check or to get a small business loan. The Fed is responsible 
for approving bank mergers and consolidations, which have led 
to banking deserts across the country.
    Do you agree the Fed has contributed to the loss of banks 
in rural areas?
    Mr. Quarles. No, actually, I do not. When we look at bank 
mergers, among the factors that we take into account, that we 
are required by statute to take into account and do so 
seriously, is the convenience and needs of the communities that 
are served by the merging institutions. And the closing of 
branches, where those are going to be closed, the plans for 
that are very carefully reviewed by us.
    Chairman Brown. Well, for the last decade, part of that 
time, right after you left the Bush administration and in your 
time with the Trump administration at the Fed, from 2019 we 
have lost 5,600 bank branches. Twenty percent of branch 
closings since 2010 have been the only branch in its census 
tract. The Fed's job is to make sure we have a strong banking 
system. That includes access--it includes the strength of local 
communities. It includes access to banking services. And we 
know if there is not a bank in the neighborhood, so often these 
are mostly low-income areas, both rural and urban, we know 
where people turn. They are much more likely to turn to an 
unregulated, high-interest-charging financial service entity.
    My time has expired. Senator Toomey, you are recognized.
    Senator Toomey. Thank you, Mr. Chairman.
    As I mentioned in my opening statement, there are a number 
of troubling signs that the Fed is attempting to get into the 
business of environmental policy. As you know, Mr. Quarles, the 
Fed's regulatory role is to ensure the safety and soundness of 
the financial institutions that it regulates. Let me ask you a 
simple question. I think this is probably a yes-or-no answer. 
Are you aware of any banks that failed due to Superstorm Sandy, 
Hurricane Andrew, the California wildfires, or any other recent 
weather event?
    Mr. Quarles. No.
    Senator Toomey. I am not either, and you can go back quite 
a ways, and it is hard to find. We have not been able to find 
it yet. So it is pretty clear to me that neither the warming of 
the Earth's temperature, which is occurring, nor severe weather 
events pose a threat to the stability of the financial system. 
As Larry Summers said last week, there seems to be an 
overemphasis of certain risks like climate change by central 
banks, and here is a quote attributable to Larry Summers. He 
said, and I quote, ``in order to be relevant to something that 
is on political leaders' minds.''
    So my concern is this will ultimately come at the expense 
of monitoring the real risks, and the Fed should not be wasting 
time and resources on what is ultimately a political effort.
    Let me move on to money market reforms. This past March, 
you said that the Financial Stability Board will be outlining 
proposals for further money market reforms. You made a 
reference to that in your opening statement. Presumably, the 
impetus for these reforms is market disruptions we saw last 
spring. Of course, as you know, many markets were disrupted. 
Even the Treasury market was disrupted, the repo market was 
disrupted. And it seems very likely that a factor that made 
things worse for money market funds was the presence of a 30-
percent liquid asset threshold that triggered these mandatory 
fees and gates. These regulations, of course, were meant to 
prevent runs, but ultimately it looks at those the had the 
opposite of their intended effect.
    My question for you is: If we are going to propose any new 
regulations, shouldn't we first make sure we fix any flaws in 
the existing ones?
    Mr. Quarles. I do think that the existing regulatory 
framework has to be something that is looked at, and we are 
including that in the overall broad review of the issues that 
led to the money market fund issues last March.
    Senator Toomey. All right. Good.
    As you know, this week I sent letters to three regional Fed 
banks inquiring about what I see as a troubling veer into 
social policy topics. In particular, some of the banks have 
appeared to engage in an activity that I think can fairly be 
characterized as advocacy with respect to systemic racism, 
which is a very controversial idea that somehow American laws 
and institutions, including, I presume, the Federal Reserve, 
are inherently racist in their design. A big concern here is 
whether the Fed banks are operating well beyond their statutory 
mandate.
    Would you agree that if regional Fed banks engage in 
partisan advocacy masquerading as research, that advocacy would 
harm the Fed's credibility and its trustworthiness as an 
independent and nonpartisan entity?
    Mr. Quarles. So let me say two things with response to 
that. The short answer is yes. At the Fed we have a narrow 
mandate. We have been given significant autonomy to pursue that 
mandate, and I think that that is important. But that means 
that we should stay within the lanes of that narrow mandate.
    I do think that within that mandate, research into breaking 
down the effects of some of the large aggregate economic 
numbers, whether by geography, whether by different 
demographies, can be appropriate. But it should not cross the 
line into advocacy. It should be analysis.
    Senator Toomey. Thanks. Last question: As you know, the 
Fed's QE has put capital pressure on banks, and you addressed 
that with a temporary measure, and I know you have indicated 
that there will be something more coming through. So you 
anticipate more permanent changes in the regulatory regime to 
recognize this capital pressure?
    Mr. Quarles. Well, we are looking at that now. I think our 
best estimate is that as the level of reserves in the system 
grows over the course of this year, we will see some of that 
pressure. There are a variety of ways one could address it. We 
are exploring them all. We have not decided whether it will 
ultimately be necessary or what we have to propose, but we are 
looking closely at it.
    Senator Toomey. I hope you will. I will finish up, Mr. 
Chairman, but, Mr. Quarles, I do think the Fed is imposing this 
through its unusual activity, which is continuing inexplicably 
to me. So I do hope you will look to remediate that. Thank you.
    Chairman Brown. Thank you, Senator Toomey.
    Senator Menendez from New Jersey is recognized for 5 
minutes.
    Senator Menendez. Thank you, Mr. Chairman. I was very happy 
to see Acting Comptroller Hsu announce the OCC was revising the 
ill-advised Trump era Community Reinvestment Act rule. After 
last week's OCC announcement, I hope to see a joint interagency 
CRA rulemaking by all three bank regulators. This is an 
important civil rights law that should not be enforced in a 
piecemeal fashion.
    So, Vice Chair Quarles, have conversations begun among the 
agencies on how the Federal Reserve, the FDIC, and the OCC 
might align their regulatory efforts around the CRA?
    Mr. Quarles. We have throughout the CRA process. As you 
know, it has been the Fed's position and desire that we would 
end the process with a joint rulemaking. We have each shared 
the comments we have received on our separate processes, the 
OCC's rule, our Advance Notice of Proposed Rulemaking. We are 
all aware of the input that has come from that, and it remains 
our objective to see a joint rule.
    Senator Menendez. I appreciate it is your objective. The 
question is: Since there is a change at the OCC--I understand 
what you did before. The question is: Are you engaged now in an 
effort with the OCC to align yourselves?
    Mr. Quarles. Well, we are certainly talking with them, and 
obviously, the position of the OCC has changed and, therefore, 
our continuing engagement I think is likely to result in the 
objective we have always had. But we do continue to talk with 
them.
    Senator Menendez. Well, let me reiterate how critical it is 
for all three banking regulators to get to the same page when 
it comes to the CRA. It is especially important, having seen 
the disproportionate impact this pandemic has had on minority-
owned businesses and communities. I have a sense that some of 
my colleagues would think that none of you have any role to 
play in terms of dealing with the great inequities in our 
society. I totally disagree with that. And certainly when you 
have oversight over the Community Reinvestment Act, this is a 
key tool to try to deal with some of the issues that we face 
today for which the CRA was originally created. So I hope you 
will all get together and adopt a unified rule that strengthens 
the original intent of the CRA, which has never mattered more.
    Let me ask you, this month marks 10 years since the 
deadline for finalizing the incentive-based compensation 
rulemaking, the rule to ban practices that reward senior bank 
executives for irresponsible risk taking. In those 10 years, we 
experienced the London whale, the Wells Fargo fake account 
scandal, and most recently Credit Suisse involvement with 
Archegos Capital Management. All three instances of corporate 
malfeasance or mismanagement were tied to executive pay 
incentives in one way or another.
    So was the Federal Reserve forced to take some regulatory 
action to the London whale and the Wells Fargo fake account 
scandal?
    Mr. Quarles. I guess two things I would say. Well, the 
London whale was before my time, and I am recused from the 
details of Wells. So those specific questions, I am not sure 
that I can answer, but I can certainly say----
    Senator Menendez. It is a simple question. It is not 
something that you have to recuse yourself. It is an 
acknowledgment of what the Reserve did, whether you were 
involved in it or not. My understanding is that there were 
regulatory actions, and so if there were, do you take my word 
for the moment--because my time is limited. Wouldn't it be more 
effective oversight to help prevent these types of scandals 
from taking place in the first place?
    Mr. Quarles. We do in our supervisory engagement with the 
firms; that is an important element of it, their compensation 
arrangements, their incentive compensation practices. As you 
know, the incentive compensation rule is a joint agency rule 
that requires complicated joint agency negotiation, but the Fed 
does closely supervise compensation practices.
    Senator Menendez. Ten years. Ten years. I do not care how 
complicated the matter is. It does not take 10 years for great 
minds to get together to think about what is an appropriate way 
to deal with excessive compensation. I think preventing 
scandals and resultant consumer harm is more effective. The 
Federal Reserve along with other regulators have a tool in 
their arsenal to help curb this type of risky and irresponsible 
behavior. And yet after 10 years, the incentive-based 
compensation rule remains unfinished. That is unacceptable, and 
I will be pressing each of the regulators that come before us. 
It is about time to get this done.
    Chairman Brown. Thank you, Senator Menendez.
    Senator Hagerty from Tennessee is recognized for 5 minutes.
    Senator Hagerty. Chairman Brown, thank you, Ranking Member 
Toomey, thank you for holding this hearing. Vice Chairman 
Quarles, it is great to see you again, and I appreciate your 
testimony today.
    Vice Chairman Quarles, like my colleagues, I am concerned 
about the Fed's potential mission creep into regulating social 
policies. I was pleased with the strength that our financial 
sector has shown as we have navigated this pandemic. I feel 
that we have done very well. I was pleased with the Financial 
Stability Report that talks about the balances in loss 
mitigation programs in our largest banks being reduced. I think 
that is a sign of strength right now. And I really am concerned 
about increasing, you know, with unnecessary regulations new 
burdens on imposing social policies that we really are at a 
point in our recovery we should not be impeding banks' 
potential to return to prepandemic levels. I am sure you share 
those concerns.
    Vice Chairman Quarles, you gave a speech at the end of last 
year where you talked about your thoughts on the evolution of 
bank supervision. In the speech, you noted that your goals at 
the Fed are to make our regulatory framework more efficient, 
more consistent, simpler, more predictable. And certainly 
driving all of that is a fundamental principle of regulation, 
making it more transparent.
    You also noted that it is even harder for the Fed--and I 
agree with those principles completely. You also noted that it 
is even harder for the Fed to do that beyond the regulatory 
framework when you get to firm-specific supervision. I agree 
with that as well.
    Last week--I would like to ask you about this--President 
Biden issued an Executive order. That Executive order 
encouraged financial regulators to detail their plans to 
incorporate climate-related financial risk into their 
regulatory and supervisory practices. Vice Chairman, how will 
this directive, which is well outside the Fed's mandate, how 
does this directive square against the principles that I think 
you so clearly articulated in terms of efficiency, confidence 
building, simplicity, and transparency in our regulatory and 
supervisory framework?
    Mr. Quarles. Well, I would say two things in response to 
that. First, I do think that it is appropriate and, indeed, 
incumbent on us as Federal regulators to look at potential 
risks--climate change is a potential risk--and to come up with 
a data-driven analytical framework around that to guide our 
engagement with the banks and to ensure that the system is 
resilient to what we determine to be actual risks arising from 
it. We are in the early stages of doing that. We have developed 
a process at the Fed for establishing such a framework. I think 
that, as I say, it is not only appropriate; it is incumbent on 
us.
    Also true is that our job is ensuring the resilience of the 
financial system, not advancing a particular view of climate 
policy. That is for the Congress, perhaps other agencies. It is 
not the job of the Fed or other financial regulators, and so we 
should remain focused on that approach to our climate change 
analysis as opposed to something broader.
    Senator Hagerty. Well, I echo Ranking Member Toomey's view 
that weather has historically not been a driving force in 
resilience for the banking system, and I do not believe this is 
a high priority that the Fed should be wasting resources on.
    I would like to turn my questions to the next area, which 
is asset valuations, Vice Chairman Quarles. The recent 
Stability Report talked about asset valuations and acknowledged 
the fact that assets are high. We have talked about asset 
bubbles before. What it failed to mention was the impact of 
inflation, yet inflation, we just hit a 13-year high in terms 
of inflation. And I am quite concerned about the inflation that 
we are seeing in our system. I think it is being driven by 
excessive amounts of Government stimulus spending. We have got 
supply chain dislocations that are lending to this. We have got 
pent-up demand that lends itself to this. But we have a real 
concern about inflation. At the same time we have a tremendous 
amount of liquidity pumped into the banking system.
    I want to understand your perspective on what the potential 
impact of all this liquidity and inflationary pressure is on 
the banking system today.
    Mr. Quarles. Well, it remains my view and the general Fed 
view that these pressures are most likely to be transitory. As 
you note, the most recent monthly inflation number was the 
highest since 2009, but after 2009 we did not experience 
durably high inflation, and I think it is still most likely 
that that will be the case here.
    If we are wrong--and, of course, we could be wrong--I think 
we have the tools to address inflation before it becomes kind 
of a permanent part of the framework.
    Senator Hagerty. Thank you, Mr. Chairman.
    Chairman Brown. Thank you.
    Senator Tester of Montana is recognized for 5 minutes.
    Senator Tester. Thank you, Chairman Brown, and I want to 
thank you, Vice Chair Quarles, for the work that you and your 
team have done at the Fed during this crisis. And I want to 
thank you for your collaboration and your work to truly keep 
the Fed independent. So thank you for that.
    Look, there are many challenges we face through this 
pandemic and the economic implications that have resulted from 
this. There are also many challenges that existed before the 
pandemic that continue to remain. I have been concerned about 
small businesses and families in rural communities having 
access to capital and credit. We have talked about it before. 
And there is also a lack of affordable accessible housing 
across the country, and that problem has only gotten worse 
during this pandemic.
    I am also concerned that there may be new or growing 
problems that are not getting the focus that they merit while 
we deal with this current crisis. This is something that we 
have visited about before and I think it is important to 
consider on an ongoing basis, and I am sure it is something 
that you do in this role as Vice Chairman.
    So are there trends that you are seeing or problems that 
you are concerned about that we really should be focused on?
    Mr. Quarles. It is a broad question, so let me try not to 
filibuster away the rest of your time with a 5-minute answer. 
But let me focus on two things.
    I do think that in our recent Financial Stability Report, 
you know, we looked at some of the financial issues that I 
think it is good for us to be focused on now. I do not put the 
financial stability risks as extremely high at the moment. I 
think they are moderate. But questions about asset valuation 
and the potential implications of that to the financial system 
are important.
    One area where I am particularly focused both domestically 
and also in my international work as Chair of the FSB is on the 
regulatory framework for nonbank finance where I think we saw 
that there could be some improvements in that regulatory 
framework that would make the system more resilient for the 
next time it faces a shock like March of 2020.
    Senator Tester. I appreciate that. So as the communities 
and institutions that you regulate recover from the pandemic 
and the economic crisis, like many of the challenges we face 
now, how to address the recovery may look in different in rural 
community, frontier communities, than it does in more urban or 
suburban communities. So in your role, are you seeing 
differences in how different communities are recovering from 
this pandemic?
    Mr. Quarles. We are. There clearly are geographic 
differences. There are differences between urban and rural. To 
some extent, there are inevitably going to be--as you come out 
of an event like this, you know, there are differences in the 
speed of policy change, and that results in differences in 
geography. There are differences in--you know, some industries 
are concentrated in a particular geography, and they have 
greater supply problems than other industries.
    It continues to be our expectation that over the course of 
the year, that will tend to even out, but there are clearly 
differences at the current moment.
    Senator Tester. OK. So are there things that we should be 
doing to help recovery overall? But dovetailing off the last 
question, too, are there things we should be doing to reduce 
the disparities between communities in their recovery? So both 
those questions: overall globally, and is there something we 
should be doing different in other communities?
    Mr. Quarles. Yeah, I would say from the point of view of 
the Federal Reserve, you know, I think our use of our tools to 
address this is if we ensure that the recovery proceeds as 
smoothly as possible, we will get to the other side of it and 
that evening out faster. I think our tools do not lend 
themselves particularly well to, again, geographically or 
demographically targeted solutions, and that our job is best 
performed in ensuring that the overall economy is moving in the 
right direction as fast as possible.
    Other more targeted solutions are the realm of Congress, 
and I would not presume to tell you what you should or should 
not do there.
    Senator Tester. We always appreciate your input. Anyway, 
thank you very much.
    Thank you, Mr. Chairman. Thank you, Vice Chair.
    Chairman Brown. Thanks, Senator Tester.
    Senator Tillis of North Carolina is recognized for 5 
minutes.
    Senator Tillis. Thank you, Mr. Chair, and thank you, Chair 
Quarles, for being here today. And thank you for your time over 
the years. I find you to be highly accessible, and I appreciate 
the time we spent talking just this week.
    I want to get back to something that we discussed, and it 
relates to the MRAs and MRIAs that the Fed supervisors send to 
financial institutions. Those are matters requiring attention 
really reflecting potential issues supervisors find.
    I understand a lot of that information is designated as 
``confidential supervisory information.'' What I believe that 
means is that when they receive an MRA or MRIA, they are really 
prohibited from disclosing that information to anyone, 
including their elected representatives. I see a problem with 
that. For all intents and purposes, that puts a Fed supervisor 
in a judge, jury, and executioner role, and I think that the 
supervisory decisions can limit a company's dividend, their 
business decisions, their hiring decisions, and pretty much any 
business action. Even if they disagree, they do not really have 
any recourse. That seems problematic to me. I know you are a 
lawyer, and I am not, but it seems like this is pretty 
foundational.
    I guess the question that I have is why the Fed would need 
to self-impose this requirement and why is it that the banking 
institution does not have the flexibility to share information 
that may be in a confidential supervisory letter, but to share 
that information and advocate in instances where they disagree 
with the supervisory position. And, more importantly, where in 
the law does the Fed have this authority to impose this 
restriction on financial institutions?
    Mr. Quarles. So I think there are a number of fair points 
there. First, you know, the due process guardrails around our 
supervisory activities I think are important. As you know, I 
have made that a theme of mine at the Federal Reserve that we 
need to think more carefully than we have in the past about how 
to impose those. Transparency is important in supervision as 
well as in respect to work with regulation.
    Now, the Federal Reserve Act and other banking statutes do 
acknowledge, they have historically acknowledged, that there 
can be concerns with the disclosure of supervisory information, 
even by the affected firm, which can lead to contagion to other 
firms. It can be misunderstood. It can cause, you know, a 
perception that there are greater problems at a firm than there 
are, depending on how a particular action may have been worded, 
understood between the supervisor and the firm, and perhaps 
susceptible to misinterpretation.
    So we have historically been cautious about the release of 
individual firms' supervisory information, including by those 
firms. But we are trying to become more transparent about it. 
In the supervisory report that we delivered to you today or 
have delivered in the past, we discuss sort of in the aggregate 
MRAs, MRIAs, what they deal with, the number of them. So we are 
trying to increase transparency around that to allow this sort 
