On March 5, 2018, the Fed’s new Vice Chairman for Supervision, Randal Quarles, spoke at the Institute of International Bankers annual conference. He wanted to express his thoughts on the appropriate regulatory environment for foreign banks in the U.S.

He suggested that large foreign banks with complex U.S. operations contributed to instability in the U.S. during the financial crisis and required extraordinary support from the regulators. These same banks expanded dramatically just before the crisis, but the regulators did not adjust to the risks created by these activities. He suggested that these banks needed greater “resiliency” to meet challenging times.

To bolster such “resiliency” the Fed focused on the following reforms—capital, liquidity, stress testing and resolution planning—and most significantly the required establishment of the intermediate holding company the (“IHC”). He thinks these items have created a more “resilient” financial system, but there is still work to be done to maintain the effectiveness of these changes but enhance transparency and simplicity. He thinks there are many areas to focus on, but he highlighted two areas where additional flexibility is warranted: enhanced prudential standards and Volcker.

Enhanced Prudential Standards

His talk mainly focused on the largest banks with complex U.S. businesses and the goal to make sure these businesses had sufficient capital and liquidity. He thinks the Fed met its goals in this area and foreign banks now operate on the same footing as U.S. banks. Nonetheless, he wants foreign banks to understand that the Fed will be willing to alter the requirements of its rules where warranted by a particular bank’s business or risk profile. 

Risk Committees. He noted that the Fed has been flexible about the establishment of the U.S. Risk Committee—allowing some banks to use their global committees, or even use U.S. management committees so long as the global board of directors gave oversight.

Stress Testing. The Fed is ready to accept different forms of stress testing so long as the test is on a consolidated basis and reviewed by home country regulators.

Overall, he is open to tailoring the level of supervision applied to a foreign bank based on the risk such bank presents to the U.S.

The Volcker Rule

In the most candid assessment ever uttered by a regulator, he said the Volcker rule is not working well. He characterized the rule as exceedingly complex and the Fed’s staff is behind simplifying the rule and reducing the burdens. He wants to make broad changes to the compliance burden especially for foreign banks with limited U.S. operations and small trading books.

Extraterritoriality. He made special mention of the burden created for foreign banks outside the U.S. and noted that the Fed has restarted the process of new rules for easing this burden. This process will be a priority for him. He wants to insure that foreign funds offered by foreign banks outside the U.S. to foreign investors will continue to benefit from the stay on enforcement of the Volcker rule. He wants to make the exemptions for foreign banks offshore trading activities easier to apply and understand.