WASHINGTON — Federal Reserve Board Chair Janet Yellen signaled Wednesday that the central bank could support a House Republican effort to reduce banks' regulatory burden in return for their holding higher capital, but said such a deal should be open only to small banks.
"It would be worthwhile for community banks to be put in a simplified capital regime," she said during her semiannual monetary policy hearing in front of the House Financial Services Committee.
Rep. Jeb Hensarling, R-Texas, introduced legislation earlier this month that would allow banks that are rated Camels 1 or 2 and have a leverage ratio of at least 10% to choose to follow a regulatory framework that would exempt them from a number of Dodd-Frank and Basel III regulations.
Yellen said regulators are also weighing that idea.
"We are looking to reduce regulatory burden and we are contemplating a simplified capital rule for well-capitalized banks," Yellen said.
Rep. Sean Duffy, R-Wis., suggested that the Fed could use the 10% leverage ratio for all banks and not just community banks.
"Do you oppose the idea that if you have a high leverage ratio and that you hold good capital that you cannot get out of regulations that come from the Fed and other regulators?" Duffy asked.
But Yellen drew the line at offering the deal for larger institutions. "I think for community banks, yes … for systemically important banks the answer is no," she responded.
She also said that relying solely on a leverage ratio is flawed because the measure does not take into account the types of assets that a bank holds and it encourages banks to take on more risk to boost profits.
"I think it would be a very bad idea to only have a leverage ratio that would encourage banking organizations to take on risk by loading up their balance sheets with riskier assets and that happened prior to the financial crisis," Yellen said. "It's why we went into risk-weighting, so I think it is useful to have such a measure as a backup measure, but not sufficient."
The Fed chief also acknowledged that community banks are "struggling under regulatory burdens" and an extended period of low interest rates that are putting pressure on margins, but said credit availability remains flush.
"Every indication I have seen is the supply of credit remains healthy to small businesses that it doesn't rank among the top of" small businesses' list of concerns, Yellen said. "I have not seen a change" in credit availability "that would be attributable to financial regulations."
But Rep. Steve Stivers, R-Ohio, said the increasing regulatory requirements are counterbalancing the Fed's monetary policy efforts.
"It just seems like even though you have reduced interest rates with your monetary policy, your regulatory policies are increasing costs and reducing folks' ability to make private investment, and also doing it at such a level higher than the rest of the world it just makes America a less attractive place to place jobs and financial services jobs," Stivers said.
Rep. Randy Neugebauer, R-Texas, also asked whether the Fed is going too far in its regulations of the largest banks by imposing capital requirements higher than international standards.
"Is the goal to make these institutions failproof or just to make sure the American taxpayers don't have to bail them out in the event that they do fail?" Neugebauer asked.
But Yellen said the higher standards more than pay for themselves in the long run.
"At various points, we have looked pretty carefully at what the impact is of these rules on the costs and benefits on society as a whole, and the overwhelming conclusion that comes from those studies is financial crisis takes an immense toll on American households and businesses," Yellen said.