of discussion and engagement without crossing the line into, 
you know, potential risk to individual firms from disclosure of 
their CSI.
    Senator Tillis. But wouldn't it make sense that if there 
was a potential risk to an individual firm, they themselves 
would not want to disclose that and work with the Fed? I am 
talking more about issues that an institution may disagree 
with. It seems like right now they have a gag order on even 
talking about that. And I do not really see anything that 
provides them with due process, mainly because I do believe in 
the judge, jury, executioner sort of context that they are 
operating in now.
    So what could we do to put meat on the bones of the concept 
of transparency when all the control is in the control of the 
Fed or the Fed supervisors?
    Mr. Quarles. So I think, you know, I do not have an answer 
for that today. That is something that I have given thought to. 
These are practices that have attained for decades, really. 
They have become more important in recent decades with the 
expansion of the supervisory activities, and, you know, I think 
that we should be paying more attention to it at the Fed as to 
how to square that circle.
    Senator Tillis. Thank you. I look forward to continuing to 
keep an intense focus on this. And I also want to thank you for 
a lot of the regulatory reform that you did to kind of ease the 
burden on the industry. I believe that you have played a very 
important role in doing that, and I wanted to thank you 
publicly for it.
    Thank you, Mr. Chair.
    Chairman Brown. Thank you, Senator Tillis.
    Senator Warner from Virginia is recognized for 5 minutes. 
And, Senator Warner, I am going to go slip into the Finance 
Committee as you do, and if you would next either call on 
Senator Lummis, if she is there, or Senator Cortez Masto if 
there is no Republican here. If you would do that, thank you.
    Senator Warner [presiding]. Thank you, Mr. Chairman.
    Vice Chairman Quarles, it is great to see you again. I want 
to raise a couple subjects that I know we have talked about in 
the past. One is we know over the last year with COVID we have 
seen disparate economic effects. Particularly communities of 
color have been hard hit; particularly women-owned businesses 
have been hard hit. One of the things that we have talked about 
in the past is a relatively small piece of the financing 
sector, but one I think that has great potential to grow is 
CDFIs, community development financial institutions. I worked 
with folks on this Committee, including Senator Crapo last 
year, and we got a $12 billion commitment to both do grants and 
Tier 1 capital into these CDFIs. I am happy to see Treasury 
rolling that out. The Fed also obviously has a role here in 
terms--and I know Senator Brown raised this in terms of CRA 
activities.
    We also saw during the pandemic that the Federal Reserve's 
Paycheck Protection Program Liquidity Facility helped produce 
some liquidity relief to CDFIs. I would like you to speak to 
that and, you know, on a going-forward basis how we can not 
only help CDFIs but also even community banks that may be 
trying to lend into some of these disadvantaged communities 
that has been tough to do in the past.
    Mr. Quarles. Certainly. Thanks, Senator. Well, we do have a 
very active program with respect to CDFIs as well as MDIs. We 
are working with the Treasury in the Emergency Capital 
Investment Program. That provides capital directly to CDFIs as 
well as MDIs. The Fed as well as the OCC and the FDIC released 
a rule in connection with that program to help implement the 
assistance by giving regulatory capital treatment for 
instruments that are issued under the program. We have provided 
a set of frequently asked questions on our website so that 
CDFIs can be better aware of how to take advantage of it. We 
host regular Ask the Regulator sessions.
    Senator Warner. I know you are kind of going through the--I 
hope we can keep working on this, and, again, a topic that I 
will not ask you to comment on today, but I try to keep 
familiarizing my colleagues with--you know, we have been 
working on, I think, a very interesting proposal that for 
first-generation homebuyers--and, again, that would help people 
across all demographic backgrounds--a mortgage product that 
would include an interest rate subsidy that would have the 
homeowner in a sense pay the same normal amount they pay on a 
30-year mortgage, but they would actually be obtaining a 20-
year mortgage. The ability of wealth building literally doubles 
if you have a 20-year mortgage versus a 30-year mortgage. And 
when we are looking at a wealth gap that is basically 10:1 
between Black and White families, 7:1 between Latino families 
and White families, if we can build more equity on a quicker 
basis for homebuyers, I would ask my colleagues to trust me on 
the math on this. More to come. But I do want to keep raising 
this and, again, hope we can get broad, bipartisan support as 
we get more details.
    I apologize about my little commercial there. I know we 
have discussed this, and I think you are intrigued on how we 
can do something that would not drive up the cost of the real 
estate or drive up the pricing when we have such short supply, 
but actually might address some of the wealth gap issues.
    In my last 50 seconds, I just want to raise the issue of 
cryptocurrencies. I mean, we have seen the EU come forward with 
a fairly broad-based report on crypto. I see some value in 
distributed ledge, but the volatility amongst some of these 
entities concern me. I see some of the illicit use from my role 
on the Intel Committee.
    Can you speak to this? What else do we need to give you and 
the other regulators to get this under some semblance of order?
    Mr. Quarles. Well, we, along with the OCC and the FDIC, are 
engaged right now in what we are calling a sprint in seeking to 
pull together views on exactly that, on a common regulatory 
framework, the capital treatment, the operational treatment. 
And in the course of that, if there are gaps in the regulatory 
framework, we will also make those known.
    Senator Warner. I look forward to continue working with 
you. I think we do need to get a structure here.
    I do not know whether I am--calling a Republican colleague, 
is Senator Lummis or Senator Rounds here? If not, I am going 
to----
    Senator Lummis. Lummis is here.
    Senator Warner. OK. Senator Lummis, please.
    Senator Lummis. Thanks, Senator Warner. And welcome to the 
Committee, Mr. Quarles. I am delighted that you would join us 
today.
    There have been concerns in Europe that Basel III's net 
stable funding ratio requirement might cause changes or 
adjustments for certain commodity markets, including gold. My 
question is: Do you see any concerns in the United States about 
this? And how can we ensure the July 1 deadline makes a smooth 
implementation date?
    Mr. Quarles. So I would say that we have not seen evidence 
currently of that phenomenon in the United States as we 
approach implementation of the NSFR. Now, we have provided a 
long runway toward implementation of the NSFR. We had a very 
comprehensive comment process in the United States. We took 
account of many of those comments in implementing our final 
rule, and we provided a lot of advance notice to firms as to 
how to prepare for it.
    So I do think that we have done a fair bit to ensure that 
that transition is smooth.
    Senator Lummis. Thank you. I am going to switch over to the 
project that Wyoming has done to complete its regulations and 
bank examination manual for digital assets. It covers issues 
like digital asset volatility risk, money laundering and 
sanctions requirements, custody, digital asset receivership, 
and capital standards.
    Can you provide an update on the FFIEC and Federal 
Reserve's work toward the creation of a supervisory framework 
for bank digital asset activities?
    Mr. Quarles. The OCC, the FDIC, and the Fed are working 
together, again, in what we have been calling a ``sprint,'' so 
over a relatively concentrated period of time to pull together 
all of our work in digital assets and to have a joint view, a 
joint framework for their regulation and supervision practices 
with regard to them.
    We are in the middle of that or actually in the early 
stages of the sprint, so it would be premature for me to tell 
you where that is going to turn out. But this is something that 
is a high priority not only as a matter of importance but as a 
matter of chronology, and we expect to be able to give at least 
some results from that soon.
    Senator Lummis. Well, while you are doing that, I want to 
refer you to the work that Wyoming has done. The Wyoming 
Division of Banking has done this securities examination 
manual. It has done this special purpose depository institution 
custody and fiduciary examination manual. It has done the SPDI 
Bank Secrecy Act anti-money laundering, asset control 
examination manual. It has done this risk examination manual. 
It has done the BSA/AML FEC compliance for these. It has done 
the examinations manual. It has done the information security 
for SPDIs. It has done the payment system risk compliance here. 
We have got 771 pages of ways to assist you in understanding 
all of the hard work that Wyoming has done to provide a 
template for your good work. So I just want to point out that 
you have a good road map in front of you for future reference.
    Mr. Quarles. I appreciate that, and I hope that when we are 
done, we have something that is nearly so comprehensive.
    [Laughter.]
    Senator Lummis. Wonderful. Thanks.
    Could you comment on the positive role of community banks 
in providing credit during the pandemic, especially 
facilitating the Paycheck Protection Program and especially in 
rural States like Wyoming?
    Mr. Quarles. Community banks were essential in the PPP 
program. They were a critical part of the distribution 
mechanism, in part because of their broad reach into their 
communities and their sort of deep knowledge of particular 
customers. I think it would have been difficult for the PPP 
program to have worked without the participation of the 
community banks.
    Senator Lummis. Thank you, Mr. Chairman. You have hit the 
5-minute nail on the head. I appreciate your appearing before 
the Committee today, and I yield back.
    Senator Warren. All right. I think that means that I am up 
next, so I will go ahead and get started.
    Last month, a hedge fund called ``Archegos'' imploded after 
making some very risky bets, and some of our biggest banks had 
loaned Archegos the money to make those bets, even though the 
hedge fund was managed by a guy who had already been charged 
with insider trading and banned by regulators from handling 
clients' money.
    Now, those banks suffered $10 billion--that is billion--in 
losses as Archegos collapsed with more than half the losses 
hitting one bank in particular--Credit Suisse.
    So, Vice Chair Quarles, your job at the Fed is to oversee 
the safety and soundness of our banks, and last year you made 
the decision that Credit Suisse and a few other big foreign 
banks no longer should be required to participate in a Fed 
program that was designed to oversee the riskiest banks, the 
Large Institution Supervision Coordinating Committee, or LISCC. 
Is that right?
    Mr. Quarles. Yes, although it did not change the intensity 
with which----
    Senator Warren. So you are the one who said we are not 
going to do that. So at the time you justified dropping these 
banks from increased supervision on the ground that these 
banks--and I have it here--``have significantly shrunk their 
U.S. footprint, and their U.S. operations are much less risky 
than they used to be.'' Your time, of course, was impeccable on 
this. Just a few months later, Archegos blew up and resulted in 
billions of dollars of losses to Credit Suisse.
    So now, Vice Chair Quarles, before you told the banks like 
Credit Suisse that they did not need extra scrutiny from 
regulators, before that, did you see any warning signs that 
these banks had some deficiencies in their risk management?
    Mr. Quarles. Well, the losses that you are referring to, 
the great bulk of the Archegos losses occurred outside the 
United States. State-funded----
    Senator Warren. Are you saying that losses outside the 
United States can affect operations inside the United States by 
these large multinationals? Surely not.
    Mr. Quarles. But we do not supervise their operations 
outside the United States, so their operations within the 
United States have shrunk exactly as I said.
    Senator Warren. So you are going to stick with your 
original play. You know, in 2019, back when Credit Suisse was 
subjected to the Fed's stress test, the Fed ``identified 
weaknesses in the assumptions used by the firm to project 
stress trading losses that raised concerns about the firm's 
capital adequacy and capital planning process.'' In plain 
English, the Fed said that Credit Suisse's models just were not 
realistic.
    So I want to put the timeline together here. In 2019, 
Credit Suisse fails a test because it cannot accurately project 
its trading losses. In 2020, you, Mr. Quarles, decide that 
Credit Suisse should be subject to weaker supervision. And in 
2021, a headline shows up in the Wall Street Journal that 
reads, ``Credit Suisse had surprise $20 billion exposure to 
Archegos investments.''
    So let me ask this: Mr. Quarles, do you now agree that you 
made the wrong decision to weaken supervision for a bank like 
Credit Suisse?
    Mr. Quarles. Senator, we did not weaken the supervision of 
a bank like Credit Suisse. The civil servants who are 
supervising Credit Suisse and a large bank and foreign bank 
operations----
    Senator Warren. Wait, you took out of the program----
    Mr. Quarles. ----would take issue with you----
    Senator Warren. I am sorry. You cannot just say----
    Mr. Quarles. ----LISCC supervisors.
    Senator Warren. You took out of a program that was designed 
to have it enhance supervision, say you did not need the 
enhanced supervision. That is what you said at the time, 
because their footprint in the United States had shrunk.
    Mr. Quarles. I did not say it was supervision, ma'am. I 
said it was more appropriate to supervise them with other 
foreign banks of the same size footprint in the United States, 
which is what we do. Other foreign banks with similar prime 
brokerage operations that have long been supervised outside of 
LISCC because their footprint in the United States is smaller. 
These banks are now smaller. The losses that you are referring 
to did not occur in the United States----
    Senator Warren. I have to say that----
    Mr. Quarles. ----we would not have been able to pick them 
up in LISCC or otherwise.
    Senator Warren. ----I am stunned by your argument that you 
want to say that there was no warning sign from the fact that 
$10 billion in losses could have affected what Credit Suisse 
was doing here in the United States. Look, we dodged a bullet 
with the Archegos collapse this time. But what slipped through 
the net by regulators to contain these losses when things go 
wrong was relatively small to what could have slipped through. 
It could have been an even bigger failure, and that is because 
instead of protecting the system, you spent your time at the 
Fed cutting holes in the safety net anytime you could. Your 
term as Chair is up in 5 months, and our financial system will 
be safer when you are gone. I urge President Biden to fill your 
role with someone who will actually keep our financial system 
safe.
    Thank you.
    Chairman Brown [presiding]. Thank you, Senator Warren.
    Senator Van Hollen from Maryland is recognized for 5 
minutes.
    Senator Van Hollen. Thank you, Mr. Chairman, and thank you, 
Vice Chairman Quarles.
    Let me start by associating myself with the comments of 
Senator Mark Warner with respect to CDFIs and MDIs, and I know 
this is something the Chairman and many of us have been working 
on.
    I also want to commend the Fed for moving forward on the 
real-time payment system. I thought it was too late in getting 
started, but I am glad you are all working to try to make up 
for some lost time. I see that a pilot program will be launched 
later this year and that the full rollout date is now schedule 
for 2023.
    Two questions on other issues. First, on the issue of 
central bank digital currencies, I am glad to see the Fed 
moving forward with issuing a report on central bank digital 
currencies that will include public input and that the Fed 
hopes to play a ``leading role in the evolution of 
international standards.'' I do not think we can afford to have 
the United States fall too far behind on this measure, 
especially given China's moving ahead with their own pilot 
program. I recognize that there are lots of issues. Can you 
tell us more about where we are in researching and developing--
can you tell me whether or not the Fed would have existing 
authority to launch a pilot program if it so chose? Or do you 
believe you need congressional authority to do that?
    Mr. Quarles. Well, so as you have noted, we are beginning a 
process--Chair Powell announced it last week--of doing a very 
deep and comprehensive study of sort of the potential of the 
issues around central bank digital currencies in the United 
States. As you noted, there are a host of issues.
    I think it would be--I think ultimately what that study 
will lead us to is to a conclusion as to whether a CBDC is 
appropriate for the United States. I think, you know, that is 
very much an open question currently.
    As to whether we have the authority to implement a pilot 
program or to implement a CBDC, I think that depends on how the 
structure of the CBDC is--on how we structure it. There are 
certain structures that we could perhaps do under current 
authority, but most of the types of CBDC that are discussed 
would require additional legislative authority to actually use.
    We are engaged in a pilot of sorts of testing out the 
technology around CBDC with MIT. Currently the Boston Fed and 
MIT are working on this technology pilot. But a broader pilot 
and certainly a CBDC itself is most likely to require 
additional legislative authority.
    Senator Van Hollen. Well, I would appreciate it if you or 
your colleagues can get back to me on exactly what additional 
authority you would need to do a more expansive pilot program 
or move forward with the full decision.
    Let me ask you about the issue of the Fed's efforts to take 
into account the risks of climate change. I was glad to see the 
Fed recently created the new Supervision Climate Committee to 
strengthen its capacity to identify and assess financial risks 
from climate change and a Financial Stability Climate Committee 
as well.
    Mr. Quarles, when can we expect to see the Fed's framework 
on climate change or any recommendations, reports, or 
deliverables that will be the product of these two committees?
    Mr. Quarles. Well, I cannot give you a timeline today on, 
you know, when we will have a sort of publicly available 
framework for comment. I can certainly commit that we will be 
very engaged in that process of getting public input, getting 
input from Congress on our thoughts, and that it is important 
that we develop a framework promptly and one that is based on 
data and our own experience.
    Senator Van Hollen. Well, Senator Schatz and I and some 
others are moving to introduce the Climate Change Financial 
Risk Act, which we introduced last Congress. We will be 
reintroducing it to establish a group of scientists and 
economists to look at these issues and hopefully inform your 
decisions.
    You agree that the standardization on climate risk data 
will be important from a supervisory perspective, in other 
words, to develop clear standards so that we can compare apples 
to apples in this conversation?
    Mr. Quarles. Yes, I do.
    Senator Van Hollen. Well, thank you, and I do look forward 
to hearing from you with respect to a little better idea of 
when we can expect those recommendations from those two 
reports. Thank you.
    Thank you, Chairman Brown.
    Chairman Brown. Thank you, Senator Van Hollen.
    Senator Cortez Masto from Nevada is recognized for 5 
minutes.
    Senator Cortez Masto. Thank you, Mr. Chair. Vice Chairman 
Quarles, welcome. It is great to see you again.
    Let me start with an issue around the unbanked population. 
So the latest FDIC report shows that 6.3 percent of the 
population in Nevada is unbanked, and as the Federal Government 
continues to allocate assistance from the American Rescue Plan, 
such as child tax credits, what steps can the Federal Reserve 
take to ensure that more individuals have access to bank 
accounts and financial services in order to receive this 
assistance?
    Mr. Quarles. So I think that, you know, as you have noted, 
COVID has shown some of the specific ways, has highlighted some 
of the specific ways in which the unbanked are disadvantaged. 
And we do participate in a number of efforts to try to increase 
the number of citizens with bank accounts. We include that in 
our CRA evaluations of banks as to whether the efforts that 
they are taking to ensure that all the members of their 
communities have access to bank accounts at those institutions. 
And we participate in something called ``BankOn'', which is a 
program with the banks to promote access to standardized, very 
low cost transaction accounts for all Americans, particularly 
those who are unbanked.
    Senator Cortez Masto. Thank you. Vice Chair Quarles, in 
your testimony you call for, and I quote, ``further review . . 
. of changing patterns in the use of financial services, by 
consumers and businesses; and a changing relationship between 
banks and their nonbank partners.''
    Can you further elaborate on that? Are you talking about 
what I have heard earlier in conversation about fintech or 
cryptocurrencies or the unbanked? What are you thinking there? 
Because you are right, the consumers and businesses are going 
to be driving this, and I am curious what the Fed's review 
looks like in this space.
    Mr. Quarles. Yes, well, the short answer is all of the 
above. You know, technology, a variety of forms, whether that 
is partnerships between banks and fintech firms where the 
fintech firms provide consumer interface principally and the 
banks provide the plumbing, or in some cases fintech firms are 
seeking to operate without banking partners and what the 
potential implications for that are. In some cases, they are 
able to operate more cheaply. Perhaps that can be a tool to 
address inclusion. But it raises issues for how we think about 
the supervision of those firms.
    There are other aspects of technology where you have got 
sort of very large tech firms that are increasingly providing 
services to the banking industry and how do we supervise the 
operational and potential financial stability risks associated 
with those relationships when historically our traditional 
focus has been on the banks. We have the authority under 
something called the ``Bank Service Company Act'' to examine 
these third-party firms, and we need to work through a 
framework as to exactly how we would do that more robustly as 
these relationships grow.
    Senator Cortez Masto. Well, thank you, and it is a big 
task, and I understand that you talked about ensuring the 
stability, safety, and soundness of the market as well. I get 
that. To what extent do you bring in consumer protection? Is 
that part of what you are looking at as well as the Fed to 
