WASHINGTON — Federal Reserve Vice Chairman for Supervision Randal Quarles on Thursday found himself in the middle of an issue that is not part of a banking regulator's typical purview: gun control.

Testifying before lawmakers increasingly critical of large banks cutting ties with firearms-related businesses, Quarles struck a neutral tone. He said the central bank does not view banks’ decisions over whether or not to provide loans or services to the firearms industry as a matter of prudential or systemic risk. Executives from credit unions and banks from across the country have also weighed in on whether or not financial institutions should stop serving gun dealers.

“I do not believe that lending to the NRA or a law-abiding firm in the gun industry raises safety and soundness questions. I don’t believe that the decision not to lend raises safety and soundness questions,” Quarles said.

Fed Vice Chairman of Banking Supervision Randal Quarles
When asked whether banks' business relationships with the gun industry pose a risk to those banks, Fed Vice Chairman for Supervision Randal Quarles said that issue is "really outside of our remit as regulators of the system." Bloomberg News

In his second congressional hearing this week, this time before the Senate Banking Committee, the Fed's top bank regulator also insisted the agency does not intend to ease holding company requirements for foreign banks, said there was no timetable on the banking agencies finishing an executive compensation rule and tried to assure senators that the Fed is serious about enforcing fair-lending rules.

But the explosive issue of gun control was an unexpectedly prominent topic in the hearing. Some lawmakers and regulators have criticized moves by Citigroup and Bank of America to institute restrictions against companies involved in the firearms industry.

Senate Banking Committee Chairman Mike Crapo, R-Idaho, opened up his questions to Quarles by asking whether banks face a reputational risk if they do business with the National Rifle Association, gun manufacturers or other firms associated with the firearms industry.

Crapo cited news reports that the New York State Department of Financial Services is poised to send a letter to banks warning that associations with that industry could pose reputational risks.

“As a prudential regulator, it is your job to ensure the safety and soundness of banks,” Crapo said. “Reputational risk should not be an excuse for a regulator to scrutinize any business it doesn’t like. Do you believe that doing business with the NRA ... or others in the firearms industry threatens safety and soundness of banks under the Fed’s supervision?”

Quarles began his reply by acknowledging the “importance and significance” of the nation's focus on gun violence in the wake of the February shooting in Parkland, Fla., as well as the growing political pressure around firearms.

But he said that the Fed would likely not take a position on banks' associations with — or efforts to disassociate from — firearms sellers on the grounds that they are unlikely to pose a prudential or systemic risk.

“Those issues are really outside of our remit as regulators of the system,” Quarles said.

Quarles went on to say that it is important that bank supervisors not apply their personal or moral judgments on the banks they supervise, but rather maintain a degree of neutrality so long as a bank’s activities are not illegal or do not pose unacceptable risks to the institution.

“One of the principles I have tried to stress as a supervisor is that we should not substitute our personal judgments … for business judgments of bank managements and directors, and that’s a principle that applies across a broad range of issues,” Quarles said. “That is an idea that I am trying to spread throughout the supervisory system, and I think that would apply here as well.”

Sen. John Kennedy, R-La., pressed this line of questioning. He asked Quarles whether he thought it would be appropriate for supervisors to scrutinize banks for supporting any other number of political advocacy organizations or businesses involved in controversial political issues, and Quarles said it would not.

Then, Kennedy asked Quarles whether banks that block such transactions might themselves be violating the law.

“Would that position violate state and local age discrimination laws?” said Kennedy.

“I don’t know the answer to that,” Quarles said.

“If it did, and a federally regulated bank was in violation of state and local law, would you do something about it?” Kennedy said.

“If a bank is violating local law, we have a responsibility as supervisor to [respond],” Quarles said.

In the aftermath of the Parkland shooting there has been a rising tide of opposition to the National Rifle Association and the gun manufacturing industry.

But the decisions by BofA and Citi have also drawn criticism, which has even crept into the debate over providing banks with regulatory relief. Earlier this week, Kennedy wrote a letter to Senate Majority Leader Mitch McConnell, arguing that large banks cutting ties with gun-related businesses should not benefit from a pending House bill to streamline regulatory authority for the proprietary trading ban known as the Volcker Rule.

"I do not believe that Congress should reward big banks for their offensive actions," Kennedy wrote in the April 16 letter.

Gun control activists have pressured banks and other businesses to cease their relationships with the NRA and gun manufacturers.

Last month Citigroup became the first major bank to respond, saying it would require commercial borrowers and cobranded card clients to adhere to certain principles regarding gun sales and the sales of associated products. The online lender Kabbage also said in March that it would restrict lending to gun sellers that sell assault rifles or firearms to persons under 21.

The reported New York State Department of Financial Services letter would represent a new level of pressure on banks, especially if it deems those sales or exposure to the firearm industry as a reputational or political risk. Quarles’ comments seemingly dispel the notion that the Federal Reserve could take a similar position.

Banks have been called on to pick sides in politically charged fights before. In 2017, a campaign was launched to have banks defund the Dakota Access Pipeline by pressuring banks involved in a syndicated loan to the pipeline’s parent company to divest their shares. Several banks did just that, and others — notably Wells Fargo — faced a wave of divestment from cities and towns that wanted to distance themselves from the firm.

Kennedy said that impulse could have far-reaching and negative consequences, potentially leading our financial system to be subject to the same political gamesmanship that embroils so much else in America.

“We don’t need red banks and blue banks,” Kennedy said. “We don’t need banks that will only do business with people who voted for President Trump. We don’t need banks who only do business with people who voted for Secretary [of State Hillary] Clinton. We need banks that are safe and sound and honest and appreciate it when the American taxpayer puts up billions of dollars … to keep these banks from going belly-up.”

Meanwhile, Quarles also said he has no intention of raising the $50 billion asset threshold for intermediate holding companies — U.S. affiliates of foreign banks — to be subject to enhanced capital standards, despite language in a pending regulatory relief bill that allows regulators to raise that threshold.

“There is nothing in the bill that requires us to change our approach,” Quarles said. “The overall IHC framework has been working fairly well. We don’t have some secret plan to overturn the framework.”

Quarles said the Fed and other financial regulators might propose a revised executive compensation rule, but assured Sen. Robert Menendez, D-N.J., that it “has not fallen behind the refrigerator and been forgotten about.”

“I assure you it will not fall behind the refrigerator because I’m going to remind you of it,” Menendez replied.

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