Senate Banking Committee Hearing with Federal Reserve Chairman Powell
Senate Banking Committee
“The Semi-Annual Monetary Policy Report to Congress”
Tuesday, February 26, 2019
Key Topics & Takeaways
- Regulatory Relief: Crapo asked Powell if the Fed is committed to revisiting Volcker rule definitions, specifically for covered funds and potential elimination of the accounting test. Powell responded by stating the Fed is currently addressing these concerns and will do their best to implement them.
- S. 2155 Implementation: Powell said the various regulators are working together to implement S. 2155, particularly on tailoring, noting there is a lot they can do for community banks without undermining safety and soundness. Asked how high a priority S. 2155 implementation is, Powell replied it is “the highest.”
- Cannabis-Related Businesses: Asked about the banking of cannabis-related businesses, and whether financial institutions need clarity on this issue, Powell responded that it would be “great” to have clarity, as financial institutions and their regulators are put in a very difficult position without it.
- Health of Banking System: Asked about recent communications between Treasury Secretary Steven Mnuchin and other regulators during the government shutdown and whether there was cause for concern, Powell explained that at the time there was “significant volatility” in the market, so the regulators looked at whether there were broader implications and found none, saying it is “[his] job to ask those questions.
Witness
Opening Statements
Sen. Mike Crapo (R-Idaho), Chairman, Senate Banking Committee
In his opening statement, Crapo highlighted the Fed’s goals to cut their balance sheet, address the growth of the U.S. deficit, and the Fed’s reserve holding requirements. He also addressed continued implementation of S. 2155 and circled back on Volcker rule definitions for covered funds and potential elimination of the accounting test. Lastly, Crapo touched on the functions of the Fair Credit Reporting Act and the committee’s commitment to continued economic growth, capital formation, and job creation.
Sen. Sherrod Brown (D-Ohio), Ranking Member, Senate Banking Committee
In his opening statement, Brown said Wall Street and large corporations have seen record high profits in the last year and noted his disapproval for the demand to weaken regulations and rules. Brown referenced concerns of household and student debt increasing, stagnation of wages, and the effects of the government shutdown on workers. He closed by referencing previous testimony from Chairman Powell on spreading wealth for economic prosperity and claimed the Fed has failed to provide relief to working families, with hopes to address previous mistakes before the next economic downturn.
Testimony
The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System
In his testimony, Powell shared his support for the goals of Congress for monetary policy and maximizing the employment rate. He commented on the Fed’s work to improve transparency through communication efforts, specifically through the implementation of the Fed’s financial stability report and supervision regulation report. Powell highlighted the Fed’s January meeting, as well as previous meetings, at which he spoke on anticipated slower economic growth and more volatile financial conditions. He laid out concerns for foreign economies, specifically China and Japan, as well as challenges from Brexit.
Powell added that the Fed is focused on cutting their balance sheet, both short and long term, by reducing holdings in treasury and agency securities, continuing to decrease banks’ reserve balances, monitoring currencies, and addressing administered rates to control policy rates with ample supply of reserves to cut requirements of active management reserves.
Question & Answer
Regulatory Relief
Crapo asked Powell if the Fed is committed to revisiting Volcker rule definitions, specifically for covered funds and potential elimination of the accounting test. Powell responded by stating the Fed is currently addressing these concerns and will do their best to implement them.
Crapo then asked Powell to address any risks to the economy. Powell stated they include addressing the baseline outlook and remaining focused on foreign risks. He stated that global growth has slowed, especially in China, and that Brexit could have an impact, although minimal. Domestically, he said the economic outlook is good, and that the Fed will be patient before moving forward on policies, waiting for data before making judgements.
Capital Requirements and Stress Testing
Sen. Tom Cotton (R-Ark.) asked about stress tests for mid-size banks, noting that some are still being told by examiners that they need to undergo stress tests despite changes to the threshold. Powell replied that banks between $10 billion and $100 billion are exempt from stress tests, and the Federal Reserve is working on revising their guidance to address this issue. Powell agreed there may be issues in communicating the changes to examiners, adding that while banks of this size are not legally required to undergo stress testing, they will not discourage any that still want to.