ensure from the business and consumer perspective that there 
are protections in place?
    Mr. Quarles. Very much so. As we look at issues like the 
use of artificial intelligence, either by banks or by fintechs, 
you know, assuring that these various technologies do not 
exacerbate risks to the consumers, that they are being operated 
with that in mind, is something that we are very focused on.
    Senator Cortez Masto. And then, briefly--I have got about 
40 seconds left--how is the Federal Reserve considering stress 
testing to assess how prepared individual firms and the overall 
system are to respond to and recover from systemic cyberevents?
    Mr. Quarles. So we do run tabletops, and we do not really 
run what we would call ``stress tests'' there to determine 
capital charges associated with potential cyberevent risk. But 
we do--you know, we are very heavily engaged with the firms on 
their cyberexposure.
    Senator Cortez Masto. Thank you. Thank you for being here 
today.
    Chairman Brown. Thank you, Senator Cortez Masto.
    I am not sure if Senator Moran is available? Then Senator 
Ossoff from Georgia is recognized for 5 minutes.
    Senator Ossoff. Thank you, Mr. Chairman, and thank you, Mr. 
Quarles, for your service and for your testimony today.
    What do you assess to be the most significant risks to 
macroeconomic and financial stability and growth over the next 
2 to 4 years?
    Mr. Quarles. So I would begin by saying that I think that 
the overall risks to stability, to financial stability, are 
only moderate. I do not think that we are in an era of 
especially large risks to financial stability currently. I 
think that the COVID event has highlighted that, at least to my 
mind, the particularly risks lie largely in the improvements 
that can be made to the regulatory framework around nonbank 
financial institutions and the potential exposure of nonbanks 
in the financial sector to be a source of instability. Again, I 
do not think that risk is large currently, but I think that 
that is certainly what I am focused on, particularly in my 
international work.
    Senator Ossoff. At what corners of capital markets and the 
financial services industry do you think regulators lack 
sufficient visibility to make informed decisions about risk and 
whether their authorities are sufficient?
    Mr. Quarles. So that is a good question. Do we need 
additional data? Obviously, most of our data certainly at the 
Federal Reserve comes from our supervision of the banking 
system. For the most part, I would say that our supervision of 
risks in the nonbanking system, the information that we get 
from the banking system's relationship with the nonbanks has 
been adequate for us to be able to judge risks in the nonbank 
sector. But, obviously, we do not get that information directly 
from those firms, and there are cases where there are data gaps 
from the nonbanking sector as to the exact state of the risks 
that they face.
    Senator Ossoff. Thank you. As the Federal Reserve 
contemplates its posture moving forward with respect to 
interest rates and quantitative easing, how is labor force 
participation, the predictable disruption to labor markets that 
has resulted from this pandemic and which persists today, and 
the dynamics in labor markets unique to this shock and this 
moment, how does that affect your and your colleagues' reading 
of the strength of the labor market, the unemployment rate as 
you contemplate potential changes to your posture targeting 
unemployment, price stability, and fulfilling your mandate?
    Mr. Quarles. So as you know, we revised our monetary policy 
framework particularly in how we think about these labor market 
issues, labor market strength measures, relative to when we 
think it is appropriate to begin withdrawing accommodation and 
to say that we really need to see the data coming through on 
improved employment numbers before we would--you know, before 
we think it is--we will wait to see that data, whereas in the 
past we might have said based on our projections, we expect to 
see that data. And in order to remain ahead of the curve, we 
will act now even before the actual employment figures improve 
to where we think they are going to be in, say, a year.
    Our experience over the course of the last decade has shown 
that when we had that slower reaction function, when we allowed 
employment to improve, to continue to improve past what would 
have been our traditional measures of a level of unemployment 
that would have accelerated inflation, that we did not get 
inflation, and we had significantly improved employment 
outcomes. I am a person who believes that we should listen to 
the data, we should believe it, and so we will wait to see that 
actual data before making some of the moves that we would have 
made sooner in the past.
    Senator Ossoff. Thank you, Mr. Quarles. I have got just 20 
seconds left, but if you could please comment on the financial 
situation of households in the lower quintile in terms of 
wealth and income, what do you think are the structural 
impediments to improvement in the financial condition of low-
wealth and low-income households? And how much progress have we 
made over the last few months, please?
    Mr. Quarles. Well, I think the principal impediment is an 
improved economy, and I think our job at the Fed is to continue 
to provide support for a rapid recovery of the economy, which 
will help all demographies.
    Senator Ossoff. Thank you, Mr. Quarles.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Ossoff.
    Senator Warnock we believe is on his way. Senator Moran's 
office is still on the screen. Let me run through and make sure 
anybody that might want to ask questions and has not yet, on 
the Republican side, Senators Shelby, Crapo, Scott, Rounds, 
Kenney, Moran, Cramer, and Daines. And on the Democratic side, 
Senators Reed, Smith, Sinema, Warnock. And Senator Moran has 
just returned. Senator Moran, you are recognized--your camera 
just went off. Senator Moran, you are recognized for 5 minutes 
if you can stay and do that.
    Randal, as you know, this is a little different time to do 
these hearings this way.
    Senator Moran, you are recognized for 5 minutes.
    Senator Moran. Yes, I am on. Chairman, thank you very much. 
Mr. Quarles, thank you for your presence today and your service 
on the Federal Reserve Board of Governors.
    I want to talk about Basel III. You stated that 
implementation of the so-called Basel III end game is a 
priority item for rulemaking proposal for public comment 
expected later this year. Would you provide the Committee with 
your perspective on how best to maintain the tailoring rules 
recently implemented?
    Mr. Quarles. Well, tailoring the regulatory framework will 
remain a principle that we have in mind as we come out with 
proposals to implement the final pieces of Basel III, of which 
the most important are the capital charge for operational risk 
and what we call the ``fundamental review of the trading book'' 
or a capital charge for trading risk.
    For the most part, I do not think those--you know, I think 
those rules will in many cases tailor themselves. They are 
addressed principally to larger firms, but we will certainly 
have in mind the principles of tailoring that we have used in 
our regulatory work over the last 4 years, and that we used in 
implementing S. 2155.
    Senator Moran. Mr. Quarles, let me see if I can build on 
that. Despite some objections that the Fed has been gutting 
Dodd-Frank and putting financial stability at risk with the 
recalibrating of its regulations and supervisory framework 
during the past few years, over the past year the banking 
system has proved to not only be incredibly resilient but one 
of the primary sources of strength in the U.S. economy. Would 
you expand on why right-sizing of regulations proved effective 
over the past year and how we should go further in those 
efforts? And I am really talking about response to COVID and 
the challenges of our economy. We have come through this pretty 
well in that sense, and what are the lessons learned, and what 
do we need to be doing in the future?
    Mr. Quarles. Yes, well, I think the lessons learned in the 
most fundamental sense are that we did have a strong banking 
system, that we had a banking system that was able to support 
the real economy. It served as a source of support for the real 
economy; that the measures that were taken both post the 
financial crisis and improving capital and liquidity, and to 
make that framework more efficient over the course of the last 
3\1/2\ years, both worked together to create a strong 
regulatory environment for that to attain.
    Senator Moran. Thank you very much.
    Mr. Chairman, thank you for the opportunity to question.
    Chairman Brown. Seeing no one else ready to testify, w will 
close the hearing. Thank you, Vice Chair Quarles, for being 
here today and providing testimony.
    For Senators who wish to submit questions for the record--
ah, Senator Warnock is on. Senator Warnock from Georgia is 
recognized for 5 minutes. Ready or not.
    Can you hear? Senator Warnock, you are recognized for 5 
minutes.
    Senator Warnock. Hello. Can you hear me now?
    Chairman Brown. There we go. Yes, we can hear you 
perfectly. Thank you.
    Senator Warnock. Great. Thank you, Chairman Brown. And, Mr. 
Quarles, thank you so very much for being with us.
    The Community Reinvestment Act addresses how banks must 
meet the credit and capital needs of the communities they 
serve. Congress, of course, passed the CRA, as you know, in 
1977 in response to real problems, like redlining, a practice 
by which banks discriminated against prospective customers 
based primarily on where they lived or their racial/ethnic 
background rather than their actual creditworthiness.
    So the CRA not only addresses a harmful legacy of 
discrimination in lending, but also racism and bias in our 
current lending system that harms communities and blocks 
wealth-building opportunities. So I was happy to hear about 
last week's decision by the OCC to halt implementation and 
reconsider its controversial CRA rulemaking, which started 
under the previous Administration. This proposed rule would 
have watered down this important civil rights era legislation 
and harmed many working-class communities.
    Vice Chair Quarles, the Fed also has oversight authority 
over the CRA and was notably absent from last year's 
rulemaking. Do you believe a joint CRA rulemaking with the Fed, 
OCC, and FDIC is important to ensure we do not leave our most 
vulnerable communities behind?
    Mr. Quarles. Yes, Senator, I think it is both important and 
desirable and achievable for our three agencies to have a joint 
rule and approach on the CRA.
    Senator Warnock. So will you commit to working with the OCC 
and the FDIC to issue a joint CRA rulemaking?
    Mr. Quarles. So we are certainly working with them to do 
that. That has long been our stated goal. You know, we are 
regularly talking with them. As you know, Senator, the Fed put 
out its own Advance Notice of Proposed Rulemaking with our own 
sort of CRA improvement framework. We are sharing the 
information that we have gained from that process with the OCC. 
The OCC is sharing the comments that they got during their 
process with us. The three agencies are engaged in joint 
discussions. It does remain very much our objective, and as I 
say, I think it is achievable for us to have a joint rule.
    Senator Warnock. I agree, and I think it is much more 
important for us to get the reform right than to do it quickly, 
and so I am hopeful that you will gather feedback from broad 
and diverse stakeholders to make sure that we get a joint rule 
and make sure that we get the CRA reform right.
    Thank you, Mr. Chairman. I am going to defy Baptist 
preacher gravity and close with 2 minutes left.
    Chairman Brown. Well, no Baptist preacher I have ever 
listened to. Thank you, Senator Warnock.
    Thank you to the witness, and, Senator Warnock, just for 
your information, we will follow up with you on that CRA. That 
is really important. We have been talking to all three 
regulators, and Senator Warnock is right on exactly where we 
want to go on that. So thank you.
    Thank you, Mr. Quarles, for being here today and providing 
testimony.
    For Senators who wish to submit questions for the record, 
those questions are due 1 week from today, Tuesday, June 1st.
    Vice Chair Quarles, based on the change made to our 
Committee rules, you have 45 days to respond to any questions. 
Thank you again.
    With that, the hearing is adjourned.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    A year ago today, we watched for 8 minutes and 46 seconds as police 
murdered George Floyd, and across the country, we saw Americans demand 
justice for the killings of too many Black and Brown Americans and an 
end to systemic racism in our country.
    And over the past year, the pandemic has taken half-a-million 
American lives, wreaked havoc on small businesses, pushed families into 
foreclosure or eviction, and forced millions of workers--many women and 
workers of color--out of the workforce.
    For most Americans, it's been a very long and difficult year. A 
year that revealed what many of us already knew--that even before the 
pandemic, our economy wasn't working for most people.
    I've heard some people, including many of my conservative 
colleagues, say that we had the best economy in our lifetime before the 
coronavirus hit. Those people need to follow Pres. Lincoln's admonition 
to get their public opinion baths.
    It certainly wasn't the greatest economy for most people in Senator 
Toomey's hometown in Rhode Island, or my hometown of Mansfield.
    Workers' wages have been flat for decades. Jobs continued to move 
overseas. In my hometown, companies like Westinghouse, Fisher-Body, 
Tappan Stove, Mansfield Tire closed down, one after another, and 
thousands of good union jobs disappeared.
    And they weren't replaced by new investment--the ``creative 
DEstruction'' the market fundamentalists like to talk about wasn't 
followed by any CONstruction, creative or otherwise.
    Yet corporate profits continue to climb and CEO pay has soared.
    Those outcomes are of course connected.
    Corporations lay off workers or cut pay and benefits to juice their 
stock price. Companies close down factories and move good-paying union 
jobs abroad to cut costs. Big banks keep getting bigger, fueling the 
concentration of corporate power in every part of our economy--from 
agriculture to health care to manufacturing.
    The economy of the past few decades may have looked good from the 
big windows of corporate board rooms looking down on Wall Street--or 
from the Dirksen Senate Office Building.
    But the economy hasn't looked great in a long time when looking out 
from the small towns and rural communities that the big banks have left 
behind in search of higher profits. It's never looked all that great 
for the Black and Brown families who lost their homes and wealth in the 
wake of the Great Recession, barely getting back on their feet before 
the next crisis hit.
    When I talk to Ohioans, I hear a constant refrain: people don't 
trust banks, especially the biggest banks. They've been burned by 
predatory mortgages, high overdraft fees, and expensive second chance 
accounts.
    They've watched Wall Street reward themselves, despite scandal 
after scandal. They remember how Wall Street bounced back after they 
wrecked our economy. They know Washington allowed that destruction to 
happen. And they certainly remember that taxpayers were forced to foot 
the bill.
    Tomorrow, for the first time ever, we will bring the CEOs of the 
six largest banks in the country to testify before this Committee. Our 
job is to hold accountable the institutions that for too long have had 
outsized power in our economy--power that only continues to grow.
    Today, we'll hear testimony from the Federal Reserve's Vice Chair 
for Supervision--the person responsible for supervising those banks.
    Mr. Quarles, checking Wall Street's power is supposed to be your 
job too.
    It's your responsibility to enforce the law and to hold banks 
accountable for their misdeeds with meaningful punishments--not slaps 
on the wrist. Not paltry fines that don't make a dent--for gargantuan 
Wall Street firms, a fine is just the cost of doing business.
    It's your job to stand up for the people who don't have corporate 
lobbyists, who don't make millions of dollars a year, and who don't get 
bailouts.
    But as far as I can tell, you don't view standing up to Wall Street 
as part of your job. You have rolled back rule after rule--rules that 
are supposed to be a check on the power of the biggest banks, and 
supposed to ensure they invest in the real economy--not themselves.
    Instead of investments in job creation and wages and new 
technology, they continue to pour all their extra cash into riskier and 
riskier bets, and buying back more of their own stock.
    Good for them--but not so good for America.
    We need--and you need--to bring the focus back to the people who 
make this country work.
    We need--and you need--to make sure banks are taking into account 
climate risk. We need--and you need--to make sure that volatile, 
unregulated cryptocurrencies don't crash the economy and harm 
consumers.
    We need to make sure workers' wages keep up with the cost of 
living--housing, childcare, prescription drugs, all the expenses that 
have been rising for decades now.
    We need to close the racial wealth and income gap that keeps 
getting wider and wider.
    It's our responsibility to work on solving these problems--not for 
the biggest banks, but for the people we serve.
    If we want an economy that reflects our values, we can't let Wall 
Street write the rules--or tell the regulators how to do to their jobs, 
for that matter. Our financial watchdogs shouldn't be doing favors for 
the biggest banks.
    You work for the American people, and I want to hear how you are 
going to stand up for workers and families and help create a better 
economy that works for everyone.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Thank you, Mr. Chairman.
    Congress has provided the Fed with a great deal of independence to 
isolate it from political influence. However, Congress also gave the 
Fed narrowly-defined monetary and regulatory missions.
    In the regulatory domain, the Fed has the authority to ensure the 
safety and soundness of the financial institutions that it regulates. 
But it doesn't have the authority to seek out and address political or 
theoretical risks in the distant future.
    The Fed's recent actions raise concerns that it's losing sight of 
this constraint. Consider its increasing focus on the supposed risks of 
global warming to the financial system. In March, John Cochrane, a 
distinguished economist at Stanford, powerfully argued before this 
Committee that ``climate change poses no measurable risk to the 
financial system.''
    Put simply, neither the warming of the Earth's temperature nor 
severe weather events are a threat to the stability of the financial 
system. Experience bears this out. In the last 11 years--a time period 
that included four of the five costliest hurricanes in U.S. history--we 
haven't found one bank failure caused by any weather event. In fact, 
we're not aware of any bank failure in the modern era due to weather.
    Nevertheless, the Fed recently joined the Network of Central Banks 
and Supervisors for Greening the Financial System. The network's stated 
aim is to use financial regulation to ``mobilize mainstream finance to 
support the transition toward a sustainable economy.'' In other words, 
to direct credit away from the fossil fuel sector.
    Such actions are inconsistent with the Fed's mandate and 
authorities. As Chair Powell himself has said, ``society's broad 
response to climate change is for others to decide--in particular, 
elected leaders.''
    If Congress believes current environmental laws don't adequately 
address global warming risks, changes should be enacted through the 
legislative process by those accountable to voters--not by financial 
regulators who have neither expertise nor accountability.
    This principle extends to other issues as well. I'm troubled that 
regional Fed banks are focusing on politically charged issues, like 
racial justice activism, that are outside the Fed's mission and 
expertise. This week I sent letters to three regional Federal Reserve 
Banks about this behavior and requested information from them.
    Instead of seeking to tackle issues that are outside the Fed's 
mandate and authorities, the Fed should focus on supervising the risks 
within its domain. For example, the Fed's recent Financial Stability 
Report highlights several risks that should be monitored--such as high 
asset prices. However, the report fails to consider a primary cause of 
these risks: the Fed's own excessively accommodative monetary policy.
    Our economy experienced a significant shock last year, but it was 
met with unprecedented monetary and fiscal support. And the economy is 
now in full recovery mode. As a result, I don't understand the 
justification for the Fed maintaining its policy of near-zero interest 
rates and $1.4 trillion in bond purchases per year, amounting to 
roughly half of new Treasury debt issuance since the beginning of the 
pandemic. Let's not kid ourselves: we are effectively monetizing about 
$1 trillion of Federal debt per year.
    This is especially troubling because the warning signs of inflation 
are getting louder. We may be seeing asset bubbles forming already, and 
history is replete with examples where the bursting of bubbles led to 
financial instability. As President Clinton's Treasury Secretary Larry 
Summers noted yesterday, the Fed needs to start ``explicitly 
recognizing that overheating, and not excessive slack, is the 
predominant near-term risk for the economy.''
    I'm concerned that the Fed's current approach almost guarantees 
that it will be behind the curve if inflation becomes problematic and 
persistent--for two reasons. First, the Fed has announced it will allow 
inflation to run above its 2 percent target level. Second, the Fed 
insists that the inflation we're experiencing now is transitory. But 
you can only know something is transitory when it comes to an end. What 
if it does not come to end?
    Another side effect of the Fed's asset purchases is the regulatory 
implications of such an abundance of reserves in the banking system. 
When the Fed purchases Treasuries or agency securities, the aggregate 
level of reserves rises correspondingly. As a result, reserves in the 
banking system have risen by over $2 trillion dollars and bank leverage 
ratios have experienced pressure from absorbing these riskless reserves 
that the Fed is creating.
    Last year, the Fed recognized this problem and issued temporary 
relief that allowed banks to accommodate a surge of reserves. That 
relief has expired and there are signs that it was needed. The Fed 
recently stated that it will address this problem on a permanent basis. 
I urge you to do so swiftly.
    Let me conclude with this: the Fed doesn't need to exceed its 
mandate and authorities to find risks to address. The siren calls of 
politically charged endeavors should be ignored, in order to preserve 
the credibility and independence of the Fed. There are plenty of risks 
within its reach, including those to which it may be contributing.
                                 ______
                                 
