HFSC Hearing with Fed Chair Powell

House Financial Services Committee

“Monetary Policy and the State of the Economy”

Tuesday, February 27, 2018

Key Takeaways

  • Tailoring Regulations: Rep. Carolyn Maloney (D-N.Y.) asked if the Federal Reserve is looking to relax regulations or reduce capital requirements. Federal Reserve Chair Jerome Powell responded that there are several “primary pillars” of post-crisis financial regulation, including high risk-based capital, high liquidity, stress testing, and resolution, which should be kept “strong and transparent.” Powell noted that when considering small institutions and community banks, regulations should be tailored to achieve safety and soundness with “creating excessive burden.”
  • Cybersecurity: Rep. Barry Loudermilk (R-Ga.) asked how Powell is strengthening cybersecurity at the Fed, to which Powell replied that he has placed a “high priority” on cybersecurity and protecting the sensitive information they keep, adding that the Fed should not collect unneeded sensitive information.
  • Supplemental Leverage Ratio: Rep. Frank Lucas (R-Okla.) asked if the Fed is willing to fix the issue of offsetting initial margin from the SLR on their own, to which Powell replied that the Fed is looking at the initial SLR, as it “went a little bit too far.” He stressed that the leverage ratio is a backstop to risk-based capital, but that the enhanced SLR is deterring low-risk wholesale activities that the Fed wants financial institutions to engage in, including client clearing.
  • Volcker Rule: Rep. French Hill (R-Ark.) discussed his legislation, H.R. 4790, which would give the Board of Governors of the Federal Reserve sole rulemaking authority over the Volcker Rule, as well as exclude community banks from the rule’s requirements, noting that excluding community banks from the Volcker Rule does not mean they will not still be subject to “careful scrutiny” by regulators for safe and sound banking practices. Powell agreed that regulators can find unsafe and unsound banking practices in institutions not subject to the Volcker Rule. Powell also agreed that the Volcker Rule is complex, and the Federal Reserve could provide more certainty about the rule if it was designated the principle regulator.

Witness

Opening Statements

Chairman Jeb Hensarling (R-Texas), House Financial Services Committee

In his opening statement, Hensarling stated that the economy has “limped along” the last eight years, leading to a failure of personal savings to recover from the 2008 financial crisis. He applauded President Donald Trump, as well as the Tax Cuts and Jobs Act (TCJA), for unemployment being at a seven-year low, bonuses being offered by companies, and the current economic expansion. Hensarling then stated his concern over the unwinding of the Federal Reserve’s (the “Fed”) “unbalanced” balance sheet, noting that there have been 10 years of “artificially low interest rates.” He stressed that monetary policy needs to remain independent, and that the Fed must continue to be accountable to Congress and “stay in their lane” when it comes to interest on reserves. Hensarling concluded that the Fed should be subject to the appropriations process like other prudential regulators, and that all formal rulemaking should be subject to “rigorous” cost-benefit analysis.

Ranking Member Maxine Waters (D-Calif.), House Financial Services Committee

In her opening statement, Waters stated her concern that the economic recovery created by former President Barack Obama “will be undone” by Trump, who continued to “roll back regulations put in place” by the Dodd-Frank Act. She continued that the TCJA gives corporations a “massive tax break,” and that taxes will eventually be raised for families. Waters then stated that there is a “Republican assault” on the Fed, creating “damaging” legislative proposals, eliminating critical tools and eliminating the Fed’s independence from the appropriations process. She concluded by criticizing H.R. 4296, which will be on the House floor today, stating that it undermines the Fed.

Testimony

The Honorable Jerome Powell, Chairman, Board of Governors of the Federal Reserve System

In his testimony, Powell applauded former Fed Chair Janet Yellen for beginning the economic recovery after the financial crisis, and that he has worked with her to ensure a smooth transition in leadership. Regarding the economy, he said that it is growing at a solid pace, and that unemployment is at the lowest rate since late 2000. Powell attributed economic growth to “solid gains” and consumer spending, adding that business investment has also grown and that the housing market is improving. He continued that the target Federal funds rate was raised in the December meeting, and that in October an initiative started to reduce securities holdings on the Fed’s balance sheet, concluding that the future path of monetary policy is dependent on the economic outlook.

