SBC Hearing with Fed Chair Powell

Senate Banking Committee

“The Semiannual Monetary Policy Report to the Congress”

Thursday, March 1, 2018

Key Takeaways

  • S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act
    • Support: There was bipartisan support for the bill, to include Chairman Mike Crapo (R-Idaho) and Sens. Jon Tester (D-Mont.), Thom Tillis (R-N.C.), and Mark Warner (D-Va.), who verified with Fed Chairman Jerome Powell that the bill only tailors regulations for smaller institutions and maintains regulations for those institutions with over $250 billion in assets, to include annual stress testing and higher capital and liquidity standards. Powell added that the Federal Reserve is “not shy” about looking below the $250 billion threshold and plans to publish a framework on the issue of public comment  
    • Opposition: Ranking Member Sherrod Brown (D-Ohio) criticized S. 2155 for tailoring rules for big banks, to include making living wills less frequent, having fewer leverage rules, and weakening the Volcker Rule. Powell replied that the bill focuses on small and medium banks, and that post-crisis regulatory rules (such as higher capital and liquidity, and stress tests) should continue to apply “in the strongest form” to the larger institutions.
  • Federal Reserve Nominee: Crapo stated that it is “critical” Vice Chair Randy Quarles be confirmed for his full term as a Fed governor, to which Powell agreed, adding that it is “very important” he is confirmed.  
  • Leverage Capital Ratio: Sen. David Perdue (R-Ga.) asked Powell about the leverage capital ratio and why certain assets, such as Treasury securities, are included in the calculation. Powell confirmed that the calculation does consider how risky Treasuries and reserves are, and that the binding capital requirements should be risk-based capital requirements.

Witness

Opening Statements

Chairman Mike Crapo (Idaho), Senate Banking Committee

In his opening statement, Crapo stated that conversations with prior Federal Reserve (“the Fed”) Chairs Ben Bernanke and Janet Yellen helped create the regulatory reform bill, S. 2155, including the portion that relates to Section 165 of the Dodd-Frank Act. He noted the bipartisan cosponsors for the bill and stressed that it merely simplifies the regulatory regime for smaller institutions, which will result in economic growth. Crapo continued that S. 2155 will be a “key component” in rising productivity, wages, and economic growth, as well as improving access to capital for small businesses and consumers. Regarding Fed Vice Chair of Supervision Randy Quarles, he urged Congress to confirm his full term as governor as soon as possible.

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Brown criticized 2017 as being the “worst year for job creation since 2010,” adding that wage growth has been slow and that the participation rate in the workforce has “barely improved” since 2014. He continued that the Republicans are working to ensure the big banks bring in bigger profits rather than focus on the middle class, accusing the recent Tax Cuts and Jobs Act of benefitting the wealthiest Americans, and corporations conducting stock buybacks rather than increasing wages. Brown concluded that he “will be watching” to ensure the Fed does not lift any of the penalties placed on big banks that commit fraud.

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 explained 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

Reg Reform Bill, S. 2155
Crapo focused his questions on S. 2155, which he is the sponsor of. He verified with Powell that the Fed would still be required to conduct supervisory stress tests for those banks with total assets between $100 billion to $250 billion, that the Fed will still have authority to apply any prudential standards on these banks if appropriate, that the bill will not weaken oversight of the largest globally systemic banks, that the bill does not exempt global banks from Section 165 of Dodd-Frank, and that it does not remove the Fed’s ability to ensure that the big banks are well-capitalized, all of which Powell agreed with.

Crapo then turned to the Volcker Rule, and asked Powell if he supports exempting community banks with less than $10 billion in total assets from Volcker, to which Powell replied it is a “sensible thing to do,” and that the Fed will still be able to apply safety and soundness supervisory activities on these banks.

Brown criticized S. 2155 for tailoring rules for big banks, to include making living wills less frequent, having fewer leverage rules, and weakening the Volcker Rule. Powell replied that the bill focuses on small and medium banks, and that post-crisis regulatory rules (such as higher capital and liquidity, and stress tests) should continue to apply “in the strongest form” to the larger institutions.

Sen. Jon Tester (D-Mont.) verified with Powell that enhanced prudential standards for large foreign banking organizations (FBOs) will not be weakened under S. 2155, to which Powell agreed. Powell elaborated that S. 2155 moves the threshold for FBOs to $250 billion and looks at their global consolidated capital, requiring them to meet capital and liquidity requirements commensurate with their activities. Powell noted that the Federal Reserve is “not shy” about looking below the $250 billion threshold and plans to publish a framework on the issue of public comment. Tester also asked if Powell thought S. 2155 put the U.S. financial system at risk. Powell replied he did not think the legislation put the financial system at risk, and that the Federal Reserve has the tools it needs to protect financial stability.

Sen. Thom Tillis (R-N.C.) noted that S. 2155 provides certain regulatory relief for one part of the banking sector and asked what more the Fed can do within its authority regarding “right sizing” regulations. Powell replied that higher capital and liquidity, stress testing, and resolution planning all apply to the largest institutions, and that these regulations are tailored as you move down to each level. He stated that “not everything that systemic institutions need to do have to be done by other banks,” and that different regulatory structures should apply to them.

Sen. Mark Warner (D-Va.) argued that S. 2155 does not change annual stress tests for the largest institutions (those over $250 billion in assets), but that institutions between $100 billion and $250 billion in assets will now have stress tests on a periodic basis. He continued that stress tests are the “most important prudential standard” and “one of the best tools” to prevent another financial crisis. Warner then asked Powell for his views on how vigorous and frequent stress tests should be for banks between $100 billion and $250 billion in assets. Powell replied that stress tests are “probably the most successful regulatory innovation of the post-crisis era” and that the Fed intends to continue to have frequent, strong, and meaningful stress tests for firms that fall in this range.

Warner then turned to the 18-month period that will be given to potential tailor the standards on firms that fall in the $100 billion to $250 billion range and asked if the Fed will conduct a thorough exam of the firms that fall within this category. Powell replied that the Fed is creating a framework that will be in place after the 18-month period that can determine all the systemic or regional risks may be for firms that fall within this range.

Federal Reserve Nominees
Crapo stated that it is “critical” Vice Chair Quarles be confirmed for his full term as a Fed governor, to which Powell agreed, adding that it is “very important” he be confirmed.

Balance Sheet
While several Senators commented on the size of the Fed’s balance sheet, Sen. David Perdue (R-Ga.) noted that the four largest global central banks have similar sized balance sheets, and asked Powell if the Fed monitors these other sheets or if they are independent. Powell replied that the Fed monitors them, and that his plan would get the Fed’s balance sheet to a normal size in approximately four years, but that the global central banks are behind due to the U.S. recovering faster from the crisis.

Leverage Ratio
Perdue then asked Powell about the leverage capital ratio and why certain assets, such as Treasury securities, are included in the calculation. Powell confirmed that the calculation does consider how risky Treasuries and reserves are, and that the binding capital requirements should be risk-based capital requirements.

Listed Options Contract

Sen. Jerry Moran (R-Kan.) noted that a recent Treasury Department report said that the current exposure method (CEM) may not appropriately measure the economic exposure of a listed options contract, and that a risk-adjusted approach for valuing options for the purposes of capital rules, such as weighing the options by their delta, may be in order. Moran said the issue needed a quicker, and perhaps more long-term fix, and asked Powell if he is able to make the changes. Powell replied that the Federal Reserve is in the middle of a changeover from CEM to standardized approach counterparty credit risk (SA-CCR) and is also looking at the calibration of the enhanced leverage ratio. Powell declined to give a timeline for this process, but said it was an active project.

For more information on this hearing, click here.