                PREPARED STATEMENT OF RANDAL K. QUARLES
   Vice Chairman for Supervision, Board of Governors of the Federal 
                             Reserve System
                              May 25, 2021
    Chairman Brown, Ranking Member Toomey, Members of the Committee, 
thank you for the invitation to testify today. Last May, my colleagues 
and I came before you--in a virtual format for the first time--
discussing our actions to maintain a strong banking sector as a source 
of support for consumers, households, and businesses. I'd like to thank 
the Committee for its flexibility and its commitment to ongoing, open 
dialogue, especially in the course of such a challenging year.
    My remarks 1 year ago came after the onset of sudden and pervasive 
financial stress. \1\ Early turmoil in overseas financial markets 
quickly crossed borders and, within days, had reached almost every 
asset class and corner of the financial system. From the beginning, the 
causes of this strain were clear, rooted in the policy measures taken 
to address the outbreak of COVID-19. But at that time, the full 
implications of the COVID event remained unclear, and the costs would 
continue to mount.
---------------------------------------------------------------------------
     \1\ Randal K. Quarles, ``Supervision and Regulation Report'' 
(testimony before the Committee on Banking, Housing, and Urban Affairs, 
U.S. Senate, Washington, DC, May 12, 2020), https://
www.federalreserve.gov/newsevents/testimony/quarles20200512a.htm.
---------------------------------------------------------------------------
    The American economy and banking sector then remained at the edge 
of the storm, with one wave of stress behind us and others yet to come. 
Today, the storm waters are receding. The economy is beginning a strong 
recovery, which owes much to an extraordinary, coordinated, and 
sustained campaign of support, by both Congress and the Federal 
Reserve, that helped clear a path to the other side of the COVID event.
    As the Federal Reserve's recent reports detail, banking 
organizations have remained an important source of strength in this 
recovery. \2\ Entering the COVID event, the banking system was 
fortified by over 10 years of work to improve safety and soundness, 
from both regulators and the banks themselves. Higher levels of capital 
and liquidity, better risk management, and more robust systems let them 
absorb an unprecedented shock--while providing refuge from market 
instability, delivering essential public aid, and working 
constructively to support borrowers and communities. \3\ In short, the 
full set of post-2008 reforms--as refined and recalibrated by the work 
of the last 4 years--ensured that this time would truly be different 
than the last. Today, the U.S. banking system is actually more liquid 
and better capitalized than it was a year ago, with over $100 billion 
in additional loan loss reserves, leaving it well-positioned to weather 
future shocks.
---------------------------------------------------------------------------
     \2\ Board of Governors of the Federal Reserve System, Supervision 
and Regulation Report, April 2021 (Washington: Board of Governors, 
April 2021), https://www.federalreserve.gov/publications/files/202104-
supervision-and-regulation-report.pdf; Board of Governors of the 
Federal Reserve System, Financial Stability Report, May 2021 
(Washington: Board of Governors, May 2021), https://
www.federalreserve.gov/publications/files/financial-stability-report-
20210506.pdf. The Supervision and Regulation Report accompanies this 
testimony.
     \3\ See Randal K. Quarles, ``Remarks at the Hoover Institution'' 
(speech at the Hoover Institution, Stanford, CA (via webcast), October 
14, 2020), https://www.federalreserve.gov/newsevents/speech/
quarles20201014a.htm.
---------------------------------------------------------------------------
    While a strong recovery is underway, it is not yet complete. \4\ 
Some households and businesses are still vulnerable, even as we enter 
this last stretch of the return to normal. Our role, as policymakers, 
is to support the financial system and the economy through the end of 
this transition back to normal operations. Our challenge, however, is 
to do so as circumstances change and the nation's need for that support 
evolves. \5\
---------------------------------------------------------------------------
     \4\ See, e.g., Jerome H. Powell, ``Getting Back to a Strong Labor 
Market'' (speech at the Economic Club of New York (via webcast), 
February 10, 2021), https://www.federalreserve.gov/newsevents/speech/
powell20210210a.htm.
     \5\ See Jerome H. Powell, ``Community Development'' (speech at the 
``2021 Just Economy Conference'' sponsored by the National Community 
Reinvestment Coalition, Washington, DC (via webcast), May 3, 2021), 
https://www.federalreserve.gov/newsevents/speech/powell20210503a.htm 
(``Lives and livelihoods have been affected in ways that vary from 
person to person, family to family, and community to community'').
---------------------------------------------------------------------------
    Most immediately, we have worked to align our emergency actions 
with other relief efforts, as the economic situation improves. Last 
spring, the Federal Reserve adopted a set of extraordinary and mostly 
temporary measures to ease the strain in financial markets and ensure 
banks could support communities and meet customer needs. \6\ In the 
last 6 months, we have maintained or extended some of those measures, 
where appropriate, to preserve household assistance and promote 
continued access to credit. \7\
---------------------------------------------------------------------------
     \6\ For a catalogue of these actions, see ``Supervisory and 
Regulatory Actions in Response to COVID-19'', Board of Governors of the 
Federal Reserve System, last updated March 15, 2021, https://
www.federalreserve.gov/supervisory-regulatory-action-response-covid-
19.htm.
     \7\ See, e.g., Board of Governors of the Federal Reserve System, 
``Federal Reserve Board Announces It Will Extend Its Paycheck 
Protection Program Liquidity Facility, or PPPLF, by Three Months to 
June 30, 2021'', news release, March 8, 2021, https://
www.federalreserve.gov/newsevents/pressreleases/monetary20210308a.htm; 
Board of Governors of the Federal Reserve System, ``Federal Reserve 
Board Announces the Second Extension of a Rule To Bolster the 
Effectiveness of the Small Business Administration's Paycheck 
Protection Program (PPP)'', news release, February 9, 2021, https://
www.federalreserve.gov/newsevents/pressreleases/bcreg20210209a.htm; 
Board of Governors of the Federal Reserve System, ``Federal Reserve 
Announces the Extension of Its Temporary U.S. Dollar Liquidity Swap 
Lines and the Temporary Repurchase Agreement Facility for Foreign and 
International Monetary Authorities (FIMA Repo Facility) Through 
September 30, 2021'', news release, December 16, 2020, https://
www.federalreserve.gov/newsevents/pressreleases/monetary20201216c.htm; 
Board of Governors of the Federal Reserve System, Federal Deposit 
Insurance Corporation, and Office of the Comptroller of the Currency, 
``Agencies Provide Temporary Relief to Community Banking 
Organizations'', news release, November 20, 2020, https://
www.federalreserve.gov/newsevents/pressreleases/bcreg20201120a.htm.
---------------------------------------------------------------------------
    We also began the transition back to our normal activities, our 
normal supervisory posture, and our normal rulebook. We closed 12 of 
our 13 emergency lending facilities; let temporary changes to our 
leverage rules expire as planned; and announced plans to transition 
large banks back to our regular capital regulation program, calibrating 
dividend and share repurchase restrictions to the results of the 
upcoming supervisory stress tests. \8\
---------------------------------------------------------------------------
     \8\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, and Office of the Comptroller of the 
Currency, ``Temporary Supplementary Leverage Ratio Changes To Expire as 
Scheduled'', news release, March 19, 2021, https://
www.federalreserve.gov/newsevents/pressreleases/bcreg20210319b.htm; 
Board of Governors of the Federal Reserve System, ``Federal Reserve 
Board Announces That the Temporary Change to Its Supplementary Leverage 
Ratio (SLR) for Bank Holding Companies Will Expire as Scheduled on 
March 31'', news release, March 19, 2021, https://
www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm; 
Board of Governors of the Federal Reserve System, ``Federal Reserve 
Announces Temporary and Additional Restrictions on Bank Holding Company 
Dividends and Share Repurchases Currently in Place Will End for Most 
Firms After June 30, Based on Results From Upcoming Stress Test'', news 
release, March 25, 2021, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20210325a.htm.
---------------------------------------------------------------------------
    These are important near-term steps, and they are part of any 
responsible transition out of our emergency posture. However, our role 
and our responsibility extend much further than merely returning to 
normal. We also have an obligation to look closely at the last year, to 
understand how the financial system came to experience such severe 
stress, and to identify and act on any lessons we find. The COVID event 
was a unique shock, but it was also the first real-world test of the 
regulatory and supervisory regime established after the 2008 financial 
crisis. As such, it gives us a chance to examine that regime's 
strengths and shortcomings, and to position it well for future 
challenges.
    Any list of lessons must begin with the strong performance of 
supervisory stress testing. \9\ The stress-testing program not only 
prepared banks for a period of prolonged hardship; it also clarified 
their health and resilience as the COVID event progressed. This role 
was a return to the original purpose of stress testing and a 
confirmation of its earliest use during the 2008 financial crisis. It 
also, however, affirmed the ways that stress testing has evolved in 
recent years, into a more flexible, more transparent anchor for the 
Federal Reserve's broader capital program.
---------------------------------------------------------------------------
     \9\ Randal K. Quarles, ``Themistocles and the Mathematicians: The 
Role of Stress Testing'' (speech at the Federal Reserve Bank of 
Atlanta, Atlanta, GA (via webcast), February 25, 2021), https://
www.federalreserve.gov/newsevents/speech/quarles20210225a.htm; see, 
also, Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board Announces Results From Second Round of Bank Stress Tests 
Will Be Released Friday, December 18, at 4:30 p.m. EST'', news release, 
December 4, 2020, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20201204a.htm.
---------------------------------------------------------------------------
    For example, while it was prudent--given that this was the first 
real-world test of the post-2008 system--for us to impose temporary 
capital distribution restrictions beyond those that form part of that 
system, we now know that our framework works. We can have particular 
confidence in the framework when it is supplemented and informed by a 
real-time stress testing regime. In the future, having learned the 
lessons of this test, we will be able to rely on the automatic 
restrictions of our carefully developed framework when the stress test 
tells us the system will be resilient, rather than impose ad hoc and 
roughly improvised limitations.
    Other areas, however, are ripe for closer examination, both 
domestically and internationally. These include the strains in short-
term funding markets, and the second destabilizing run on prime money 
market mutual funds in roughly a decade, which required significant 
public intervention to address. \10\ Despite some efforts after the 
2008 crisis to enhance the resiliency of these investment vehicles, the 
basic model of a seemingly stable-value fund, backed by assets the 
value and liquidity of which varies, remained vulnerable. Work is 
ongoing both domestically and at the Financial Stability Board on how 
to better address these vulnerabilities.
---------------------------------------------------------------------------
     \10\ Randal K. Quarles, ``The FSB in 2021: Addressing Financial 
Stability Challenges in an Age of Interconnectedness, Innovation, and 
Change'' (speech at the Peterson Institute for International Economics, 
Washington, DC (via webcast), March 30, 2021), https://
www.federalreserve.gov/newsevents/speech/quarles20210330a.htm.
---------------------------------------------------------------------------
    Areas for further examination also include Treasury markets, where 
last year's selling pressures overwhelmed dealers' willingness or 
ability to intermediate, and which continue to be a focus for the 
Board, the Department of the Treasury, and other regulators. \11\ Among 
other measures, we are reviewing the design and calibration of the 
supplementary leverage ratio, which was originally gauged for a 
financial system with far lower levels of cash reserves and a much 
smaller Treasury market. \12\
---------------------------------------------------------------------------
     \11\ Randal K. Quarles, ``What Happened? What Have We Learned From 
It? Lessons From COVID-19 Stress on the Financial System'' (speech at 
the Institute of International Finance, Washington, DC (via webcast), 
October 15, 2020), https://www.federalreserve.gov/newsevents/speech/
quarles20201015a.htm.
     \12\ See n. 8, Board of Governors of the Federal Reserve System, 
news release, March 19, 2021.
---------------------------------------------------------------------------
    Finally, these areas for further review include a rapidly changing 
set of customer practices; changing patterns in the use of financial 
services, by consumers and businesses; and a changing relationship 
between banks and their nonbank partners. These trends predate the 
COVID event, but the past year accelerated them dramatically, with 
important implications for financial stability, safety and soundness, 
consumer protection, and underserved communities' access to safe and 
fair financial services. The Federal Reserve is working to understand 
and address this changing landscape in a number of ways--from the use 
of artificial intelligence, to the evolving need for operational 
resiliency, to the growing risk of disruptive shocks from cybersecurity 
failures. \13\
---------------------------------------------------------------------------
     \13\ Board of Governors of the Federal Reserve System, Consumer 
Financial Protection Bureau, Federal Deposit Insurance Corporation, 
National Credit Union Administration, and Office of the Comptroller of 
the Currency, ``Agencies Seek Wide Range of Views on Financial 
Institutions' Use of Artificial Intelligence'', news release, March 29, 
2021, https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20210329a.htm; Board of Governors of the Federal Reserve System, 
SR letter 20-24: ``Interagency Paper on Sound Practices To Strengthen 
Operational Resilience'', November 2, 2020, https://
www.federalreserve.gov/supervisionreg/srletters/SR2024.htm; see also 
``Jerome Powell: Full 2021 60 Minutes Interview Transcript'', 60 
Minutes Overtime, April 11, 2021, https://www.cbsnews.com/news/jerome-
powell-full-2021-60-minutes-interview-transcript/.
---------------------------------------------------------------------------
    We are not alone in our work to understand these post-COVID-event 
lessons. We have valuable and willing partners in our fellow 
regulators, in other agencies across Government, and in our colleagues 
abroad. We continue to participate actively in relevant work at the 
Financial Stability Board and other international forums, since 
financial risks do not respect the jurisdictional lines between 
agencies or countries. And we are committed to keeping Congress closely 
and actively informed of our efforts, mindful of the effect these 
trends may have on our core mandate.
    This work is critical, but only in service of a more fundamental 
goal: a safe, transparent, and efficient approach to supervision and 
regulation, which ensures the financial system is strong and stable 
enough to withstand even historic shocks. \14\ Those values are of 
perennial importance, and they continue to be the bedrock of the 
Federal Reserve's work. \15\ They also animate two of our highest 
priorities for this year: to finalize the postcrisis Basel III reforms 
and to complete the long-overdue transition away from LIBOR. On the 
former, we remain committed to implementing Basel III for our 
internationally active banking organizations in a full, timely, and 
consistent manner, with a rulemaking proposal for public comment later 
this year. For LIBOR, by contrast, the time for comment, speculation, 
and delay has long since passed. Continued use of LIBOR in new 
contracts after 2021 would create safety and soundness risks, and we 
will examine bank practices accordingly. \16\
---------------------------------------------------------------------------
     \14\ Randal K. Quarles, ``The Eye of Providence: Thoughts on the 
Evolution of Bank Supervision'' (speech at the Federal Reserve Board, 
Harvard Law School, and Wharton School Conference: Bank Supervision: 
Past, Present, and Future (via webcast), December 11, 2020), https://
www.federalreserve.gov/newsevents/speech/quarles20201211a.htm.
     \15\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board Adopts Final Rule Outlining and Confirming the Use of 
Supervisory Guidance for Regulated Institutions'', news release, March 
31, 2021, https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20210331a.htm; Board of Governors of the Federal Reserve System, 
``Federal Reserve Board Publishes Frequently Asked Questions (FAQs) 
Comprising Existing Legal Interpretations Related to a Number of the 
Board's Longstanding Regulations'', news release, March 31, 2021, 
https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20210331b.htm; Board of Governors of the Federal Reserve System, 
``Federal Reserve Publishes Latest Version of Its Supervision and 
Regulation Report'', news release, November 6, 2020, https://
www.federalreserve.gov/newsevents/pressreleases/bcreg20201106a.htm.
     \16\ Randal K. Quarles, ``Keynote Remarks'' (speech at ``The SOFR 
Symposium: The Final Year'', an event hosted by the Alternative 
Reference Rates Committee, New York, NY (via webcast), March 22, 2021), 
https://www.federalreserve.gov/newsevents/speech/quarles20210322a.htm; 
see also Mark Van Der Weide, ``The End of LIBOR: Transitioning to an 
Alternative Interest Rate Calculation for Mortgages, Student Loans, 
Business Borrowing, and Other Financial Products'' (testimony before 
the Subcommittee on Investor Protection, Entrepreneurship, and Capital 
Markets, Committee on Financial Services, U.S. House of 
Representatives, Washington, DC, April 15, 2021), https://
www.federalreserve.gov/newsevents/testimony/vanderweide20210415a.htm.
---------------------------------------------------------------------------
    The COVID event is not behind us, and the vulnerabilities it 
exposed are not gone. As we continue to recover, the ``vast influence 
of accident'' can only grow, with consequences that can 
disproportionately fall on the most vulnerable. \17\ However, we can do 
more than just wait and hope that the path out of the COVID event is 
smooth. We can work to ensure the financial system is resilient enough 
to support consumers, households, and businesses, and we can recommit 
ourselves to supporting the economy through the completion of the 
recovery. The work we undertake to learn the lessons of the past year 
is a critical step in upholding that commitment.
---------------------------------------------------------------------------
     \17\ Thucydides, The History of the Peloponnesian War, translated 
by Richard Crawley, at Ch. 3, https://www.gutenberg.org/files/7142/
7142-h/7142-h.htm.
---------------------------------------------------------------------------
    Thank you. I look forward to your questions.
        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
                     FROM RANDAL K. QUARLES

