WASHINGTON: The Federal Reserve is overhauling how it manages bank stress tests – the most difficult regulatory hurdle established after the 2008 financial crisis – and the agency’s supervision chief argues that a key limit on a lender’s leverage shouldn’t be part of the exams.
Randal Quarles, the Fed’s vice chairman for supervision, defended the regulator’s plans to remove that element, which has been particularly difficult for firms such as Goldman Sachs Group Inc and Morgan Stanley, telling lawmakers on Wednesday that he doesn’t see the move as weakening regulation.
Quarles said last week that the agency is considering concessions that could address some of Wall Street’s biggest complaints about the tests, including making the process more transparent and getting rid of the possibility that banks can publicly fail and have their capital plans rejected.
He also said the Fed might scrap the demand that banks still clear minimum leverage thresholds after the stress events laid out in the tests - a bar that he called illogical.
“The stress test is a very firm-specific, risk-based test,” Quarles said at a House Financial Services Committee hearing. “The leverage ratio is intended to be non-risk-sensitive and to serve as a backstop, so when you put that into the stress test, you’re basically confusing those two things.”
Representative Maxine Waters, the panel’s top Democrat and likely its next chairman, fired a warning shot in her opening remarks at the hearing.
“The days of this committee weakening regulations and putting our economy once again at risk of another financial crisis will come to an end” when Democrats take control of the House in January, she said. — Bloomberg
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