Fed’s Quarles Says Banks Should Be Encouraged To Increase Lending

Are federal regulations putting a damper on bank lending amid the pandemic-driven downturn, or are bankers simply being too cautious?

That’s a key issue that Randal Quarles, the top U.S. banking supervisor, will examine as he looks at why banks have not deployed more of their capital to support businesses and individuals during the lockdown, the Financial Times reports.

Quarles, in remarks to the financial newspaper on the sidelines of a global banking summit, expressed frustration that U.S. banks did not draw down their liquidity and capital buffers during the pandemic to support businesses and customers.

Banks are required by regulators to maintain specified levels of capital and liquidity to ensure that they are prepared for a financial market shock or an economic downturn.

“Those cushions … are designed to be cushions, to be used during a period like this, and for the most part, banks haven’t done that,” Quarles told the FT global banking summit. “I would have liked to have seen that happen.”

Quarles, the Federal Reserve’s vice-chair for supervision and chair of the Financial Stability Board, a global panel of regulators, also warned that a “wave” of small business bankruptcies that many feared after the pandemic have not been diverted, but rather delayed until the spring.

A key factor in keeping many businesses afloat so far, despite the ongoing pandemic and downturn, has been a combination of government stimulus spending – as in the $2 trillion coronavirus relief package last spring – and the Fed’s persistent efforts to pump more liquidity into the economy through its government bond-buying program.

Still, despite looming business bankruptcies, Quarles does not see a threat that could overwhelm the banking system.

“Our best estimate currently is that, at least in the U.S., we’ll certainly see some of that, but it will not be a systemically disruptive phenomenon,” the top Fed executive told the FT. “It certainly won’t overwhelm the system.”