Q.1. We see more and more severe weather events in Ohio and in 
all of my colleagues' States--from flooding to ice storms to 
catastrophic hurricanes. Taking these risks into consideration 
is something individual banks have done for a long time. How is 
the Fed supervising banks for climate risk on a system-wide 
basis? When can we expect the Fed to include climate risks in 
the big bank stress tests? The Fed should not wait several 
years to incorporate these risks--which could destroy trillions 
of dollars in assets--when the climate crisis is already here.

A.1. We expect supervised firms to manage effectively and 
mitigate all material risks they face, including those risks 
posed by climate change. With respect to climate-related risks, 
we are undertaking a broad work plan of analysis and public 
engagement. We are actively engaging with large financial 
institutions to strengthen our understanding of how they 
currently assess climate risks and incorporate the physical and 
transition risks from climate change into their risk management 
frameworks. We are also engaging with a wide range of 
stakeholders to ensure a broad range of diverse perspectives.
    This engagement and our ongoing analytical work will inform 
our assessment of our supervisory program. As with all 
supervisory undertakings, we will tailor our approach and 
resources to focus on firms that face the most risk.
    Climate scenario analysis is one of many tools that can be 
used to better understand the range of potential climate-
related risks to the financial sector. Climate scenario 
analysis, which is distinct from regulatory stress tests, is a 
tool to explore how climate risks could evolve under a range of 
plausible scenarios. In contrast, regulatory stress tests are 
used to assess capital adequacy under specific shocks in the 
short term and have specific consequences for capital and 
supervisory ratings. We are building our understanding of 
climate scenario analysis by engaging with financial 
institutions, academics, and foreign central banks, and other 
institutions to better understand scenario design.
    We are taking a careful, thoughtful, and transparent 
approach to our work regarding climate related risks, and we 
will engage with Congress and the public along the way.

