Fed's Powell: Don't expect changes to bank liquidity rule

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WASHINGTON — The Federal Reserve Board does not see an immediate need to lower a key short-term liquidity benchmark for banks, Chairman Jerome Powell said Wednesday.

The post-crisis requirement, known as the liquidity coverage ratio, is among rules that have drawn attention over concerns they force banks to load up on too many liquid assets. Some believe such regulations have led to market distortions in the short-term funding market.

Under the LCR, large banks must maintain enough high-quality liquid assets to cover cash outflows over a 30-day period of stressed economic conditions.

“It’s not impossible that we would come to a view that the LCR is calibrated too high, but that’s not something that we think right now,” Powell said at a press conference following a meeting of the Federal Open Market Committee.

Instead, Powell noted, the central bank could be prepared to make additional reserves available on its balance sheet.

“It might be that more reserves are needed, in which case we are in a position to supply them,” he said.

Powell also emphasized that the liquidity buffers are an important tool for banks to have in the event of a weakened economy, but they should not impede institutions in healthy times.

“I think we want banks to use their liquidity buffers in times of stress rather than pull back from the markets and pull back from serving their clients as a general rule,” he said.

The Fed chief also added that the agency is looking at finalizing the net stable funding ratio in “the relatively near future.”

The NSFR governs long-term bank liquidity and, as proposed in 2016, would mandate that systemically significant banks hold enough debt and liquid assets to keep the firms’ operations afloat for at least a year. Both the LCR and NSFR are in line with Basel Committee standards.

Meanwhile, Powell indicated that negative interest rates are not option that the Fed is likely to consider now or in an economic downturn, taking a different view than has been expressed by President Trump.

In a Sept. 11 tweet, Trump said, “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.”

Powell noted that during the financial crisis, the Fed weighed using negative interest rates as a way to stimulate the economy, but instead used “aggressive forward guidance” and large-scale asset purchases, which worked “fairly well.”

“I think if we were to find ourselves in some future date again at the effective lower bound—again not something we are expecting—then I think that we would look at using large-scale asset purchases and forward guidance,” he said. “I do not think we would be looking at using negative rates. I just don’t think those would be at the top of our list.”

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Regulatory reform LCR NSFR Monetary policy Interest rates Jerome Powell Donald Trump FOMC Federal Reserve