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July 11, 2019 04:12 PM

Fed's Quarles isn't rooting for banks to fail stress tests

Brian Croce
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    Bloomberg

    Federal Reserve vice chairman Randal Quarles says it should not be the goal of the Fed to have banks fail its stress tests.

    Randal Quarles, the Federal Reserve vice chairman for supervision, said it should not be the Fed's goal to have banks to fail its stress tests.

    Mr. Quarles took part in a question and answer session Thursday at the Bipartisan Policy Center in Washington and said that there's a sentiment among some that the Fed is only being effective as regulators if there are a number of banks that fail the stress tests.

    "How else would we measure success unless we say we have brought the banks to a position, and the system to a position where when we put it through a very strong stress (test), everybody passes?," he said. "That ought to be what we want."

    Each of the 18 banks the Fed reviewed, including J.P. Morgan Chase, Goldman Sachs and Morgan Stanley, passed both rounds of its annual stress test, the results of which were released in June.

    Mr. Quarles offered a similar sentiment Tuesday at a research conference sponsored by the Federal Reserve Bank of Boston.

    "Like a teacher, we don't want banks to fail, we want them to learn," Mr. Quarles said. "In this case, we want them to learn good risk management in the context of forward-looking capital planning. This will provide the public with more information about the capital planning of major banks, and about how the Federal Reserve views good capital planning and risk management, bolstering our credibility."

    Also, Mr. Quarles didn't tip his hand as to whether the Fed might cut rates later this month, but did say the central bank will assess a wide range of data and weigh economic uncertainties when it makes a decision.

    Following the release of the most recent Federal Open Markets Committee minutes Wednesday and testimony on Capitol Hill on Wednesday and Thursday from Federal Reserve Chairman Jerome Powell, Fed watchers are expecting a rate cut at the group's July 30-31 meeting.

    "We ought to have coherent enough intellectual frameworks in which we're thinking about monetary policy that we can communicate that and that people can have a reasonable idea that if things evolve (a certain) way then the Fed is likely to evolve (a certain) way," Mr. Quarles said when asked if he feels a responsibility to guide the market to correctly price in future rate adjustments.

    Like Mr. Powell said in his testimony, Mr. Quarles said the Fed will weigh economic risks, such as uncertainties on trade, when making its decision in a few weeks.

    While holding the target range for the federal funds rate at 2.25% to 2.5%, members indicated that "international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed," the minutes from the Fed's June meeting said.

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