Q.2. During your testimony, you indicated that the Federal 
Reserve carefully reviews branch closures as part of its merger 
analysis. How many branches of banks involved in a merger or 
consolidation since June 1, 2011, have closed? How many of such 
closures have occurred in rural, minority, or low-moderate 
income areas? Please describe all instances in which the 
Federal Reserve bas denied a bank merger application because of 
concerns related to branch closures.

A.2. This response provides the requested data on the number of 
branch closures associated with banks that were involved in a 
merger or consolidation since June 1, 2011. The response also 
discusses certain limitations in the available data that do not 
enable an inference of causation to be established between 
branch closures since 2011 and M&A activity.
    From 2011 to 2020, there was a net loss of 5,605 branches 
for banks that were involved in an M&A transaction over that 
period. \1\ During this time period, the total net loss of 
branches that were located in counties that possessed one or 
more of the characteristics of being low-and moderate-income 
(LMI), \2\ majority-minority, \3\ or nonmetropolitan \4\ was 
2,453. \5\
---------------------------------------------------------------------------
     \1\ ``Branch'' means full-service, brick and mortar retail bank 
branches.
     \2\ LMI counties are defined as counties with median family income 
less than 80 percent of national median family income for that year.
     \3\ Majority-minority counties are defined as counties in which 
less than half of the population is non-Hispanic White.
     \4\ Nonmetropolitan counties are defined as any county that is not 
part of a Metropolitan Statistical Area (MSA). An MSA is defined as an 
area with at least one urbanized area that has a population of at least 
50,000 and comprises the central county or counties containing the 
core, plus adjacent outlying counties having a high degree of social or 
economic integration with the central county as measured by commuting 
data.
     \5\ These branches often possess multiple characteristics, and the 
total number of closed branches in LMI counties was 1,254 out of 2,453 
total branches; the total number of closed branches in majority-
minority counties was 1,062 out of 2,453 total branches; and the total 
number of closed branches in nonmetropolitan counties was 1,144 out of 
2,453 total branches.
---------------------------------------------------------------------------
    The limitations of the data do not enable an inference of 
causation to be established between all of the net branch 
closures and M&A activity, because closures captured in these 
figures may have occurred for reasons unrelated to M&A 
activity. For example, the figures provided above include all 
of the branch openings and closings of the banks and savings 
associations involved in an M&A transaction (including at the 
holding company level) that occurred after the date of the 
institution's first instance of M&A activity in the period 
between 2011 to 2020. As an important caveat, the figures do 
not account for proximity in time between branch activity to 
the first associated M&A activity. Consequently, it would be 
difficult to associate some of an institution's branch closures 
with its M&A activity if those closures occurred well after the 
M&A transaction.
    In addition, the data do not account for the geographic 
relationship between the branch activity and the M&A activity. 
The branch networks of an acquirer and target institution may 
only partially overlap or not overlap at all. It would be 
difficult to causally associate some of an institution's branch 
closures with the institution's M&A activity if such closures 
occurred outside the geographic area where the acquirer's and 
target's branch networks overlapped.
    Moreover, branch consolidations resulting from M&A activity 
are reflected in the data as branch closures. In M&A 
transactions, the acquiring and target institutions may have 
branches that are located a short distance from one another in 
areas where the institutions have overlapping operations. 
Although the combined organization may consolidate nearby 
branches into a single branch to enhance operating efficiency, 
consolidation of this type generally would not limit customers' 
access to the bank's branches.
    From 2011 to 2020, there was a net loss of 12,098 branches 
among all banks and savings associations nationwide. Although 
bank consolidation may be a factor in the overall decline, 
other factors have also contributed to this trend. These 
factors may include, for example, the rise in online and mobile 
banking products and services, increased competition from 
internet banks and nonbank fintech companies, changing customer 
preferences, increased branch operational costs, and, most 
recently, the COVID event.
    Between 2011 and present, the Board has not denied any M&A 
proposals due to concerns related to branch closures. The Board 
denies few M&A proposals overall because it has set clear 
standards about what M&A transactions it will approve. As a 
consequence of that transparency, bank holding companies and 
banks generally do not propose M&A transactions that would not 
meet the Board's standards. \6\ In addition, some applicants 
choose to withdraw proposals prior to the Board's 
consideration. Approximately 12 percent of the merger 
applications submitted to the Federal Reserve from 2006 through 
2020 were withdrawn.
---------------------------------------------------------------------------
     \6\ The Board has released publicly its approach to applications 
that may not satisfy statutory requirements for approval or that 
otherwise raise supervisory or regulatory concerns. This is reflected 
in the Board's Supervision and Regulation (SR) letter 14-2;Consumer 
Affairs (CA) letter 14-1: ``Enhancing Transparency in the Federal 
Reserve's Applications Process'', https://www.federalreserve.gov/
supervisionreg/srletters/sr1402.htm.
---------------------------------------------------------------------------
                                ------                                


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

Q.1. In your testimony before the Banking Committee you argued 
that Federal regulators should analyze potential climate-
related risks and develop a ``data-driven analytical 
framework'' to guide your engagement with banks. You further 
noted that the Federal Reserve is in the ``early stages'' of 
doing that. Following your testimony, Acting Comptroller of the 
Currency Michael Hsu made comments on June 2, 2021, that appear 
to prejudge the outcome of this analysis. \1\ He argued that 
regulators will ``eventually'' be required to incorporate 
climate-related risks into bank capital rules because 
``exposure is exposure and you have to risk manage and 
capitalize for that.'' \2\ Do you believe that changes to the 
bank capital framework are an appropriate way to address 
climate-related risks?
---------------------------------------------------------------------------
     \1\ Pete Schroeder, Climate change risks will affect U.S. bank 
capital in long-run--official, Reuters (Jun. 2, 2021), https://
www.reuters.com/article/usa-regulator-banks/climate-change-risks-will-
affect-us-bank-capital-in-long-run-official-idUSL2N2NJ2Y7.
     \2\ Id.

A.1. Congress has given the Federal Reserve narrow but 
important mandates around monetary policy, financial stability, 
and supervision of financial firms, and we would consider the 
potential effects of climate change only to the extent they 
would affect the achievement of our statutory mandates. With 
respect to climate-related risks, we are undertaking a broad 
work plan of analysis and public engagement. We are actively 
engaging with large financial institutions to strengthen our 
understanding of how they currently assess climate risks and 
incorporate the physical and transition risks from climate 
change into their risk management frameworks. We are also 
engaging with a wide range of stakeholders to ensure a broad 
range of diverse perspectives.
    Given that we are in the early stages of this work, we do 
not yet have a considered view about what actions might be 
appropriate from the Federal Reserve to address potential 
financial and economic risks of climate change once we have a 
more analytical understanding of that possibility. I would note 
that the Bank of England (BoE), which is considered among the 
most active global regulators in applying climate risk analysis 
to bank supervision, is running an analysis of its bank and 
insurance system's climate exposures that it is calling a 
stress test and which will be complete in the spring of 2022, 
yet even the BoE has been quite clear that this test will not 
be used to set capital standards. We are taking a careful, 
thoughtful, and transparent approach to this work, and we will 
engage with Congress and the public along the way.
                                ------                                


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

Q.1. Suspicious Activity Reports--Last year, a New York Times 
article stated that major banks had filed Suspicious Activity 
Reports (SARs) that showed major financial institutions had 
helped suspected terrorists, drug dealers, and corrupt foreign 
officials move trillions of dollars around the world. \1\
---------------------------------------------------------------------------
     \1\ https://www.nytimes.com/2020/09/20/business/fincen-banks-
suspicious-activity-reports-buzzfeed.html
---------------------------------------------------------------------------
    The article reported multiple examples of major financial 
institutions failing to take proactive action regarding 
customers on whom they have filed SARs and/or against whom they 
have suspicions of illegal activity. How big of a concern is 
this for the Fed?

A.1. We are committed to a strong anti-money laundering (AML) 
regime. The Federal Reserve expects banks operating in the 
United States to have an effective AML program as required by 
the Bank Secrecy Act (BSA) and appropriate measures in place to 
identify and report suspicious activity to law enforcement.
    The Federal Reserve has taken action, and will continue to 
take action, to address BSA/AML deficiencies within its 
supervised institutions where warranted. Within the last 
several years, we have imposed enforcement actions against 
firms for failing to understand and mitigate the money 
laundering and terrorist financing risks associated with 
certain global business lines, activities, and customers.
    While U.S. banks are neither required nor in an appropriate 
position to determine whether a crime has been committed, they 
are required to identify and report suspicious activity to 
FinCEN consistent with the relevant suspicious activity 
reporting regulations.
    Banks are required to file SARs in a wide range of 
circumstances. U.S. banks are obligated to screen all 
transactions for suspicious activity, even those for which the 
bank does not have a direct customer relationship with the 
originator of the transaction, such as in the case of foreign 
correspondent banking.

Q.2. What steps is the Federal Reserve instituting to ensure 
that financial institutions comply with the Anti-Money 
Laundering Act of 2020?

A.2. We are committed to ensuring that our supervised entities 
comply with BSA/AML laws and regulations. The Federal Reserve 
is working closely with the U.S. Department of the Treasury, 
FinCEN, and the other Federal and State banking supervisors to 
provide meaningful consultation and support for effective, 
appropriately tailored implementation of the AML Act reforms. 
In addition, the Federal Reserve and other Federal and State 
banking supervisors are collaborating through the Federal 
Financial Institutions Examination Council's BSA/AML Working 
Group to update our supervisory approach, as necessary, to 
incorporate AML Act reforms.

Q.3. Archegos Capital Management--In the May 2020 Financial 
Stability Report, \2\ the Federal Reserve warned about the high 
level of ``business-sector debt.'' Since then the implosion of 
the Archegos Capital Management resulted in a $10 billion loss 
to Credit Suisse and Morgan Stanley.
---------------------------------------------------------------------------
     \2\ https://www.federalreserve.gov/publications/files/financial-
stability-report-20200515.pdf. P. 33.
---------------------------------------------------------------------------
    How will the Federal Reserve adjust its stress tests for 
large financial institutions to ensure that banks can 
accurately project major trading losses for their private fund 
clients?
    Will the Federal Reserve include hypothetical scenarios 
based on overleveraged private fund clients in its annual bank 
stress tests?

A.3. The Federal Reserve's supervisory stress test incorporates 
global market shock and counterparty default components to 
assess the risks of firms with significant trading activities. 
In the June 2020 and December 2020 supervisory stress tests, 
the Federal Reserve projected trading and counterparty losses 
of $83.2 billion and $95.1 billion, respectively, under the 
severely adverse scenario for the 13 firms with significant 
trading activities. These amounts are far larger than the total 
global losses stemming from Archegos, the great bulk of which 
were incurred by foreign banks outside the United States and 
nearly 100 times larger than the minor portion of Archegos 
losses that fell within the Federal Reserve's regulator 
perimeter.
    Consistent with the Federal Reserve Board's Policy 
Statement on the Scenario Design Framework for Stress Testing 
(Scenario Design Framework), we consider emerging and ongoing 
areas of financial market vulnerability in the development of 
the global market shock component. For example, over the last 
few years the global market shock component has emphasized 
heightened stress to highly leveraged markets. We will continue 
to develop our supervisory stress test scenarios according to 
the Scenario Design Framework, ensuring that salient risks are 
captured.
    As part of our capital plan assessment, we review the 
assumptions and methodologies used by firms to project revenues 
and losses under a range of stressful conditions, including an 
internal stress scenario that is reflective of a firm's unique 
risk exposures and business activities. This assessment helps 
to highlight key weaknesses in a firm's internal processes that 
can result in additional supervisory scrutiny.