Questions & Answer

Interest on Excess Reserves

Throughout the question and answer period, Hensarling focused on interest on excess reserves (IOER). He asked if this will be the new primary monetary policy rule, or only used in times of emergency. Powell replied that it is the current tool used to keep the Federal funds rate in the designated range, but that a decision has not been made for the long term.

Balance Sheet
Hensarling asked about the Fed including mortgage-backed securities (MBS) on their balance sheet, to which Powell replied that he intends to have the balance sheet consist of primarily Treasury securities in the future. He added that the MBS were purchased after the financial crisis and that he does not intend to purchase them again unless there is a “severe situation.”

Federal Reserve Diversity

Waters noted the upcoming opening in the New York Fed and asked several questions about finding and hiring a diverse replacement. Powell replied that he insists on a “highly diverse candidate pool” and that each candidate is given the same opportunity. He added that the Fed conducts outreach in the community and that they use national search firms to find the most diverse candidates.

Regulation and Capital Requirements

Rep. Carolyn Maloney (D-N.Y.) asked if the Federal Reserve is looking to relax regulations or reduce capital requirements. Powell responded that there are several “primary pillars” of post-crisis financial regulation, including high risk-based capital, high liquidity, stress testing, and resolution, which should be kept “strong and transparent.” Powell noted that when considering small institutions and community banks, regulations should be tailored to achieve safety and soundness with “creating excessive burden.”

Rep. Tom Emmer (R-Minn.) asked if Powell’s views on tailoring regulations for small and community banks has changed since his confirmation hearing. Powell replied that tailoring regulations for community institutions is “at the heart of what [they’re] doing,” and that the Fed is ensuring regulations are not more burdensome than necessary. When asked if he supports Treasury Secretary Steve Mnuchin’s recommendations in the Treasury Report regarding tailoring regulations based on an institution’s size, Powell replied that he does is currently doing that very thing, though the “devil is in the details.”

Rep. Scott Tipton (R-Colo.) also asked about Powell’s views on tailoring, and when we can expect the tailoring process to take place, referencing his bill H.R. 1116, the TAILOR Act. Powell responded that the number of small banks in rural and non-urban areas has declined “sharply,” a trend that the Federal Reserve does not want to contribute to. Powell noted that they have reduced the scope and burden of the call report, made the gaps between exams longer, and are trying to find ways to simplify capital requirements, adding that he is committed to continuing to address the issue.

Rep. Ted Budd (R-N.C) asked if Powell would be willing to review recommendations made by the Financial Stability Board (FSB) about capital requirements for internationally active insurance groups, to which Powell replied he would be willing to review but would have to look into the issue further.

Leveraged Lending Guidance

Rep. Blaine Luetkemeyer (R-Mo.) stated that the U.S. Government Accountability Office (GAO) concluded that the leveraged lending guidance is a rule under the Congressional Review Act and is therefore ineffective because it was never submitted to Congress, noting that the same would presumably be true for other agency guidance. Asked if he agreed that the guidance is not binding regulation, Powell stated he did agree, and that in the case of the leveraged lending guidance, the Fed “accept[s] and understand[s]” that it is non-binding guidance and is working to ensure banks and supervisors are aware.

Cybersecurity

Luetkemeyer noted that cybersecurity threats have the potential to “wreak havoc” on the economy, but financial institutions face a “maze” of regulations without harmonization between agencies. Powell agreed that cybersecurity is a “significant” threat, and that the Federal Reserve is working to harmonize regulations through supervisory guidance . Powell added that the Treasury Department chairs a group focused on cybersecurity and pledged to attend those meetings in the future.

Rep. Barry Loudermilk (R-Ga.) asked how Powell is strengthening cybersecurity at the Fed, to which Powell replied that he has placed a “high priority” on cybersecurity and protecting the sensitive information they keep, adding that the Fed should not collect unneeded sensitive information.