Sen. Jerry Moran (R-Kan.) asked about risk-based capital rules and the recent interagency proposal for the community bank leverage ratio. Powell said this is another rule they have out for comment, calling them “important tailoring proposals” that they intend to look at carefully.
Asked by Moran whether regulators are working closely together to implement S. 2155, Powell said they are working together on tailoring, noting there is a lot they can do for community banks without undermining safety and soundness. Asked by Toomey how high a priority S. 2155 implementation is, Powell replied it is “the highest.”
Health of Banking System
When asked about the health of the overall banking system, Powell said the financial system is “quite strong” overall, noting record profits, no bank failures in 2018, better risk management, better resolution planning, and higher liquidity and capital, adding that banks have generally been profitable, strong, and well-capitalized.
Asked by Sen. Doug Jones (D-Ala.) about recent communications between Treasury Secretary Steven Mnuchin and other regulators during the government shutdown and whether there was cause for concern, Powell explained that at the time there was “significant volatility” in the market, so the regulators looked at whether there were broader implications and found none, saying it is “[his] job to ask those questions.”
Stock Buybacks
Sen. John Kennedy (R-La.) asked if legislative proposals that would prohibit stock buybacks were “a good thing.” Powell responded that is not under the jurisdiction of the Federal Reserve, but the goal that prosperity be widely shared is “one we all share.” Powell also said that what companies do with their profits and capital has been left in private hands, and he would want to understand the consequences of changing that before considering any proposals.
Cannabis-Related Businesses
Sen. Robert Menendez (D-N.J.) asked about the banking of cannabis-related businesses, and whether Powell agreed that financial institutions need clarity on this issue. Powell responded that it would be “great” to have clarity, as financial institutions and their regulators are put in a very difficult position without it.
Cybersecurity
Sen. Jack Reed (D-R.I.) asked Powell if the Fed is looking closely at cybersecurity. Powell responded yes, and stated that bigger banks have better resources to protect against cyber risks which puts more burden on smaller banks, adding that this is something the Fed is focused on, especially on the end of payments. Powell also mentioned the Fed’s use of table top exercises to be prepared for cyber security measures.
Trade
Asked by numerous Senators how trade policy affects the economy, Powell replied that the Federal Reserve does not have jurisdiction over trade, but commented that businesses want a transparent set of rules and providing certainty is important.
Cost-Benefit Analysis
Shelby asked about the formation of a Policy Effectiveness Unit at the Federal Reserve to conduct cost-benefit analysis on regulations. Powell said the unit is up and running and he is pleased with their progress, adding that they have been involved in rulemakings and the overall assessment of all aspects of the Federal Reserve’s work.
Federal Reserve Balance Sheet
Crapo asked if the ultimate size of the Fed’s balance sheet would be determined by the principle demand by financial institutions for reserves plus a buffer, to which Powell concurred. Crapo asked the ideal amount of reserves it would take for the Fed to achieve their target monetary policy objective. Powell responded that before the financial crisis the quantity of reserves was about $20 billion, and after the crisis the Fed created a requirement for banks, mainly larger banks, to hold a much higher amount of liquid assets. He continued that one of those is bank reserves, and the demand for these reserves will remain high, including a sustainable requirement increase in the last year.
Housing Finance Reform
Crapo asked Powell if his previous stance on housing finance reform remains the same, to which he agreed. Crapo noted that Powell has previously been on the record stating the outline for reform should focus on providing as low bailouts as possible, attracting more private capital, applying guarantees to securities, not institutions, and increasing transparency, and continue to build upon bipartisan agreements. Powell added that continuing to look at reforms of private capital and housing risk will help to remove funds off the federal balance sheet.
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