WASHINGTON – The Federal Reserve’s chief banking supervisor on Tuesday defended the central bank’s withdrawal of certain foreign banks from a program to monitor systemically important institutions, while confirming the interest of regulators in in place of an interagency cryptocurrency working group.

Fed vice chairman of oversight Randal Quarles has been questioned harshly by Senator Elizabeth Warren, D-Mass., About the losses suffered by Credit Suisse and other foreign banks in the collapse of Archegos Capital in March. Credit Suisse, which lost about $ 5.5 billion after the investment firm failed to respond to margin calls, was among the foreign banks the Fed pulled from the portfolio last year. Co-ordinating Committee for the Supervision of Large Institutions.

“At the time, you were justifying removing these banks from increased supervision on the grounds that these banks … ‘have significantly reduced their footprint in the United States and their operations in the United States are much less risky than’ before, ”Warren said at a Senate Banking Committee hearing. , quoting Quarles. “Your timing, of course, was impeccable on this. A few months later, Archegos exploded and resulted in billions of dollars in losses for Credit Suisse. “

Quarles argued that most of the losses resulting from the Archegos incident occurred outside the United States and that the Fed does not oversee foreign banking operations that take place abroad.

“I said it was more appropriate to oversee them with other foreign banks of the same size as the United States, which we are doing,” he said.

Still, Warren countered that she was “stunned” by Quarles’ argument and accused him of overturning regulations meant to prevent massive failures.

“It was more appropriate to supervise them with other foreign banks of the same size as the United States, which we are doing,” said Randal Quarles, vice president of supervision of the Fed.

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“Instead of protecting the system, you spent your time at the Fed digging holes in the safety net,” she said. “Your term as President ends in five months, and our financial system will be more secure when you are gone.”

Quarles also discussed interagency efforts to regulate cryptocurrency-related activities and agreed with other regulators on the need to assess climate change risks in the banking system.

Much of the audience revolved around efforts by federal bank regulators to create a joint framework dealing with digital assets.

Bank branches have increasingly focused on cryptocurrencies as they have become more popular, but have also experienced price volatility. The Office of the Comptroller of the Currency recently issued guidelines for banks that provide custodial service for digital assets and has approved many crypto companies for national trust charters.

Quarles said the Fed, OCC and the Federal Deposit Insurance Corp. were working on developing a digital currency regulatory regime that could subject cryptocurrencies such as Bitcoin and Ethereum to certain capital and operating requirements if tied to banks. His comments came after Acting Currency Comptroller Michael Hsu last week indicated that agencies were planning to form an “interagency policy sprint team” on digital assets.

“We, along with the OCC and the FDIC, are currently engaged in what we call a ‘sprint’ in seeking to bring together perspectives on exactly that,” Quarles said. “During that, if there are any gaps in the regulatory framework, we will also let them know.”

Several Fed officials, including President Jerome Powell, have noted that while digital currencies can harness innovation and potentially expand access to instant payments, they could also pose a risk to investors and the financial system.

Some lawmakers also expressed the same concerns during Tuesday’s hearing.

“I see some value in the distributed ledger [technology]but the volatility among some of these entities concerns me, ”said Senator Mark Warner, D-Va. “I see some of the misuse of my role on the Intel Committee.”

Quarles warned that agencies are “in the early stages of the sprint.” But regulators would be able to disclose some of the interagency work on digital assets “soon,” he said.

“It would be premature for me to tell you where this is going to happen, but this is something that is a high priority, not just as a matter of importance, but as a matter of timeline,” he said. .

Following sharp swings in Bitcoin prices, Powell posted a video message last week indicating that the central bank will release a discussion paper this summer detailing its current thinking on digital payments and the central bank’s digital currency.

The Fed has yet to make a decision to create a so-called digital dollar, but has embarked on several research efforts to explore how a central bank digital currency might work in practice.

“I am pleased to see the Fed moving forward with the release of a central bank digital currencies report that will include public input,” said Senator Chris Van Hollen, D-Md. “I don’t think we can afford to let the United States fall too far behind on this measure, especially as China is moving forward with its own pilot program.”

Quarles said the Fed’s current efforts would likely lead to “a conclusion as to whether a CBDC is appropriate for the United States.”

“I think it’s a very open question right now,” he said.

He also added that depending on how the Fed might decide to structure a hypothetical CBDC, it might need the legislative green light from Congress.

“There are some structures that we could perhaps put in place under the current authority, but most of the types of CBDCs that are in question would require additional legislative authorization to actually be used,” said Quarles, who added that A larger CBDC pilot program would likely also require legislation. .

Meanwhile, Quarles said it was important for regulators to analyze the potential risks climate change poses to the financial system.

“It’s not just appropriate, it’s up to us,” he said.

However, Quarles said the Fed should adapt this analysis to the financial sector and not advocate any specific policy responses to climate change.

“Our job is to ensure the resilience of the financial system, not to promote a particular vision of climate policy,” he said. “It’s for Congress, maybe for other agencies. It’s not the job of the Fed or other financial regulators. And so we should stay focused on this approach to climate change, the analysis as opposed to something larger. “

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