Leverage Ratio
Emmer noted that the supplemental leverage ratio (SLR) increases clearance costs, making it more expensive to use the cleared derivatives markets, and stressed the importance of recognizing the exposure-reducing nature of initial client margin in revising the capital rule. Powell replied that the SLR is a needed “hard backstop,” but that the current calibration of the SLR “isn’t appropriate,” and that he is working on addressing this in the enhanced SLR.

Rep. Frank Lucas (R-Okla.) asked if the Fed is willing to fix the issue of offsetting initial margin from the SLR on their own, to which Powell replied that the Fed is looking at the initial SLR, as it “went a little bit too far.” He once again stressed that the leverage ratio is a backstop to risk-based capital, but that the enhanced SLR is deterring low-risk wholesale activities that the Fed wants financial institutions to engage in, including client clearing.

Rep. Randy Hultgren (R-Ill.) also asked if Powell supports Treasury’s recommendation regarding the leverage ratio, to which he echoed his comments that the SLR deters banks from participating in low-risk wholesale activities, and that the Fed is carefully assessing how they can provide relief for institutions, such as custody banks.

Libor and SOFR

Rep. Robert Pittenger (R-N.C.) noted that the Fed was involved in creating a potential alternative to the London Interbank Offered Rate (Libor), called the Secured Overnight Financing Rate (SOFR), and asked if the Fed has conducted a cost-benefit analysis to the potential impact of the transition to consumers and borrowers. Powell replied that the Financial Conduit Authority (FCA) has said that banks will no longer be required to submit to the Libor panel after four years, and that there are more than $300 trillion in Libor-based contracts that will be impacted, which could potentially lead to a financial stability problem should banks not publish their Libor submissions. Regarding the cost-benefit analysis to such a transition, he continued that the Fed is currently seeking guidance from businesses subject to Libor to determine its impact, though he stressed that the cost will not be as high as the potential systemic risk of doing nothing.

Housing Market
Rep. Wm. Lacy Clay (D-Mo.) asked if the U.S. housing market is in recovery mode, and also what the Fed can do about ensuring applicants for home mortgages are treated fairly, noting that African American home buyers continue to be denied loans at a higher rate than white applicants. Powell replied that any racial discrimination is “completely unacceptable” and that the Fed will stop the discrimination where they have the authority to, and also punish it when it happens.

Exchange Traded Funds
Rep. Stephen Lynch (D-Mass.) asked if complex exchange traded funds (ETFs) bring risk to the financial system, to which Powell replied that when analyzing the recent market volatility, he does not believe ETFs were at the “heart of what went on,” though they continue to have conversations with other agencies about them, especially the Securities and Exchange Commission (SEC).

Board Vacancies
Rep. Keith Rothfus (R-Pa.) asked about the four vacancies on the Board of Governors and whether it impacts the Fed’s capabilities. Powell replied that it has been a long time since the Board has been down to three members, and that he is eager to have more people. He continued that the Fed needs people from diverse backgrounds, to include economists, the non-profit and profit sector, financial markets, and law to bring diverse perspectives to the Board.

SIFI Threshold
Loudermilk asked if banks that have less than $250 billion in assets pose a threat to the economy. Powell replied that banks under this threshold tend to engage more in traditional banking activities, and that Sen. Mike Crapo’s (R-Idaho) regulatory relief bill would allow regulators to identify places where enhanced prudential standards will be necessary for institutions with $100 billion to $250 billion in assets.

Payment Systems
When asked by Loudermilk what the Fed is doing when it comes to improving payment processes, Powell replied that the Fed has created a group made up of private sector companies, regulators, and customers to work together and move toward faster mobile payments.

Volcker Rule

Rep. French Hill (R-Ark.) discussed his legislation, H.R. 4790, which would give the Board of Governors of the Federal Reserve sole rulemaking authority over the Volcker Rule, as well as exclude community banks from the rule’s requirements, noting that excluding community banks from the Volcker Rule does not mean they will not still be subject to “careful scrutiny” by regulators for safe and sound banking practices. Powell agreed that regulators can find unsafe and unsound banking practices in institutions not subject to the Volcker Rule. Powell also agreed that the Volcker Rule is complex, and the Federal Reserve could provide more certainty about the rule if it was designated the principle regulator.

For more information on this hearing, click here.