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Federal Reserve Chairman Jerome Powell prepares to testify at the Senate Banking, Housing and Urban Affairs Committee hearing titled “The Semiannual Monetary Policy Report to the Congress” at the Dirksen Building on Thursday, June 22, 2023.
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New rules that are expected to require banks to hold more capital will almost certainly not apply to smaller institutions, Fed Chairman Jerome Powell said Thursday.
Powell responded to concerns about proposals to tighten the reins of larger banks, telling members of the Senate Banking Committee that the rules are still in the draft stage.
At the same time, he also expressed concern about the impact of higher capital requirements on lending.
“More capital means more stable banks and stronger banks, but there is also a trade-off,” he said on the second day of his semi-annual monetary policy testimony. “You have to make a judgment about where you draw that line.”
According to Powell, banks with assets under $100 billion will not be affected by new requirements. That provided some relief to Republican lawmakers who questioned whether the changes were necessary, as Powell faced multiple questions about the future of regulation and oversight. If so, the new rules would affect the 25 or so largest banks in the US
The questions and the move to reexamine the regulations follow industry turmoil in March, which saw Silicon Valley Bank and two other major regional banks shut down after deposit runs.
Lawmakers and regulators from the Biden administration have been pushing for a return to stricter requirements after larger regions were given a break from the changes made in 2018.
In separate testimony on Thursday, FDIC Chairman Martin Gruenberg said the upcoming rules could apply so-called international Basel III standards to banks in the $100 billion to $250 billion asset range. The changes are not expected to be applied until sometime in 2024. Michael Barr, the Fed’s vice chairman of oversight, has said they will likely take years to fully implement.
“Capital requirements will be very, very skewed for the top eight banks,” Powell said. “There may be some capital raises for other banks. None of this should affect banks below $100 billion.”
Even with the exemption for smaller institutions, the impending changes represent a shift in thinking that Powell had previously supported, specifically that regulation should be tailored to both small and medium-sized banks. Gruenberg’s comments, for example, “support our view that banking regulators have a preference for higher levels of capital,” Ed Mills, Raymond James’ policy analyst in Washington, said in a note to a client.
The American Bankers Association criticized the move to increase requirements reportedly 20% higher.
“We’ve long believed that regulation should be tailored to a bank’s risk and business model,” ABA president Rob Nichols said in a statement. “Arbitrary capital thresholds and changes that are not justified by rigorous data and evidence are a mistake that will only make it more difficult for banks of all sizes to meet the needs of their clients, customers and communities as financial activities move to less regulated non-banks are sent.”
Powell, for his part, faced little hostile interrogation, despite concerns about the failure of the SVB.
He did receive some criticism from Sen. Elizabeth Warren (D-Mass.), a frequent critic who charged Thursday that Powell is “ultimately responsible for the team of supervisors who fell on the job” when SVB failed.
Powell responded that the Fed “learned some lessons” from the episode.
“The main responsibility I take on is to take the right lessons from this and address it so that we don’t end up in a situation like this where we unexpectedly bankrupt a major bank and contaminate the banking system. That is not the intention. happen, and we need to take appropriate action to make sure it doesn’t happen again,” he said.
Fed Chairman Powell says smaller banks are likely to do so
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