May 25, 2021

At Hearing, Warren Calls On The Biden Administration to Replace Quarles As Soon As His Term Is Up

Video of Hearing Exchange (Youtube)

Washington, DC - In a Senate Banking, Housing, and Urban Affairs Committee hearing today, United States Senator Elizabeth Warren (D-Mass.) questioned Randal K. Quarles, Vice Chairman for Supervision at the Board of Governors of the Federal Reserve System, about his decision to weaken supervision for large foreign banks including Credit Suisse, which suffered the largest losses from the implosion of the hedge fund Archegos. 

In 2020, Quarles, whose job at the Fed is to oversee the safety and soundness of banks, announced his intent to weaken supervision for Credit Suisse, despite the giant bank's failure to accurately project its trading losses in the Fed's annual stress tests a year earlier. In March 2021, Credit Suisse suffered over $5 billion in losses following the risky betting and collapse of Archegos, to which Credit Suisse had a $20 billion exposure--an amount far greater than the bank was aware of. 

Credit Suisse's poor management of its Archegos holdings demonstrates that the Fed should have strengthened supervision of the bank following the stress test results. Instead, with the approval of Quarles, the Fed moved the bank from the supervision portfolio where it would have received the greatest scrutiny from regulators.  

Instead of protecting the financial system, Quarles has spent his time at the Fed cutting holes in the safety net. Quarles' term as Vice Chair is up in five months, and Senator Warren is calling on President Biden to fill his role with someone who will keep the financial system safe. 

Transcript: The Semiannual Testimony on the Federal Reserve's Supervision and Regulation of the Financial System
U.S. Senate Committee on Banking, Housing and Urban Affairs
Wednesday, May 25, 2021

Senator Warren: Last month, a hedge fund called Archegos imploded after making some very risky bets. And some of our biggest banks had loaned Archegos the money to make those bets - even though the hedge fund was managed by a guy who had already been charged with insider trading and banned by regulators from handling clients' money.

Now, those banks suffered $10 billion-that's 'billion' dollars-in losses as Archegos collapsed, with more than half of the losses hitting one bank in particular: Credit Suisse. 

So Vice Chair Quarles, your job at the Fed is to oversee the safety and soundness of our banks. And last year, you made the decision that Credit Suisse and a few other big foreign banks no longer should be required to participate in a Fed program that was designed to oversee the riskiest banks, the Large Institution Supervision Coordinating Committee, or LISCC. Is that right?

Vice Chair Quarles: Yes. Although, it didn't change the-- 

Senator Warren: So you're the one who said we're not going to do that. So at the time, you justified dropping these banks from increased supervision on the ground that these banks-and I have it here-"have significantly shrunk their U.S. footprint, and their U.S. operations are much less risky than they used to be."

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. 

So now, Vice Chair Quarles, before you told the banks like Credit Suisse that they didn't need extra scrutiny from regulators, before that, did you see any warning signs that these banks had some deficiencies in their risk management?

Vice Chair Quarles: Well, the losses that you're referring to, the great bulk of the Archegos losses, occurred outside the United States.

Senator Warren: Are you saying that losses outside the United States can't affect operations inside the United States by these large multinationals? Surely not.

Vice Chair Quarles: But we don't supervise their operations outside the United States. So their operations within the United States have shrunk exactly as I said. 

Senator Warren: So you're going to stick with your original play. You know, in 2019, back when Credit Suisse was subjected to the Fed's stress tests, the Fed "identified weaknesses in the assumptions used by the firm to project stressed trading losses that raise concerns about the firm's capital adequacy and capital planning process." In plain English: the Fed said that Credit Suisse's models just weren't realistic.  

So I want to put the timeline together here. In 2019, Credit Suisse fails a test because it can't accurately project its trading losses. In 2020, you, Mr. Quarles, decide that Credit Suisse should be subject to weaker supervision. And then in 2021, a headline shows up in the Wall Street Journal that reads "Credit Suisse had surprise $20 billion exposure to Archegos investments." 

So let me ask this. Mr. Quarles, do you now agree that you made the wrong decision to weaken supervision for a bank like Credit Suisse?  

Vice Chair Quarles: Senator, we did not weaken the supervision of a bank like Credit Suisse. The civil servants who are supervising Credit Suisse and our large bank and foreign--

Senator Warren: Wait, you took them out of the program--


Vice Chair Quarles: --would take issue with-- 


Senator Warren: I'm sorry. You can't just say you didn't weaken it. You took it out of a program that was designed to have enhanced supervision, saying you didn't need the enhanced supervision. That's what you said at the time, because their footprint in the United States had shrunk. 

Vice Chair Quarles: I didn't say it was outside supervision, ma'am. I said it was more appropriate to supervise them with other foreign banks of the same size footprint as the United States, which is what we do. 

Senator Warren: You know--

Vice Chair Quarles: There are other foreign banks with similar prime brokerage operations that have long been supervised outside of LISCC because their footprint in the United States is smaller. These banks are now smaller. The losses that you are referring to did not occur in the United States. 

Senator Warren: I have to say that--

Vice Chair Quarles: --we would not have been able to pick them up in LISCC or otherwise.

Senator Warren: I am stunned by your argument that you want to say that there was no warning sign from the fact that $10 billion dollars in losses could have affected what Credit Suisse was doing here in the United States. 

Look, we dodged a bullet with the Archegos collapse this time. But what slipped through the net by regulators to contain these losses when things go wrong was relatively small to what could have slipped through. It could have been an even bigger failure. And that is because, instead of protecting the system, you spent your time at the Fed cutting holes in the safety net wherever you could.

Your term as Chair is up in five months. And our financial system will be safer when you are gone. I urge President Biden to fill your role with someone who'll actually keep our financial system safe.

Thank you.