Warren: Financial system would be ‘safer’ with Quarles at the Fed

Diving Brief:

  • Sen. Elizabeth Warren, D-MA, blasted Federal Reserve Vice Chairman for Oversight Randal Quarles during a hearing tuesdaysaying, “Our financial system will be safer when you’re gone.”
  • The testy exchange came as Warren asked Quarles if he was sorry abolition of Credit Suisse and other foreign banks in November under the umbrella of the Fed’s Coordinating Committee on Large Institutional Supervision. Credit Suisse has taken $5.5 billion in losses four months later for failing to respond to margin calls during the collapse of investment firm Archegos Capital Management.
  • Quarles’ term as the Fed’s chief banking supervisor expires Oct. 13, and Warren, in the final remark in his round of questioning, urged Chairman Joe Biden “to fulfill [Quarles’s] role with someone who will actually ensure the security of our financial system. Besides the vice presidency, Quarles serves a term as Fed governor until 2032, but central bank officials often resign if they are not reappointed to their leadership positions.

Overview of the dive:

The question is how Credit Suisse’s change in classification may or may not have affected supervision, and whether the Fed could have predicted any risk management vulnerabilities within the bank.

During 2019 stress testthe Fed “has identified weaknesses in the assumptions used by [Credit Suisse] to project stress business losses that raised concerns about the company’s capital adequacy and capital planning process,” Warren said at the hearing, citing an assessment.

“Do you now agree that you made the wrong decision to weaken the supervision of a bank like Credit Suisse?” Warren asked Quarles.

The Fed hasn’t weakened oversight of Credit Suisse, Quarles said, adding that “officials who oversee Credit Suisse and our major banking and foreign banking operations would disagree with you.”

On the contrary, Quarles said, the 2020 classification change reflected the smaller U.S. footprint of Credit Suisse and other foreign banks with a similarly sized U.S. operations.

Additionally, Quarles said, “the vast majority of Archegos’ losses have occurred outside of the United States,” in jurisdictions that the Fed does not oversee.

Warren expressed doubts that the United States would be safe from global financial disruption simply because she is not from there.

“We dodged a bullet with Archegos collapsing this time, but what slipped through the net by regulators, to contain those losses when things go wrong, was relatively small compared to what might have slipped through. “Warren said Tuesday. “It could have been an even bigger failure, and that’s because instead of protecting the system, you spent your time at the Fed cutting holes in the safety net.

Warren is not the first lawmaker to openly want a regulator to end his term. Former Consumer Financial Protection Bureau director Kathy Kraninger was often the butt of derision from Democrats during her tenure. House Financial Services Committee Chairwoman, Rep. Maxine Waters, D-CA, began her remarks during a July 2020 hearing by saying, “I would like to welcome Director Kraninger to what I hope will be his last appearance before this committee as director of the CFPB.

Warren, during Kraninger’s appearance before the Senate Banking Committee a day earlier, called the former CFPB chief’s leadership a “dismal failure.”

“Based on your actions in this pandemic, you should step down,” she told Kraninger in July.

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Don F. Davis