Q.4. Cyber Risks--Federal Reserve Bank of Cleveland President 
Loretta Mester urged further development and use of stress 
testing to assess the financial system's resilience to cyber 
risks.
    How can an institution ensure that the data it backed up 
has not already been altered?

A.4. In today's data driven marketplace, data integrity is 
extremely important for any financial institution's operations 
and decision making. We recently published interagency guidance 
that outlines sound practices for strengthening operational 
resilience. The guidance contains a number of practices that 
seek to ensure the effectiveness of processes and controls to 
protect the confidentiality, integrity, availability, and 
overall security of the firm's data and information systems. 
One such practice is for firms to establish controls to 
safeguard the integrity and availability of critical data 
against the impact of destructive malware, including 
ransomware, or other similar threats. Recovery from such 
incidents may include use of protocols for secure, immutable, 
off-line storage of critical data. In addition, we point 
institutions to National Institute of Standards and Technology 
(NIST) resources such as: NIST Special Publication 1800-11-Data 
Integrity Recovering from Ransomware and Other Destructive 
Events \1\ and the NIST draft white paper, Securing Data 
Integrity Against Ransomware Attacks: Using the NIST 
Cybersecurity Framework and NIST Cybersecurity Practice Guides 
\2\ for more detailed information.
---------------------------------------------------------------------------
     \1\ See NIST Cybersecurity Practice Guide SP 1800-11, ``Data 
Integrity: Recovering from Ransomware and Other Destructive Events''.
     \2\ See the NIST draft white paper, ``Securing Data Integrity 
Against Ransomware Attacks: Using the NIST Cybersecurity Framework and 
NIST Cybersecurity Practice Guides''.

Q.5. We see more cybercriminals target small businesses, 
leading to a loss of revenue, jobs and in some cases, putting 
some out of business.
    How should financial institutions consider the impact of 
cybercrime when they lend to small businesses?

A.5. There are several potential risks that may limit or render 
a small business incapable of fulfilling the terms of its loan 
agreement with its lender, including cybercrime. As part of 
their underwriting, lenders should consider how the small 
business's ability to repay could be affected for a variety of 
risks including cyberincidents. The level of cyberpreparedness 
and hygiene of a small business could be considered as factors 
in underwriting together with other risks that could affect the 
borrower's ability to repay.
    As banks themselves become more aware of cyber risks, they 
could provide a useful channel for increasing awareness among 
their customers, especially small businesses, to heightened 
resilience and the need to have appropriate safeguards to 
manage these risks.

Q.6. Expanding on Your Testimony--In your testimony, you call 
for ``further review of changing patterns in the use of 
financial services, by consumers and businesses; and a changing 
relationship between banks and their nonbank partners.''
    Besides greater online banking, what changing patterns has 
the Federal Reserve noticed in the usage patterns of customers 
of financial services companies?

A.6. Customers' use of digital financial services--banking, 
payments, investment, insurance, lending, and financial 
planning--increased substantially in the years preceding the 
COVID event and continued to accelerate during the last year. 
Customers are starting to use online channels for a range of 
financial activities that span beyond checking account 
balances, including financial transactions such as making 
payments, seeking loans, or investing money. For example, 
according to the 2020 edition of McKinsey's annual Digital 
Payments Consumer Survey, \3\ more than three-quarters of 
Americans use some form of digital payment, such as browser-
based and in-app online purchases, in-store checkout using a 
mobile phone and/or Quick Response code, and person-to-person 
payments. In some cases, consumers are gaining access to these 
services through their banks; in other cases, through nonbank 
fintech companies.
---------------------------------------------------------------------------
     \3\ See 2020 McKinsey Digital Payments Consumer Survey.
---------------------------------------------------------------------------
    In addition, consumers are increasingly getting customer 
service through digital channels. A number of banks have 
leveraged new technologies such as artificial intelligence (AI) 
to enable 24x7 chat-bots, which can answer basic customer 
service questions.
    Consumer surveys such as the 2019 E&Y Global FinTech 
Adoption Survey \4\ and the 2019 PwC Global Fintech Report \5\ 
show shifting customer preferences with respect to the use of 
online financial services. Price, ease of setup, user 
experience, and access to innovative products are all important 
factors for consumers using new fintech services.
---------------------------------------------------------------------------
     \4\ See 2019 E&Y Global FinTech Adoption Survey.
     \5\ See 2019 PwC Global Fintech Report.
---------------------------------------------------------------------------
    Businesses are also seeking to leverage advances in 
financial technology for services such as lending, payments 
technology, fraud detection, and data processing services. For 
example, the 2020 Federal Reserve Small Business Credit Survey 
\6\ found that 20 percent of small businesses had used an 
online (nonbank) lender for funding in the past 5 years. 
Medium/high-credit-risk applicants were more inclined to apply 
to online lenders and were more than twice as likely as other 
applicants to state that denials by other lenders drove their 
application decisions. They also had the greatest chance of 
success at online lenders, with 77 percent getting approved in 
comparison to a 40 percent approval rate at a large bank.
---------------------------------------------------------------------------
     \6\ See 2020 Federal Reserve Small Business Credit Survey.

Q.7. What concerns do you have about the commercial real estate 
market? If remote work increases substantially, do you expect 
to see any risk to the financial system due to outstanding 
---------------------------------------------------------------------------
commercial real estate loans?

A.7. As noted in the May 2021 Financial Stability Report (FSR), 
disruptions caused by the COVID event continue to make it 
difficult to assess valuations in the commercial real estate 
(CRE) sector. Since late 2020, CRE price indexes based on 
transactions recovered from their decline early last year, 
suggesting elevated pressures. Further, capitalization rates, 
which measure annual income relative to prices of commercial 
properties, have continued to tick down. Yet, other measures 
suggest market participants perceive values as having fallen 
over the past year.
    For example, an index of the prices of CRE properties 
administered by real estate investment trusts (REITs), which 
supplements observed transactions with appraisal information, 
remains below pre-COVID levels. \7\ Similarly, stock prices of 
REITs that invest in harder-hit commercial property sectors 
have increased since November but generally remain below their 
pre-COVID levels.
---------------------------------------------------------------------------
     \7\ The Green Street price index remained below its pre-COVID 
level in February. This index is appraisal based, using both sales and 
nonsales information to track prices of properties managed by REITs.
---------------------------------------------------------------------------
    Other indicators continue to show strains in CRE markets. 
Vacancy rates continue to increase and rent growth has declined 
further. Additionally, delinquency rates on commercial 
mortgage-backed securities (CMBS), which usually contain 
riskier loans, remain elevated. Delinquency rates for CRE loans 
secured by COVID-affected properties, such as hotels and retail 
properties, also rose during the second half of 2020. Finally, 
the January 2021 Senior Loan Officer Opinion Survey on Bank 
Lending Practices \8\ indicated that banks, on net, reported 
weaker demand for most CRE loans and tighter lending standards 
in the fourth quarter of 2020.
---------------------------------------------------------------------------
     \8\ https://www.federalreserve.gov/data/sloos/sloos-202101.htm
---------------------------------------------------------------------------
    It is too early to determine the long-term trends arising 
from a prolonged work from home environment such as has been 
experienced during the COVID event. The Federal Reserve will 
continue to monitor the CRE market as these trends materialize.

Q.8. Your testimony notes that these changes have ``important 
implications for financial stability, safety and soundness, 
consumer protection, and underserved communities' access to 
safe and fair financial services.''
    What are the implications for consumer protection and 
underserved communities' access to safe and fair financial 
services you wish to bring to the attention of Congress, the 
banking sector, the markets and the public?

A.8. As noted in my response to Question 4, customers' use of 
digital financial services--banking, payments, investment, 
insurance, lending, and financial planning--increased 
substantially in the years preceding the COVID event and 
continued to accelerate during the COVID event. The Federal 
Reserve strongly supports responsible innovation and recognizes 
the benefits it can offer to financial institutions, 
businesses, and consumers, as seen by the vital role innovative 
technology played in enabling the economy and financial 
services throughout the course of the last year.
    We also realize that innovation can lead to new and 
unforeseen risks. In the financial arena, we have seen through 
the years that many innovations, while beneficial, brought new 
ways to introduce familiar problems, such as leverage, maturity 
transformation, inadequate risk management, and too-big-to-fail 
issues to manifest.
    The combination of rapid changes in technology, the rise of 
large technology firms, and the fact that oversight of these 
entities and their financial activities may be limited and 
dispersed across many different regulatory bodies provide a 
real challenge--particularly to the financial system--as 
society attempts to promote responsible innovation.
    The Federal Reserve is focused on ensuring its oversight 
takes into account technological innovation, particularly for 
our supervised institutions. Much fintech development is 
happening in the nonbank sector and the Federal Reserve does 
not have direct supervisory authority over nonbank fintechs. 
However, we continue to monitor developments to assess their 
potential impact on the banking sector and on financial 
stability. We also regularly discuss these topics with the 
other agencies. In March 2021, along with the other Federal 
financial regulatory agencies, we jointly issued an interagency 
request for information on risk management of AI in financial 
services. \9\ As nonbank fintechs partner with banking 
organizations we supervise, we carefully review those 
partnerships to ensure they do not raise risks to banks' safety 
and soundness and comply with consumer protection requirements, 
including fair lending laws and regulations that prohibit 
illegal discrimination.
---------------------------------------------------------------------------
     \9\ See Federal Reserve Board, Press Releases, ``Agencies Seek 
Wide Range of Views on Financial Institutions' Use of Artificial 
Intelligence'', March 29, 2021, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20210329a.htm.
---------------------------------------------------------------------------
    The Federal Reserve's robust fair lending supervisory and 
enforcement program reflects our commitment to promoting fair 
lending and identifying unlawful discrimination in the 
institutions we supervise. We examine for fair lending risk at 
every consumer compliance exam, and a bank's fintech activities 
are assessed within the fair lending review, commensurate with 
the level of risk. In studying the benefits and challenges of 
fintech, we look at the potential risks of amplifying bias and 
inequitable outcomes. It is important that we understand how 
complex data interactions may skew the outcomes of algorithms 
in ways that undermine fairness and transparency.

Q.9. In your testimony, you note the use of artificial 
intelligence (AI) specifically.
    What concerns does the Federal Reserve have regarding AI?

A.9. The Federal Reserve supports responsible innovation by 
financial institutions. With appropriate governance, risk 
management, and compliance management, financial institutions' 
use of AI has the potential to offer improved efficiency, 
enhanced performance, and cost reduction for financial 
institutions, as well as benefits to consumers and businesses.
    At the same time, the use of AI presents a variety of 
risks. Many of the potential risks associated with using AI are 
not unique to AI. For instance, the use of AI could result in 
operational vulnerabilities, such as internal process or 
control breakdowns, cyberthreats, information technology 
lapses, risks associated with the use of third parties, and 
model risk, all of which could affect a financial institution's 
safety and soundness. However, AI may present particular risk 
management challenges to financial institutions, such as those 
in the areas of explainability, data usage, and dynamic 
updating. The use of AI can also create or heighten consumer 
protection risks, such as risks of unlawful discrimination, 
unfair, deceptive, or abusive acts or practices under the Dodd-
Frank Wall Street Reform and Consumer Protection Act, unfair or 
deceptive acts or practices under the Federal Trade Commission 
Act, or privacy concerns.
    The Federal Reserve, in coordination with our fellow 
Federal banking agencies, has taken a variety of steps to 
assess the benefits and risks associated with AI. These steps 
have included outreach to a wide range of external parties, 
including banks, consumer groups, vendors, and others to hear a 
range of perspectives on how the technology is being used and 
particular risk management challenges that banks face in using 
the technology. Among other efforts, the agencies hosted an Ask 
the Regulators session for bankers in December 2020, and the 
Federal Reserve hosted a 2-day academic symposium on AI in 
January 2021.
    Further, in March 2021, in collaboration with the Office of 
the Comptroller of the Currency, Federal Deposit Insurance 
Corporation, Consumer Financial Protection Bureau, and National 
Credit Union Administration, the Federal Reserve published a 
Request for Information (RFI) to explore whether additional 
supervisory clarity is needed to facilitate the responsible use 
of AI. The RFI explores the benefits and risks noted above in 
more detail. The agencies are seeking feedback from a wide 
range of stakeholders, including financial services firms, 
technology companies, consumer advocates, civil rights groups, 
merchants, and other businesses, and the public to inform any 
future policy steps in this area. The agencies intend to 
continue working together on further activities related to AI.

Q.10. How will the Federal Reserve ensure that AI does not lead 
to discrimination in financial services?

A.10. Discrimination has no place in a fair and transparent 
marketplace. Discriminatory practices can close off 
opportunities and limit consumers' ability to improve their 
economic circumstances, including through access to home 
ownership and education. The Fair Housing Act (FHA) and Equal 
Credit Opportunity Act (ECOA) were enacted to help ensure 
consumers are treated fairly when offered financial products 
and services. The Federal Reserve supervises the institutions 
it oversees for compliance with these laws to ensure that banks 
do not discriminate on the basis of race, color, national 
origin, sex, religion, marital status, familial status, age, 
handicap/disability, receipt of public assistance, and the good 
faith exercise of rights under the Consumer Credit Protection 
Act (collectively, the ``prohibited bases'').
    The Federal Reserve's fair lending supervisory program 
reflects our commitment to promoting financial inclusion and 
ensuring that the financial institutions under our jurisdiction 
fully comply with applicable Federal consumer protection laws 
and regulations. In studying the benefits and challenges of 
fintech, including AI, we look at the potential risks of 
introducing or amplifying bias. It is important that we 
understand how complex data interactions may skew the outcomes 
of algorithms in ways that undermine fairness and transparency. 
We review the use of fintech, including AI, in consumer lending 
as part of our supervisory program, including evaluating 
whether banks' use of AI creates consumer protection risks.
    In addition to our supervisory work, we proactively support 
financial institutions in their efforts to guard against fair 
lending risks through outreach efforts that promote sound 
compliance management practices and programs, including with 
respect to the use of AI. Outreach efforts include Consumer 
Compliance Outlook, a widely subscribed Federal Reserve System 
publication focused on consumer compliance issues which has 
included several focus pieces on the use of technology in 
banking, its companion webinar series, Outlook Live, as well as 
the Consumer Compliance Supervision Bulletin, which had an 
issue dedicated to fintech. We continue to engage with public 
stakeholders and to study the benefits and challenges of 
fintech, including potential risks of amplifying bias and 
inequitable outcomes. We hosted a public symposium dedicated to 
leading academics discussing AI and bias and held an 
interagency ``Ask the Regulator'' webinar on banks' use of AI 
in December 2020.
    The March 2021 interagency RFI on AI includes a section 
dedicated to fair lending, seeking input on techniques 
available to facilitate or evaluate the compliance of AI-based 
credit determination approaches with fair lending laws; the 
risks that AI can be biased and/or result in discrimination on 
prohibited bases and how to reduce any such risks; how existing 
principles and practices aid or inhibit evaluations of AI-based 
credit determination approaches for compliance with fair 
lending laws; and challenges financial institutions may face 
when applying internal model risk management principles and 
practices to the development, validation, or use of fair 
lending risk assessment models based on AI.
                                ------                                


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

Q.1. I want to address your work with the International 
Association of Insurance Supervisors and the current monitoring 
period of the Insurance Capital Standard.
    While these terms might not mean much to the average South 
Carolinian, a bad outcome will mean that the average South 
Carolinian will have their access to retirement products and 
insurance services severely restricted. Recognition of O.S. 
insurance capital standards as outcome-comparable to the ICS is 
the ultimate and measurable goal here.
    In speaking on this topic to the National Association of 
Insurance Commissioners, you stated that if differences between 
international insurance markets were significant, ``a one-size-
fits-all methodology could produce unintended consequences, 
send false signals to regulators or capital markets, and 
ultimately be destabilizing.'' Europeans do not have a need for 
private-sector retirement products. Or private health 
insurance. Our markets are radically different. A one-size-
fits-all approach to capital regulation will be a disaster.
    Vice Chair Quarles, you are one of the most powerful 
international regulatory voices in the world. You have 
extensive relationships with the key financial regulatory 
personnel--around the globe. I strongly urge you to commit to 
using all necessary political capital to have the O.S. system 
of insurance regulation formally deemed as equivalent at the 
IAIS before your tenure at the Federal Reserve comes to a 
close.
    Is the Federal Reserve prepared to vote in favor of the 
time-tested O.S. system of insurance regulation and deem group 
capital measurement standards as preferable and outcome 
comparable to the ICS? Perhaps better said, are you going to 
stand up for both my constituent policyholders and American 
insurers?

