Friday, January 24, 2020

Transparency and Banking Supervision

On January 17, I headed to the University of Florida’s Warrington College of Business to be a discussant at the Huber Hurst Seminar.  A great event!  On the same day, Randal K. Quarles, the Vice Chair for Supervision (a position created by Dodd-Frank) and Governor of the Federal Reserve System gave a speech, Spontaneity and Order: Transparency, Accountability, and Fairness in Bank Supervision, at the 2020 American Bar Association Banking Committee Meeting.  Legal scholars have focused scant attention on bank supervision in the past, but this is starting to change.  It can be a challenging area to work in as Wharton Assistant Professor Peter Conti-Brown explains in The curse of confidential supervisory information.  Indeed, confidential supervisory information is protected from disclosure with criminal penalties.     

Bank regulation (which has received a bit more attention) and bank supervision, though linked concepts, are distinct.  Supervision “implements the regulatory framework.”  An important tension exists in banking supervision.  In his speech, Quarles explains that “We have a public interest in a confidential, tailored, rapid-acting and closely informed system of bank supervision.  And we have a public interest in all governmental processes being fair, predictable, efficient, and accountable.  How do we square this circle?”  It’s an important question.  Quarles terms it “a complex and consequential issue that, for decades now, has received far too little attention from practitioners, academics, policymakers and the public.” 

Quarles’ speech makes several suggestions regarding “some obvious and immediate ways that supervision can become more transparent, efficient, and effective.”  To improve transparency, he makes three proposals: 1) “create a word-searchable database on the Board’s website with the historical interpretations by the Board and its staff of all significant rules,” 2) “putting significant supervisory guidance out for public comment,” and 3) “submitting significant supervisory guidance to Congress for purposes of the Congressional Review Act.”

All three proposals strike me as reasonable.  What would be the drawback of the Board making interpretations of significant rules transparent and easily accessible?  Regulatory guidance, as opposed to rules, is not legally binding.  Yet in reality, there may be no difference in practice.  I’d welcome both additional public comment on significant supervisory guidance and review by Congress.  However, it’s also critical that a variety of stakeholders, especially academics, policymakers, and the public, actively participate in these processes.               

Colleen Baker, Financial Markets | Permalink


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