WASHINGTON — Jerome Powell’s nomination hearing Tuesday was a textbook in how federal regulators must walk a political tightrope in 2017.
Chosen to run the Federal Reserve Board in a post-crisis, deregulatory and yet highly partisan environment, Powell was quick to assure Republican senators of his regulatory relief credentials. But Democrats still worry that he and other Trump appointees might upend the Dodd-Frank Act regulatory regime.
For the most part, Powell showed his preference for the former, expressing resistance to writing new regulations and support for tailoring rules for smaller banks. He backed steps to ease the burden for community banks on capital requirements and the Volcker Rule, while appearing to agree with the legislative framework Senate Banking Committee Chairman Mike Crapo has crafted with Democrats on a regulatory relief bill.
“We want regulations to be the most intense and most stringent for the very largest most complex institutions and decrease in intensity, stringency as we move down” to regional and community banks, Powell said in his hearing before the Banking Committee.
But Powell, now a Fed governor, has largely supported the central bank’s post-crisis regulatory regime. At the hearing, he sought to ease concerns by Democrats about the influence of the Trump administration.
“I’m strongly committed to an independent Federal Reserve,” he said.
Here are key takeaways from the hearing:
Powell is strongly committed to regulatory relief
The Fed nominee clearly has come down on the side of easing banks’ regulatory burden, pledging to prioritize steps to tailor requirements based on the size or complexity of an institution while saying the Fed does not have plans to advance further rules.
“Tailoring of regulation is one of our most fundamental principles,” he said.
Powell sounded supportive of the Senate's bipartisan regulatory relief proposal when Crapo asked him if he believed it "would provide significant regulatory relief to community banks, midsize banks and regional banks while still giving the Federal Reserve the authority it needs to supervise those institutions.”
“I do," Powell responded. "On both counts.”
Sen. Adam Schatz, D-Hawaii, asked Powell about whether there is any real need for the banking compliance burden to be reduced if most of the largest banks are already highly profitable and most of their earnings are already passed to shareholders in the form of dividends and stock buybacks. Powell said that if rules can be made simpler without making the financial system less stable, then it is a worthwhile task for the Fed to undertake.
“Let me agree that the banking system is healthy. It’s nice to see banks profitably service their customers,” Powell said. “We do want to err on the side of caution, and I think we’re doing that. It doesn’t help anyone for banks to waste money if you will, to spend more than they need to spend to achieve these safety and soundness objectives.”
There is still skepticism regulatory relief will help community banks
Some senators needed further convincing that the Federal Reserve under Powell would be sufficiently focused on easing the regulatory burden for community banks.
Sen. John Kennedy, R-La., asked Powell if he thought community banks shared any of the responsibility for the 2008 financial crisis.
“It’s fair to say that community banks did not contribute to the crisis in 2008,” Powell said.
But then Kennedy followed up by asserting that the Fed had “punished” smaller banks with the bevy of post-crisis rules.
“I like to think that I have been, and frankly my colleagues as well on the board, have been very focused on avoiding excessive regulation for community banks,” Powell responded. “We’re committed to doing better.”
Democrats are worried the Fed’s independence will suffer in Trump administration
As Republicans sought assurances that Powell will direct the central bank to take a lighter approach to regulation, Democrats expressed concern about the Trump administration’s growing influence on financial regulators and that the agencies will go too far in rolling back crisis-era rules.
“The current administration does not appear to value independence — in the judiciary, the FBI, or the Federal Reserve,” said Sen. Sherrod Brown, D-Ohio, the Banking Committee’s ranking member.
“In unprecedented ways, the president has made comments about the current Fed chair, as well as interest rates,” Brown said.
Brown compared the selection of Powell as the next Fed chair to a reality TV show.
“The search for the Fed chair seemed like an episode of 'The Apprentice,' ” he said.
Sen. Elizabeth Warren, D-Mass., pressed Powell on what rules might be made more stringent under his leadership. She pointed out that his comments to date have been primarily about making existing rules simpler for banks to obey.