A.1. Yes, the Federal Reserve is committed to standing up for 
U.S policy holders and insurers.
    While it is important to note that none of the standards 
set by the International Association of Insurance Supervisors 
(IAIS) have binding effect on the United States, we believe 
that it is in our national interest to engage in the 
international insurance standards-development process so that 
it produces standards that protect the U.S. market and U.S. 
consumers when foreign insurers operate here through their U.S. 
subsidiaries and that are appropriate for U.S. companies 
operating abroad in a similar fashion.
    The Federal Reserve advocates for the U.S. approach to 
insurance regulation at the IAIS. To assess the adequacy of 
group capital, U.S. regulators have proposed aggregating 
existing legal entity capital requirements, referred to as the 
Aggregation Method (AM). The Federal Reserve Board (Board) 
proposed a similar approach, termed the Building Block Approach 
(BBA), for depository institution holding companies 
significantly engaged in insurance activities. The National 
Association of Insurance Commissioners and the States have 
proposed a similar approach, the Group Capital Calculation 
(GCC). The Federal Reserve will continue to advocate for the AM 
to be deemed an outcome-equivalent approach for implementation 
of the Insurance Capital Standard.

Q.2. I am very interested in the promulgation of the final rule 
applying capital standards to insurance companies that own 
banks. I am concerned that the proposed rule would impose a 
separate ``Collins Amendment'' calculation on certain insurance 
companies, based solely on their business structure. I do not 
believe this separate calculation to be statutorily required 
and it runs directly counter to the sole reason Congress 
enacted a--law in 2014--to prevent banking capital standards 
from being imposed on insurance companies. Will you commit to 
resolving this issue to better reflect the will of Congress in 
the final rule?

A.2. As part of the Board's notice ofproposed rulemaking 
regarding capital requirements for depository institution 
holding companies that are significantly engaged in insurance 
activities (proposal), the Board proposed to establish a 
section 171 calculation to comply with section 171 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act), which, in part, requires the Board to establish 
minimum risk-based capital requirements for depository 
institution holding companies on a consolidated basis. The 
proposed section 171 calculation would satisfy the requirement 
in section 171 of the Dodd-Frank Act to establish a minimum 
risk-based capital requirement on a consolidated basis for 
depository institution holding companies, while excluding from 
this calculation State-regulated insurers to the full extent 
permitted by the Insurance Capital Standards Clarification Act 
of 2014 (the Clarification Act).
    The Board invited public comment on all aspects of the 
proposal, including the section 171 calculation. Several 
comments suggested that the Building Block Approach (BBA) would 
comply with the statutory requirements without an additional 
calculation because the BBA's minimum requirement would not be 
less than the generally applicable capital requirement.
    Consistent with the Administrative Procedure Act, the Board 
will consider the comments on the proposal, the requirements of 
section 171 of the Dodd-Frank Act (as amended by the 
Clarification Act), and other provisions of law, before making 
a final rule. The Board continues to consider whether the 
proposed section 171 calculation is necessary in order to 
ensure that minimum risk-based capital requirements for 
depository institution holding companies that are significantly 
engaged in insurance activities are established on a 
consolidated basis.

Q.3. In recent weeks, you stated: ``Today, the U.S. banking 
system is actually more liquid and better capitalized than it 
was a year ago, with over $100 billion in additional loan loss 
reserves, leaving it well-positioned to weather future 
shocks,'' and ``[t[he stress testing program not only prepared 
banks for a period of prolonged hardship; it also clarified 
their health and resilience as the COVID event progressed.''
    How do you reconcile these statements with the fact that 
the Federal Reserve is planning to propose Basel III 
finalization rules this year that will potentially drive a 
large increase in bank capital requirements?

A.3. As I have often stated, the levels of loss absorbing 
capital in the banking system that have largely prevailed 
throughout my term at the Federal Reserve, are generally 
appropriate. Strengthened by a decade of improvements in 
capital, liquidity, and risk management, banks have continued 
to be a source of strength during the past year. As we work to 
implement the Basel III reforms in the United States, we will 
aim to maintain these levels of overall strength in our bank 
capital requirements.

Q.4. As the Federal Reserve works to complete its economic 
analysis to support further Basel III implementation, will the 
Fed commit to completing an analysis of the proposed revisions 
on all categories of subject banking organizations, including, 
for example, IHCs, which have been left out of some prior 
quantitative impact studies that focused only on domestic bank 
holding companies?

A.4. As a general matter, economic impact analyses associated 
with proposed rulemakings focus on the banking organizations to 
which a given proposal would apply. Under the current capital 
framework, the Basel-based advanced approaches apply to 
Category I organizations (U.S. global systemically important 
firms) and Category II organizations (firms of global scale 
with more than $700 billion in assets or more than $75 billion 
in cross-jurisdictional activity). This is consistent with the 
approach the Federal banking agencies described in the 2019 
tailoring rule that is, applying requirements that reflect 
agreements reached by the Basel Committee is appropriate for 
the risk profiles of banking organizations in these two 
categories. As of 2021, no intermediate holding company (IHC) 
exceeds the relevant thresholds to qualify as a Category I or 
II organization and therefore no IHC is currently subject to 
the advanced approaches framework. While all IHCs are currently 
classified as Category III or below, some IHCs could rise to 
Category II status in the future depending on their activities 
in the United States. As we develop the proposal to implement 
the outstanding Basel III capital reforms in the United States, 
including determining the proposed scope of application, our 
related analysis would incorporate any firms that would be in 
scope.

Q.5. And finally, how does the Federal Reserve intend to 
release the economic impact analysis to ensure transparency of 
impact across all categories of institutions?

A.5. Consistent with our general practice, we would include a 
discussion of economic impact of the proposed rule to implement 
the outstanding Basel III reforms in the United States in the 
Federal Register.
                                ------                                


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

Q.1. As a follow-up to your exchange with Senator Warren on the 
Large Institution Supervision Coordinating Committee (LISCC), 
would any changes made to LISCC designations over your term 
have prevented what happened at Archegos?

A.1. The Archegos-related exposures that ultimately led to 
substantial losses in the non-U.S. operations of certain non-
U.S. banks were largely established while the U.S. operations 
of those banks were supervised as part of the LISCC portfolio 
at the Federal Reserve, so the change of supervisory portfolio 
was not a factor in the practices that led to the losses. Nor 
was the Archegos incident an example of a failure of Federal 
Reserve supervision, whether LISCC or non-LISCC: the great bulk 
of the losses associated with Archegos occurred in non-U.S. 
banks, in activities outside the U.S. bank regulatory perimeter 
that are supervised by authorities other than the Federal 
Reserve. Only a small portion of the Archegos-related losses 
fell within the Federal Reserve's jurisdiction, and in our 
annual stress tests of the U.S. banking system we regularly 
ensure the ability of the U.S. system to withstand capital 
market activity losses that are as much as 100 times as large 
as the Archegos losses in the United States, and indeed nearly 
9 times as large as the aggregate Archegos losses in the entire 
global banking system.
    Finally, the realignment of certain banks from the LISCC 
supervisory portfolio to our Large and Foreign Banking 
Organization (LFBO) portfolio will not make future such 
incidents any more likely. LFBO supervision is not ``weaker'' 
supervision; it is supervision of firms in a manner that allows 
the comparison of firms with similar risks to each other. The 
realigned banks have reduced the size of their U.S. operations 
dramatically, so the U.S. risks of those operations are now 
more similar to those of similarly sized foreign banks that 
have already long been supervised in our LFBO portfolio than 
they are to the U.S. global systemically important banks 
(GSIBs) that now constitute our LISCC portfolio.
    More specifically, the Federal Reserve Board (Board) sorts 
firms into supervisory portfolios based on considerations 
outlined in the Board's tailoring rule and consistent with the 
Economic Growth, Regulatory Relief and Consumer Protection Act 
of 2018. Specifically, the Board applies regulatory standards 
to firms on the basis of size, cross-jurisdictional activity, 
nonbank assets, weighted short-term wholesale funding, and off-
balance-sheet assets.
    The Federal Reserve supervises the intermediate holding 
companies of foreign banking organizations under the Large 
Foreign Banking Organization portfolio with other large and 
complex firms that are not U.S. GSIBs and subjects them to 
standards of supervision and regulation commensurate with their 
risk. The goal of these stringent standards across supervisory 
portfolios is to require these firms to hold sufficient capital 
and liquidity. No matter the supervisory portfolio, supervisory 
focus is directed to drivers of risk for individual firms to 
ensure that effective systems are in place such that risks like 
those resulting from the Archegos default are identified in a 
timely manner and appropriately analyzed and mitigated such 
that associated losses are nonsystemic if they do occur.
                         ------                                

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

Q.1. In recent testimony before the House Financial Services 
Committee, who stated that the Fed's supervisory stance was not 
materially deficient and that a ``bulk'' of the losses related 
to Archegos occurred outside the United States, and thus, did 
not present a material risk to the U.S. economy. You also said 
any regulatory proposals in response would be premature and 
this ``remains largely a risk management issue.'' Given your 
remarks and the fact that both LISCC and non-LISCC firms, which 
are subject to the same heightened capital and liquidity 
requirements, had exposure to Archegos, is it a leap to suggest 
that placing all of the recently removed firms back into LISCC 
would have prevented the losses from occurring?

A.1. The Archegos-related exposures that ultimately led to 
substantial losses in the non-U.S. operations of certain non-
U.S. banks were largely established while the U.S. operations 
of those banks were supervised as part of the LISCC portfolio 
at the Federal Reserve, so the change of supervisory portfolio 
was not a factor in the practices that led to the losses. Nor 
was the Archegos incident an example of a failure of Federal 
Reserve supervision, whether LISCC or non-LISCC: the great bulk 
of the losses associated with Archegos occurred in non-U.S. 
banks, in activities outside the U.S. bank regulatory perimeter 
that are supervised by authorities other than the Federal 
Reserve. Only a small portion of the Archegos-related losses 
fell within the Federal Reserve's jurisdiction, and in our 
annual stress tests of the U.S. banking system we regularly 
ensure the ability of the U.S. system to withstand capital 
market activity losses that are as much as 100 times as large 
as the Archegos losses in the United States, and indeed nearly 
9 times as large as the aggregate Archegos losses in the entire 
global banking system.
    Finally, the realignment of certain banks from the LISCC 
supervisory portfolio to our Large and Foreign Banking 
Organization (LFBO) portfolio will not make future such 
incidents any more likely. LFBO supervision is not ``weaker'' 
supervision; it is supervision of firms in a manner that allows 
the comparison of firms with similar risks to each other. The 
realigned banks have reduced the size of their U.S. operations 
dramatically, so the U.S. risks of those operations are now 
more similar to those of similarly sized foreign banks that 
have already long been supervised in our LFBO portfolio than 
they are to the U.S. global systemically important banks 
(GSIBs) that now constitute our LISCC portfolio.
    More specifically, the Federal Reserve Board (Board) sorts 
firms into supervisory portfolios based on considerations 
outlined in the Board's tailoring rule and consistent with the 
Economic Growth, Regulatory Relief and Consumer Protection Act 
of 2018. Specifically, the Board applies regulatory standards 
to firms on the basis of size, cross-jurisdictional activity, 
nonbank assets, weighted short-term wholesale funding, and off-
balance-sheet assets. The Federal Reserve supervises the 
intermediate holding companies of foreign banking organizations 
under the Large Foreign Banking Organization portfolio with 
other large and complex firms that are not U.S. GSIBs and 
subjects them to standards of supervision and regulation 
commensurate with their risk. The goal of these stringent 
standards across supervisory portfolios is to require these 
firms to hold sufficient capital and liquidity. No matter the 
supervisory portfolio, supervisory focus is directed to drivers 
of risk for individual firms to ensure that effective systems 
are in place such that risks like those resulting from the 
Archegos default are identified in a timely manner and 
appropriately analyzed and mitigated such that associated 
losses are nonsystemic if they do occur.

Q.2. Thank you for your letter to update me last week on the 
Board staff efforts to analyze and consider different 
approaches to update Regulation T to make additional OTC 
securities margin eligible. I appreciate the desire that any 
amendments to Reg T would be ``straightforward to implement'' 
and ``cover a meaningful set of OTC stocks that are liquid but 
not already margin-eligible.'' As you know, these rules have 
not been updated since 1999, when Nasdaq was the primary 
electronic market for OTC securities. Since then, there have 
been significant developments in the OTC marketplace, including 
Nasdaq becoming an exchange over 14 years ago, and the many 
improvements made since then to increase transparency, 
liquidity, and information in OTC securities. An update on the 
margin eligibility for OTC securities is long overdue. Can you 
give me a timeframe for when I can expect to see a proposal 
from the Fed on this issue?

A.2. Board staff are continuing to explore avenues for 
increasing the universe of equity securities eligible as 
collateral for securities trading at broker-dealers. Board 
staff are consulting with industry representatives and other 
regulators in an attempt to develop a meaningful standard for 
assessing the creditworthiness, as collateral, of stocks not 
traded on a U.S. securities exchange. These consultations 
involve a number of details and issues that are not in our 
control and I thus cannot yet give a definitive timetable for 
when this effort will be complete. We remain however actively 
engaged in the matter.

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