Capital levels are just right, Powell tells House members

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WASHINGTON — Federal Reserve Board Chairman Jerome Powell on Wednesday defended his agency's refinements to the post-crisis regulatory regime, telling House members that the central bank's policy approach will not result in meaningful changes to capital requirements, especially for the largest banks.

In his second day of semiannual testimony in Congress, Powell alternately declined invitations by some members of the House Financial Services Committee to consider loosening capital standards and and pushed back against portrayals by others that the Fed’s regulatory changes have resulted in a weaker capital regime.

Rep. Andy Barr, R-Ky., said the success of the post-crisis regulatory framework — credited by Powell as having made the system more resilient to financial shocks than before the crisis — should prompt the Fed to reconsider its special capital surcharge for "global systemically important banks."

With the "enhancement to resiliency and resolvability, would it be appropriate to re-examine the calculation of the G-SIB surcharge, since it was originally formulated in 2015, prior to the aforementioned improvements? Barr said.

Powell countered that the current calculation of the surcharge is appropriate.

“I think the overall level of capital, particularly at the largest firms, is about right,” Powell said. “I’m open to evidence that there are problems with that. I don’t see U.S. banks having difficulty competing, particularly internationally. In terms of the surcharge in particular … I would say the overall level is just about right.”

On the other side of the coin, Powell similarly would not concede an assertion by Rep. Katie Porter, D-Calif., that the agency’s recent regulatory proposals that ease some of the demands on large banks — particularly changes to the enhanced supplementary leverage ratio and stress tests — would reduce loss-absorbing capital in the banking sector.

“The Fed’s view is that we want the leverage ratio to be a high and hard backstop — we don’t want it to be binding, and it had become binding, so we lowered it a bit,” Powell said. “The actual amount of capital that will leave the system, including at the holding companies, is very, very small.”

He said any reduction in required capital levels resulting from the changes is small.

“I like to think we’re holding it where it is,” Powell said. “It’s a relatively tiny amount of capital that leaves the system. Some of it can leave the bank to go to other parts of the holding company, but it doesn’t get out of the holding company.”

Powell also defended the Fed’s recent proposals to increase transparency in its stress testing regime, providing banks with post-stress loss metrics for both hypothetical and real portfolios, as well as greater insight into the Fed’s framework for developing models. The stress tests are a critical post-crisis supervisory innovation, he said, and as such they must remain stringent, but the Fed should be open to making improvements where possible.

“The idea that we would give [the banks] our actual models is not a good idea for a couple of reasons,” Powell said. “One is that would really be … in effect giving away the test, but in addition, I think it would create real incentives for banks to stop thinking about risk on their own and kind of rely on our thinking about risk, our loss-rate estimates. So we’ve stopped way short of that, but we’ve provided more transparency, and I think appropriately so.”

Rep. Steve Stivers, R-Ohio, also asked Powell whether the Fed was considering pulling back on a plan to develop its own real-time payments system, if such a system already existed outside of government control.

“One thing that I hope you’ll stay focused on is whether the free market and the private sector can actually provide a real-time payments system, because if they can, there’s no need for the Federal Reserve to do it,” Stivers said.

Powell said the central bank was focused on its statutory responsibilities.

“That’s part of the things we have to look at under the Monetary Control Act,” Powell said.

Several members also asked Powell whether he supported a transition to the Financial Accounting Standards Board’s Current Expected Credit Loss standard, known as CECL. Rep. Brad Sherman, D-Calif., said that the standard — which requires banks to build in expected loan losses at the time loans are originated — might cause banks to increase reserves and discourage lending in times of economic stress.

“The effect of this may be to increase reserves, but you, the regulators, are supposed to decide the level of reserves,” Sherman said. “I wonder if you think we should make this major accounting change for banks that will deter lending, particularly in economic downturns, without a quantitative impact study.”

“We don’t think it will have that effect, but we will be watching carefully,” Powell said in response. “It’s really been under discussion for a decade now — it’s a decision that FASB made and that we’re just implementing, and if we find it does have effects like that, then we’ll take appropriate action.”

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