House lawmakers press Powell on CRA, climate change, stress tests

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WASHINGTON — House lawmakers pressed Federal Reserve Chairman Jerome Powell on a host of regulatory issues including the Community Reinvestment Act, a new capital buffer for big banks, the transition to a new interest rate benchmark and the impact of climate change on the financial system.

Powell’s testimony to the House Financial Services Committee Tuesday came as lawmakers have raised questions about the differing approaches to CRA reform. The Fed held back support for the overhaul plan proposed in December by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

Powell hinted at the central bank possibly considering its own CRA proposal and reaffirmed his support of Fed Gov. Lael Brainard’s criticism of the FDIC and OCC's approach, saying he is “very comfortable with the thinking” that she outlined in a recent speech. Brainard questioned the other agencies' support of a consolidated CRA score, combining various tests.

“We want to be very, very sure that what comes out of this is a proposal that ... will leave all major participants in CRA better off,” said Fed Chairman Jerome Powell.
“We want to be very, very sure that what comes out of this is a proposal that ... will leave all major participants in CRA better off,” said Fed Chairman Jerome Powell.

“We want to be very, very sure that what comes out of this is a proposal that from us that will leave all major participants in CRA better off,” Powell said. “And so, we think it's important that each metric, each change that we make, is grounded in data.”

The agency is also in the midst of finalizing a new simplified capital buffer for the largest banks that some industry professionals fear won’t be ready for the 2020 stress testing cycle, despite assurances from the Fed. And banks are in the process of transitioning away from the London interbank offered rate to a new interest rate benchmark.

The lawmakers also homed in on climate change and the growth of digital currencies in their questions to Powell.

Powell said the Fed is in the early stages of studying both issues.

"Climate change is a very important issue that Congress has largely assigned to other agencies. It does play into our work, however, as it relates to the public's very reasonable expectation that we would make sure that the financial sector, the banks or the utilities that we supervise, are resilient against the longer-term risks from climate change," Powell said. "We're in very early days of understanding what all that means."

Powell is scheduled to testify to the Senate on Wednesday. Here are five takeaways from Powell’s first day on Capitol Hill this week.

Lawmakers from both parties want consensus on CRA rule

Powell was pressed from both parties on the central bank’s plans to propose changes to the CRA.

Democrats, who have previously called on the three regulators to speak with one voice on CRA reform, urged Powell to ensure that the law isn’t weakened and that all stakeholders have ample time to comment on any proposals.

“I am very concerned about OCC Comptroller [Joseph] Otting's harmful proposal to turn CRA into the community disinvestment act and allow banks to escape their obligation to make responsible investments in the communities where they are chartered,” said House Financial Services Committee Chairwoman Maxine Waters, D-Calif. “I urge the Fed to take a careful, deliberate approach to any changes to the implementation of the CRA and to not join Comptroller Otting's misguided efforts.”

Republicans, who have largely supported the OCC’s proposal, pushed Powell to get in sync with the OCC and FDIC in order to provide regulatory clarity to banks.

“As a former community banker, it's my view that we really should have ultimately one approach to CRA among the financial services regulatory agencies,” said Rep. French Hill, R-Ark. “I've had 40 years of dealing with consistency in delivery of regulatory proposals, and so I do think ultimately it would be productive for us to have one approach to that regulation, and modernize it for the digital world that we live in today.”

Rep. Nydia Velazquez, D-N.Y., asked Powell if he "would ... agree with Gov. Brainard's comment that it's more important to get the rule right than to do it quickly."

"Yes, I mean I think that's been our approach and will continue to be," Powell said in response.

Interest is growing in climate-change effects on financial system

Several Democratic lawmakers have been pushing financial regulators to consider the risks of climate change on the financial system. On the Senate side, Democrats have even introduced a bill that would require the Fed to create climate-related stress test scenarios for financial institutions.

At Tuesday’s hearing, Waters urged Powell to give more attention to climate change.

“The Fed and other regulators should utilize financial stability tools under Dodd-Frank, such as incorporating climate-related losses into supervisory stress tests of big banks to address this growing risk,” Waters said.

Powell told lawmakers that the Fed does have an obligation to monitor climate risks to the financial system and said the central bank is in the early stages of determining the implications of climate change.

“We have a job to do, and that is to think about the potential implications for the financial system for the economy,” Powell said. “I think we're at the very early stages of filling in what exactly that means.”

Core of stress capital buffer 'on track' for 2020 cycle

Several Republican lawmakers questioned whether the Fed would complete its work on the stress capital buffer before the 2020 stress testing cycle. The new buffer, first proposed in April 2018, is a simplified metric meant to replace many of the capital ratios banks must meet in their stress tests.

Rep. Ann Wagner, R-Mo., noted that the Fed recently released its economic scenarios against which banks will be tested in the Comprehensive Capital Analysis and Review, but has yet to finalize the stress capital buffer.

“Given the acknowledgment by principals at the Fed of the importance of transparency, I guess I'm concerned about the lack of transparency in this process,” Wagner said.

Powell reiterated comments by Federal Vice Chairman for Supervision Randal Quarles that “the core” of the stress capital buffer will be ready to be incorporated in the next stress testing cycle.

“We're moving along on that, and we're on track to do that,” Powell said. However, he would not provide details on what the key components of the final buffer framework will be.

Libor to SOFR

Rep. Patrick McHenry, R-N.C., the ranking member of the panel, said he is still concerned about the how the financial industry’s transition to a new interest rate benchmark will impact consumers.

The London interbank offered rate, or Libor, the most dominant interest rate benchmark around the globe, will likely be unavailable starting at the end of 2021. The secured overnight financing rate has been developed as an alternative and has gradually gained market share.

“We still have contracts written to the Libor reference rate,” McHenry said. “And I think given the recent volatility in the repo markets, I'm concerned about the subsequent volatility in consumer facing products, including mortgages, auto loans, business loans and other consumer loans.”

Powell told the committee that the Fed is “committed to having the banks ready by the end of next year” to move on from Libor. But he also said he is working with community and regional banks to ease disruptions from the transition.

“SOFR will be the main substitute for Libor, but you know, we are working with regional and some of the larger banks, too, about the idea of also having a credit sensitive rate, and that's something that's ongoing,” Powell said.

A digital dollar?

Members of both parties asked Powell whether the Fed should establish a digital dollar in the wake of the growing use of cryptocurrencies around the world.

Rep. Bill Foster, D-Ill., asked whether a digital dollar would “help ensure that the U.S. dollar continues to serve as the core of the U.S. and the world's financial system.”

And Hill asked whether Congress would need to write legislation authorizing the Fed to create a digital U.S. dollar.

Powell told the panel that having a “single government currency at the heart of the financial system” is something that has served the economy well. He said it remains an “open question” whether the U.S. needs a digital dollar.

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CRA Stress tests Federal Reserve Jerome Powell House Financial Services Committee Maxine Waters Patrick McHenry Climate change Cryptocurrencies
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