Federal Reserve Board ("FRB") Vice Chair of Supervision Randal K. Quarles addressed challenges to financial stability and the economy due to COVID-19. He also reviewed the findings of the Financial Stability Board ("FSB") evaluation of "too-big-to-fail" reforms.
In a speech to financial professionals, Mr. Quarles described many challenges to financial stability caused by the reaction to the pandemic including "market turmoil" that reflected "severe uncertainty," major re-pricing and volatility in global financial markets, and the disruption in the flow of credit to the economy. Mr. Quarles highlighted the early "dash for cash" reaction as firms drew down their lines of credit, and investors indiscriminately sold assets to obtain liquidity.
Mr. Quarles described the context and certain responses to these challenges. First, he noted the difference between the present financial crisis and the 2007-08 global financial crisis, explaining that (i) the present economic turmoil is a result of factors outside of the financial system and (ii) financial systems are more resilient than they were in 2007-08 because of the package of reforms endorsed by G20 leaders. Second, he described a recent FSB) evaluation of "too-big-to-fail" reforms, which found that (i) banks have bolstered their capacity for total-loss absorption, and (ii) investors are increasingly expecting that failing banks will be resolved as opposed to being bailed out.
Mr. Quarles credited the efforts of regulatory authorities in developing resolution frameworks that emphasize maintaining financial stability and reducing exposure to taxpayers. Despite noting substantial improvements in bank recovery and resolution planning, Mr. Quarles urged FSB jurisdictions to operationalize reforms so their benefits can be realized, and underscored the importance of better understanding the risks and benefits of nonbank financial intermediation.
Originally published July 08, 2020.
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