“I don’t want to see a one-way street here,” Warren said.
Powell said that, while resolution planning might be an area that the Fed will continue to seek improvements in compliance, there are no major supervisory loopholes that the central bank or other agencies have yet to tackle.
“I get your question. There are a lot of problems we need to address in the banking system, and we’ve had eight years of writing new rules,” Powell said. “I can’t think of a place where we’re lacking an important rule.”
Warren said she was troubled by that position and thought that a Fed that is primarily seeking to accommodate the banking industry is one that is poised to create the conditions necessary for a new financial crisis.
“I am deeply concerned that you think the biggest regulatory problem is that the rules are too hard on Wall Street banks,” she said. “That kind of mindset … helped lead to the financial crisis.”
Sen. Catherine Cortez-Masto, D-Nevada, asked Powell what the Fed might do under his watch to ensure that average consumers remain protected from predatory activities by the banking industry as rules and laws are changed to benefit their profitability. Powell said that the Fed has little power to control how banks distribute their earnings between customers, investors and employees, but it does have an important consumer protection mandate and will pursue that mandate and any additional requirements “aggressively.”
“We have been assigned an important role in consumer protection,” Powell said. “I’m committed as chair, as I have been as governor, that our consumer protection [office] will have the resources it needs to do its job, and whatever Congress assigns to us we will do … aggressively."
The Fed nominee supports softening asset thresholds
One of the biggest regulatory relief issues involves the asset cutoffs at which bigger banks face a tougher level of regulation. For example, many support raising the $50 billion threshold in Dodd-Frank for “systemically important” banks, with some arguing that a numeric threshold should be replaced with an activities-based trigger.
Powell said, in general, he supports having both components — a “discretionary approach” and a numeric threshold — having a role.
“If you go entirely with a discretionary approach, then you are leaving the regulators a lot of room to decide things. Congress has generally … done both, and I think doing both is appropriate,” he said. “I do think though that fundamentally size is only one indicator of the riskiness of a firm and of the possibility of it damaging the financial system through its failure or through its activities. The business model really matters, and all sorts of things matter.”
Powell does not see big risk from cryptocurrencies in the short term
Sen. David Purdue, R-Ga., asked Powell whether he was concerned about the potential for the meteoric rise in valuations for blockchain technologies to pose an asset bubble risk to the economy on the scale of the late-1990s dotcom bubble. Powell said that cryptocurrencies could pose a threat to the Fed’s ability to make open market operations in the long term, but in the near term the sheer size of blockchain technologies isn’t big enough to pose that kind of threat.
“There’s no question, the valuation [of cryptocurrencies] have gone up a lot in the last year or so,” Powell said. “In the long, long run, I think cryptocurrencies could matter, but they don’t really matter today.”
Stress test rollback isn’t a done deal
Brown further pressed Powell on whether he thought that the kinds of regulatory changes envisioned by the administration and Congress might “pave the way” for a future financial crisis. Powell said that, while “certainty is kind of a high standard,” he was confident that the changes would not lead to that kind of an effect.
“What about fewer stress tests?” Brown asked.
“That’s not something we’ve decided,” Powell responded. “Stress testing is a really important post-crisis innovation, and the banks will tell that to you privately.”
No free pass for Wells Fargo
Cortez-Masto asked Powell whether he thought the Fed has been too harsh in its responses to bank misbehavior, citing specifically the cross-selling scandal that has embroiled Wells Fargo in the past year. While not referring to Wells by name, Powell said he found the behavior of the firm in that case to be “very disturbing” and did not think the Fed or other regulators have been too harsh in its responses.
“I don’t think I would characterize it as too harsh,” Powell said. “I think it’s appropriate that we strike a professional tone in our supervision and regulation of financial institutions. But no, my main reaction to what you refer to is one of concern that institutions are still having problems with bad behavior, bad conduct toward consumers.”