Dive Brief:

• Sen. Elizabeth Warren, D-MA, castigated the Federal Reserve’s vice chair for supervision, Randal Quarles, during a hearing Tuesday, saying, “Our financial system will be safer when you are gone.”
• The testy exchange came as Warren asked Quarles if he regretted removing Credit Suisse and other foreign banks in November from the purview of the Fed’s Large Institution Supervision Coordinating Committee. Credit Suisse took $5.5 billion in losses four months later for failing to meet margin calls in the collapse of investment firm Archegos Capital Management.
• Quarles’s term as the Fed’s top banking supervisor expires Oct. 13, and Warren, in the final remark of her line of questioning, urged President Joe Biden “to fill [Quarles’s] role with someone who will actually keep our financial system safe.” Aside from the vice chairmanship, Quarles is serving a term as a Fed governor through 2032, but central bank officials often step down if they are not reappointed to their leadership roles.

Dive Insight:

At issue is how Credit Suisse’s change in classification may or may not have affected supervision, and whether the Fed could have foretold any risk management vulnerabilities at the bank.

During a 2019 stress test, the Fed “identified weaknesses in the assumptions used by [Credit Suisse] to project stress trading losses that raised concerns about the firm’s capital adequacy and capital planning process,” Warren said at the hearing, quoting an assessment.

"Do you now agree that you made the wrong decision to weaken supervision for a bank like Credit Suisse?" Warren asked Quarles.

The Fed did not weaken supervision of Credit Suisse, Quarles asserted, adding, “the civil servants who are supervising Credit Suisse and our large bank and foreign bank operations would take issue with you."

Rather, Quarles said, the 2020 change in classification reflected the smaller U.S. footprint of Credit Suisse and other foreign banks with similarly sized stateside operations.

Further, Quarles said, “the great bulk of the Archegos losses occurred outside the United States,” in jurisdictions the Fed doesn’t supervise.

Warren expressed doubt that the U.S. would be immune to a global financial disruption simply because it doesn’t originate there.

"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 compared to what could have slipped through,” Warren said Tuesday. "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.”

Warren is not the first lawmaker to baldly wish for a regulator’s term to end. Former Consumer Financial Protection Bureau Director Kathy Kraninger was a frequent target of Democrats’ derision during her tenure. House Financial Services Committee Chairwoman Rep. Maxine Waters, D-CA, began her remarks at a July 2020 hearing by saying, "I would like to welcome Director Kraninger to what I hope will be her last appearance before this committee as CFPB director.”

Warren, during Kraninger’s appearance before the Senate Banking Committee a day earlier, called the ex-CFPB chief’s leadership “a miserable failure.”

"Based on your actions in this pandemic, you should resign,” she told Kraninger in July.