Kristian Rouz — the Federal Reserve's top supervision official — has laid out his deregulatory agenda aimed at easing controls over bank liquidity and capitalization. The central bank is set to welcome its new chair, Jerome Powell, in February, a man widely expected to bring monetary policies in line with President Trump's approach to the economy and trade.
The Fed's Vice Chair of supervision Randal Quarles said the central bank will focus on several crucial changes in its regulation of Wall Street. These include relaxed capital rules, proprietary trading, and a crackdown on taxpayer bailouts at the central bank's or the government's expense.
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The looming changes are poised to boost financial sector responsibility, self-reliance, and competitiveness, while also allowing commercial banks to increase lending. More flexible proprietary trading rules — including a gradual revocation of the Volcker rule — are expected to allow banks to seek profits on the stock market by reinvesting gains in the non-financial sector of the economy.
"If we have a choice between two methods of equal effectiveness in achieving a goal, we should strive to choose the one that is less burdensome for both the system and regulators," Quarles said in a speech to financial sector attorneys.
The Fed is seeking to ease regulations imposed after the 2007-2009 financial crisis, as many policymakers, as well as financial industry experts, see those rules as hindering banking sector profitability, efficiency, and competitiveness.
Additionally, the inability of banks to increase lending has adverse effects to broaden economic growth, as many enterprises in non-financial industries are struggling to secure loans to expand their operation, according to some.
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"Now is an eminently natural and expected time to step back and assess those efforts," Quarles noted. "It is our responsibility to ensure that they are working as intended and — given the breadth and complexity of this new body of regulation — it is inevitable that we will be able to improve them, especially with the benefit of experience and hindsight."
Quarles was appointed by Trump in October and is perceived as a more business-friendly policymaker. The President's effort to ease the burden of excessive regulation includes eliminating many existing rules, as well as rescinding two old regulations per each one new rule enforced.
Trump said last month that his administration had achieved progress during his first 11 months in office. The deregulation effort is expected to gain momentum this year, as the central bank joins efforts with the White House.
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Quarles emphasized the harmful effects of a "one-size-fits-all" approach to financial sector supervision, and pledged a sweeping reform to make regulation less prominent, yet more efficient.
"I believe we at the Federal Reserve have the responsibility to ensure that we do further tailoring for the institutions that remain subject to our rules to ensure that regulation matches the risk of the firm," Quarles said.
He said non-systemically-important (non-GSI) banks could fail without posing risks to US financial stability. Therefore, either the bailout policies or excessive policing are redundant in this segment of the banking sector.
Quarles said current liquidity and capitalization regulations make little or no difference between GSI and non-GSI banks, enforcing similar tough standards and reserve requirements on both. By revising the Fed's rules, Quarles said, the central bank could promote higher non-GSI bank lending activity, but the banks will have to responsibly take on the higher risks.
The Fed's supervision chief, however, provided little detail of how the central bank will tackle the issues. Quarles only briefly outlined the general direction of the Federal Reserve's new regulatory paradigm, suggesting smaller banks — as well as some Wall Street financial institutions — would benefit from the looming changes.
