Warren, Quarles spar over Fed role in banks’ Archegos losses

WASHINGTON — The Federal Reserve’s top bank supervision official on Tuesday defended the central bank’s removal of certain foreign banks from a monitoring program for systemically important institutions, while confirming regulators’ interest in setting up an interagency working group on cryptocurrency.

Fed Vice Chairman for Supervision Randal Quarles took tough questioning from Sen. Elizabeth Warren, D-Mass., about losses suffered by Credit Suisse and other foreign banks in the Archegos Capital meltdown in March. Credit Suisse, which lost about $5.5 billion after the investment firm failed to meet margin calls, was among foreign banks that the Fed had removed last year from the Large Institution Supervision Coordinating Committee’s portfolio.

“At the time you justified dropping these banks from increased supervision on the ground that these banks … ‘significantly shrunk their U.S. footprint, and their U.S. operations are much less risky than they used to be,’” Warren said at a Senate Banking Committee hearing, quoting Quarles. “Your timing 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.”

Quarles argued that the bulk of losses stemming from the Archegos incident occurred outside of the U.S., and that the Fed does not supervise foreign bank operations that take place overseas.

“I said it was more appropriate to supervise them with other foreign banks of the same-size footprint of the United States, which is what we do,” he said.

Still, Warren shot back that she was “stunned” by Quarles’ argument, and accused him of rolling back regulations intended to prevent massive failures.

“It was more appropriate to supervise them with other foreign banks of the same-size footprint of the United States, which is what we do,” said Fed Vice Chair of Supervision Randal Quarles.

Bloomberg News

“Instead of protecting the system, you spent your time at the Fed cutting holes in the safety net,” she said. “Your term as chair is up in five months, and our financial system will be safer when you are gone.”

Quarles also discussed interagency efforts to regulate cryptocurrency-related activities, and concurred with other regulators about the need to assess climate change risks in the banking system.

Much of the hearing revolved around efforts by the federal bank regulators to create a joint framework dealing with digital assets.

The banking agencies have grown increasingly focused on cryptocurrencies as they have become more popular but have also experienced pricing volatility. The Office of the Comptroller of the Currency has recently issued guidance for banks that provide custody service for digital assets and approved numerous crypto firms for national trust charters.

Quarles said the Fed, OCC and Federal Deposit Insurance Corp. are working to develop a digital currency regulatory regime that could subject cryptocurrencies like Bitcoin and Ethereum to certain capital and operational requirements if they are tied to banks. His comments came after Acting Comptroller of the Currency Michael Hsu last week indicated that the agencies plan to form an “interagency policy sprint team” on digital assets.

“We along with the OCC and the FDIC are engaged right now in what we’re calling a ‘sprint’ in seeking to pull together views on exactly that,” Quarles said. “In the course of that, if there are gaps in the regulatory framework, we will also make those known.”

Several Fed officials, including Chair Jerome Powell, have noted that while digital currencies can harness innovation and potentially expand access to instant payments, they could also pose a risk to investors and the financial system.

Some lawmakers also expressed the same concerns during Tuesday’s hearing.

“I see some value in distributed ledger [technology], but the volatility amongst some of these entities is concerning to me,” said Sen. Mark Warner, D-Va. “I see some of the illicit use from my role on the Intel Committee.”

Quarles cautioned that the agencies are “in the early stages of the sprint.” But the regulators would be able to disclose some of the interagency work on digital assets “soon,” he said.

“It would be premature for me to tell you where that’s 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,” he said.

Following sharp Bitcoin price fluctuations, Powell released a video message last week saying that the central bank would publish a discussion paper this summer detailing its current thinking on digital payments and central bank digital currency.

The Fed has not yet decided whether to establish a so-called digital dollar, but is engaged in several research efforts to explore how a central bank digital currency might work in practice.

“I’m glad to see the Fed moving forward with issuing a report on central bank digital currencies that will include public input,” said Sen. Chris Van Hollen, D-Md. “I don’t 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.”

Quarles said the Fed’s current efforts will likely lead to “a conclusion as to whether a CBDC is appropriate for the United States.”

“I think that’s very much an open question currently,” he said.

He also added that depending on how the Fed might decide to structure a hypothetical CBDC, it could need the legislative green light from Congress.

“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,” said Quarles, who added that a broader CBDC pilot program would also likely require legislation.

Meanwhile, Quarles said it was important for regulators to analzye potential risks from climate change on the financial system.

“It’s not only appropriate it’s incumbent on us,” he said.

However, Quarles said the Fed should tailor that analysis to the financial sector and not advocate for any particular policy response to climate change.

“Our job is ensuring the resilience of the financial system, not advancing a particular view of climate policy,” he said. “That’s for the Congress, perhaps other agencies. It’s not the job of the Fed or other financial regulators. And so we should remain focused on that approach to climate change, analysis as opposed to something broader.”

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