The Federal Reserve's report on financial regulation in Congress

Randall Quarles, the Federal Reserve's vice chairman in charge of financial institution supervision and administration, recently went to Congress to present an analysis report on the financial supervision situation on behalf of the Federal Reserve in the Senate Committee on Banking, Housing, and Urban Affairs. This article describes his analysis. The past two months have been an unusually difficult period for the economy. Congress has shown extraordinary will to act in a concerted and speedy manner to address this difficulty and its wide-ranging consequences. I thank you for your commitment to continue our work together and for the opportunity to attend. The report that accompanies my testimony reviews the regulatory measures taken by the Federal Reserve to address the economic and financial challenges brought about by the current economic contraction. Instead, I'll briefly outline ways the Federal Reserve supports the country's economy, maintains credit supply, and reduces the impact of various controls on public health issues on the economy. This approach applies not only to our efforts so far, but also to the efforts we — and the financial sector — will be making over the next few months to support households and businesses.

It is worth acknowledging at all times the profound impact of the crisis on the country's financial system and economy. The steps taken to contain the pandemic triggered a profound and sudden global financial shock. Uncertainty continues to creep up in the financial system. Savers and investors, consumers, and companies all participated in a safe escape in search of cash stability to overcome market fluctuations. No port is immune to the ensuing storm, from commercial paper to US Treasury bonds, to access asset classes. The stress it causes is pervasive as families and businesses struggle to pay their bills, pay their expenses, and maintain their everyday lives. More than a decade ago, US banking organizations faced different crises, and their structural weaknesses fueled and intensified ongoing pressure. 12 years of work by Congress, financial institutions, and regulators to ensure that this dynamic does not happen again. Reforms, as well as other measures taken by the industry, have increased the quantity and quality of bank capital, enabling banks to withstand severe economic downturns and continue to lend. They establish higher levels of liquidity, so banks are able to meet the needs of customers and counterparties. They need improved risk management so banks can avoid unexpected losses lurking in their books. They have increased operational resilience, so banks can open doors and turn on lights after shocks. As a result, banks entered this crisis in a strong position.

Over the past two months, the Federal Reserve has taken more than 30 regulatory actions to ensure that financial institutions can use this advantage to support consumers, households, and businesses. We recommend that institutions cooperate constructively with clients to provide them with responsible loan modifications and microfinance. This is a safe and sound banking practice, which is more suitable for this extraordinary period. We've made practical adjustments to certain documentation and compliance requirements to ensure the continued flow of credit while maintaining important consumer protections. We have delayed implementation of the new regulatory measures, temporarily shifting our regulatory activities from on-site inspections to off-site monitoring to reduce the operational burden and allow the company to focus on customer needs. We have made targeted (and where appropriate, temporary) changes to capital requirements so that companies can more effectively use their balance sheets to support customers and the operation of financial markets. We support banks' ability to meet customer requirements by reducing reserve requirements to zero, and take steps to increase the availability of discount windows to meet liquidity needs.

Thanks to these measures and the solid foundation upon which they were established, banking organizations are well placed to be a source of strength rather than pressure during the current crisis. They are able to lend to reputable companies that suddenly have no access to capital markets or are simply trying to keep more cash. They have been able to absorb new deposits and prepare families and businesses to move on the difficult path. They have been able to handle a large amount of reaction from investors to high volatility. As channels of official sector support, they helped stabilize the financial system and restore market functions. Pressure on financial markets has eased due to the actions of Congress, executive agencies, central banks, and other private and public institutions around the world. Serious economic damage to measures to contain the pandemic remains, and households and businesses are still being profoundly affected. Financial institutions now have an important role to play in addressing this chaos as a bridge between the beginning of this crisis and the completion of our economic recovery. The current crisis is very different from the one we faced ten years ago. The most fundamental, however, is the origin of the stress. 2008 was the peak of financial panic — nurtured in the financial sector, triggered by financial market turmoil, combined with the weakness of financial institutions, and development into the real economy through financial channels. The uncertainty that causes fear was born in the financial system, and policies aimed at the financial system can directly solve this problem.

Today's uncertainty is different. The financial sector is already feeling its impact, and financial policies have helped limit losses. However, it has roots elsewhere and penetrates deep into the bone marrow of the real economy. They are fixated on pressing questions with no ready-made answers: When will the fears about the pandemic pass? When the world was like, what would it be like? How do we get back to normal? None of us can answer these questions with certainty. However, we can affirm our commitment to support those who bear the heaviest burden of the current crisis and help them bear that burden by ensuring that the banking sector is strong and resilient to meet the country's current economic needs. Over the past two months, the system has shown resilience. Banking organizations use capital buffers to support significant increases in loans, particularly through clients' long-term credit lines. The first wave of severe financial pressure has begun to subside. However, the storm wasn't over. Banking organizations must continue to work constructively with borrowers to provide them with the flexibility to overcome hardships they could not have anticipated and caused. Banks must still meet the operational challenges of a public health emergency. Ultimately, banking organizations can only be as strong as the economy they serve. As responses to these public health issues continue to unfold, the strength of America's financial sector will reflect and depend on the strength of the US economy. This power, in turn, will depend on the calibration and effectiveness of our public health responses.

We at the Federal Reserve are seeking to play our part responsibly and effectively. The tools we have are tools no country wants to need; they use time that no country should want to face. We may need to do more before the current crisis is over. We can only guarantee to fulfill the demands of this moment.