Fed Nominee Quarles: Bank Stress Tests Need More Transparency

By Andrew Ackerman and Ryan Tracy Features Dow Jones Newswires

Randal Quarles, President Donald Trump's pick to become the Federal Reserve's point person on financial regulation, told lawmakers Thursday he would support changes to the central bank's stress tests for big banks, embracing industry-backed efforts to boost their transparency.

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At his confirmation hearing before the Senate Banking Committee, Mr. Quarles criticized "the lack of transparency that has surrounded" the annual tests, which have become the key regulatory hurdle large U.S. banks face.

The remarks suggested Mr. Quarles, if confirmed, would be willing to go further than his predecessor, former Fed governor Daniel Tarullo, in publishing more information about how the tests are run. Industry officials have long demanded more details, in part to avoid embarrassing failures. Mr. Tarullo resisted disclosing certain information, saying it could allow banks to game the exams.

"I do think the Fed can look at being more transparent about those activities and do it in a way that doesn't reduce the effectiveness of those tests," Mr. Quarles said.

Mr. Quarles, who was testifying alongside Joseph Otting, Mr. Trump's pick for the comptroller of the currency, also called for "some refinements" to the postcrisis rule book for Wall Street, which he said has broadly made the financial system safer.

"As with any complex undertaking, after the first wave of reform, and with the benefit of experience and reflection, some refinements will undoubtedly be in order," Mr. Quarles said.

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The hearing is a crucial step to advance the nominees toward their expected confirmation in the coming months. The nominations require a simple Senate majority to pass, and Republicans control 52 of 100 seats in the chamber.

Both likely would represent more industry-friendly voices at the country's top bank regulators. The Trump administration already is conducting a review of Obama-era banking rules that it says go too far and curb lending.

No Republican criticized either nominee Thursday, but the pair quickly came under fire from Senate Democrats. Sen. Sherrod Brown of Ohio, the panel's top Democrat, highlighted positive remarks about the economy that Mr. Quarles made before the financial crisis while he was serving in the George W. Bush administration.

"Many of his statements leading up to the crisis lead me to wonder whether he was asleep at the switch or willfully turning a blind eye to Wall Street abuses," Mr. Brown said. Mr. Quarles said later at the hearing that he regretted some remarks highlighted by Mr. Brown.

Idaho Sen. Mike Crapo, the Republican who heads the panel, praised both Messrs. Quarles and Otting as "highly qualified."

Mr. Quarles, an investment-fund manager and former Treasury Department official nominated earlier this month, would become Fed vice chairman of supervision, taking on a job created by Congress in 2010. That post was never formally filled, although Mr. Tarullo effectively served in the role.

At Thursday's hearing, Mr. Quarles also said he would be open to revisiting the Volcker rule, which bans banks from certain types of trading and investing. He swatted away questions about bank capital requirements, saying, "I don't have a view as to whether they should be higher or lower."

In addition to his work on financial regulation, Mr. Quarles would weigh in on monetary policy as a member of the Fed's board of governors. The seven-seat board is currently short-staffed, with only four members.

Mr. Quarles didn't back away from his previous support of using clearly stated rules for setting monetary policy, but he did tell senators that he doesn't necessarily support the rule named for Stanford professor John Taylor, his former boss at the Treasury Department. "I'm not advocating the adoption of a Taylor rule to guide Fed policy," he said.

Mr. Quarles previously served in the Treasury Department in both Bush administrations. He left the government in 2006 and the following year became a managing director at private-equity firm Carlyle Group, investing in troubled banks. To join the Fed, he is leaving a job as managing director at Cynosure Group, a Utah investment firm backed by family offices, including the Eccles family, which Mr. Quarles married into.

Not much is known about Mr. Otting's regulatory views, though he adopted a similar tone to other Trump administration officials, who have called for a review of banking rules. On Thursday, Mr. Otting suggested he would be open to easing capital requirements that he said are "highly complex" and need "to be examined."

Mr. Otting has worked in banking for decades. In 2010, he was hired as chief executive of OneWest, now owned by CIT Group. At the time, he was a lieutenant of Treasury Secretary Steven Mnuchin, who was chairman of OneWest.

Democrats pressed Mr. Otting on allegations that the bank engaged in "robo-signing" during the foreclosure crisis, pushing borrowers out of their homes without properly reviewing their loan documentation. Mr. Otting said that although he signed a 2011 consent order laying out what regulators called faulty practices at the bank, he didn't agree with the findings.

"The error rate was incredibly low, and so my viewpoint is, is if you look at the actual facts, there is a false narrative," he said.

Mr. Otting would succeed Keith Noreika, the acting comptroller.

Write to Andrew Ackerman at andrew.ackerman@wsj.com and Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

July 27, 2017 13:47 ET (17:47 GMT)