July 17, 2018

Senate Banking, Housing, and Urban Affairs Committee “The Semiannual Monetary Policy Report to the Congress”

Key Takeaways

  • Changes to eSLR: Powell defended the Fed’s proposed change to the enhanced Supplementary Leverage Ratio (eSLR), noting that it would have negligible effects on the capital requirements for a whole firm. He stressed that it is unfavorable to have banks bound by the eSLR as it causes them to take on more risk.
  • Regulatory Relief: In response to a question about re-calibrating rules for foreign banks, Powell explained that all banks with $50 billion in U.S. assets have more than $250 billion in global assets, so it is not clear how S.2155 will provide regulatory relief for those firms, though he would not say regulatory relief for such firms will never happen during his tenure, adding that he currently does not have any plans.
  • Trade: Powell explained that there should be an international rules-based system so countries have to answer to each other should they violate the rules, adding that this type of system as “served us well.” He added that countries that remain open to trade without barriers or tariffs tend to grow faster than those who impose barriers and tariffs. 

Witness

Opening Statements

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

In his opening statement, Chairman Crapo said that the Fed’s semiannual monetary policy report to Congress provides the committee the opportunity to explore the state of the United States economy and the implementation of the Federal Reserve’s monetary policy. Crapo highlighted that since the last meeting, S.2155 has been enacted and has given the Federal Reserve the ability to provide relief to certain banks, improve access to capital, and has been considered by agencies when rules are revisited and created.

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

In his opening statement, Ranking Member Brown said that during last month’s stress tests the Federal Reserve allowed $96 billion to go to dividends and stock buybacks that could have gone to workers, reducing consumer fees, or protecting against future bailouts. Brown criticized multiple banks for being below the capital requirements of the stress test, but noted that Federal Reserve gave those banks passing grades. Brown noted that banks are given the ability to greater influence the test, possibly as far as eliminating the qualitative test. Brown concluded that regulators have been loosening the rules on capital when they should be preparing for the next crisis.

Testimony

The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System
In his testimony, Powell defended the actions of the Federal Reserve to return interest rates and securities holdings to normal levels, citing the unemployment rate, the labor force participation rate, and inflation being near its two percent target. He noted that strong job gains, rising after tax income, and optimism among households have lifted consumer spending, which has, along with healthy levels of business investment and strong economic performance abroad, contributed to robust gross domestic product (GDP) growth in the first half of this year. The Chairman concluded that the Federal Open Market Committee (FOMC) believes that continuing to gradually raise the target for the Federal Funds Rate and reduce the Federal Reserve’s holdings of Treasury and mortgage-backed securities (MBSs) is the best path forward.

Questions & Answers

Capital Requirements

When asked about the Federal Reserve’s decision to issue conditional objections to this year’s Comprehensive Capital Analysis and Review (CCAR) results, Powell stressed that this year’s test was “the most stringent test yet” with most firms finishing above the required post-stress minimums, but that several firms did not and were “appropriate[ly]” labeled conditional non-objects instead of flat out objecting to their plan.

Powell defended the Federal Reserve’s proposed change to the enhanced Supplementary Leverage Ratio (eSLR), noting that it would have negligible effects on the capital requirements for a whole firm. He stressed that it is unfavorable to have banks bound by the eSLR as it causes them to take on more risk.

Throughout the hearing Powell reiterated to Members on both sides of the aisle that stress tests will not be weakened for the largest banks.

Regulatory Relief

Powell was asked how quickly elements of S.2155 will be implemented at the Federal Reserve, such as increased thresholds for the application of enhanced prudential standards from $50 billion in assets to $250 billion, to which he replied that they will be implemented as soon as possible.

In response to a question about recalibrating rules for foreign banks, Powell explained that all banks with $50 billion in U.S. assets have more than $250 billion in global assets, so it is not clear how S.2155 will provide regulatory relief for those firms, though he would not say regulatory relief for such firms will never happen during his tenure, adding that he currently does not have any plans.

Powell replied to a question about weakening regulations in light of high financial profits by pointing out the distinction between larger and smaller institutions, noting that many smaller banks are still subject to burdensome and unnecessary requirements that hamper their ability to do business.

Physical Commodities Rules

Powell commented that he has no time estimate for finalizing rules on physical commodities.

Trade

In response to several inquiries on trade and tariffs, Powell noted that tariffs will have an impact on the economy, and when they become long-run impacts “we should talk about it,” but added that countries that remain open to trade without barriers or tariffs tend to grow faster than those who impose barriers and tariffs.

Powell defended the international rules-based system of trade, that requires countries have to answer to each other should they violate the rules, adding that this type of system has “served us well.” 

Options Market

Regarding capital requirements in the options market and the rule to transition to the standardized approach for counterparty credit risk (SA-CCR), Powell stated that it is a “good policy” and that the Fed is working on it

Incentive-Based Compensation

Powell explained that the incentive-based compensation rule is being handled by multiple agencies, leading to a lack of consensus on the rule so far. However, he continued that the largest financial institutions should have compensation plans in place that do not encourage excessive risk taking, overseen by their Board of Directors.

Housing Finance

When asked about the MBSs found in the Federal Reserve’s balance sheet, Powell explained that they are guaranteed by the government and therefore pose no credit risk. He stressed that the government-sponsored entities (GSEs), Fannie Mae and Freddie Mac, are a “big unfinished piece of business” post-financial crisis and stated the importance of removing the housing finance system from the Federal Reserve’s balance sheet.

For more information on this hearing, click here.