WASHINGTON — Federal Reserve Chair Jerome Powell said that the central bank will consider a Basel III endgame proposal — in addition to the nascent leverage ratio proposal being unveiled later in the day — as part of bank regulators' deregulation push during the Trump administration.
Powell, speaking before the Senate Banking Committee on the
"We're looking at basically two big pieces now: Basel III and the leverage ratio," Powell said. "I'm pretty confident we'll move on both of those in the relatively near future."
Powell said that the previous Basel III endgame proposal, put forward by regulators during the Biden administration, set minimum capital requirements "well above" the international standard.
"I would agree we're going to take a fresh start at that," he said.
Powell's comments come just before the Fed is set to meet on Wednesday to advance a proposal that would reduce the supplemental leverage ratio for the largest banks. Republicans applauded the planned meeting, while the Senate Banking Committee's ranking member Elizabeth Warren, D-Mass.,
"Today, you will leave this hearing and go directly to a meeting where the Fed is expected to vote to lower capital requirements for JPMorgan, Goldman Sachs, any of the other "too big to fail" banks," she said. "At a time when the economic data are flashing red, these shortsighted changes will increase the likelihood that these megabanks once again tank the economy and come back here, begging Congress for bailouts when they're risky bets go bust."
Powell said that the proposal "would not in any way diminish the safety and soundness of the banking system."
"The idea behind it is that we want risk based capital to be the binding capital requirement, because we want … banks [to] be sensitive to the risks that they're taking," Powell said. "If leverage ratio is not risk sensitive, it treats every asset as equally risky. So if that's binding, then that interferes with banks' incentives to manage the risks, and actually discourages banks from taking on relatively low-risk activity."
At the same time, Powell threw cold water on a proposal from Sen. Ted Cruz, R-Texas, that would end the Fed's authority to pay interest to banks. The proposal hasn't gotten any other support and isn't likely to be passed by the Senate, and Powell's comments will likely further stall the bill.
"There's an illusion that it would save money, that is not the case," Powell said.
He said that the proposal would threaten the Fed's ability to control short-term interest rates and the central bank's so-called "ample reserves" monetary policy regime.
"If you want to go back to scarce reserves, it would be a long and bumpy and volatile road," he said. "I wouldn't recommend that we take that road. Having a lot of liquidity which is what goes with ample reserves, means banks are able to continue to lend."
