WASHINGTON — Federal Reserve Chairman Jerome Powell said Wednesday that he does not think revamping capital or liquidity requirements is necessary despite recent volatility in the repurchase markets, appearing to diverge from comments this week by Treasury Secretary Steven Mnuchin, who suggested they may need to be rethought.
Liquidity requirements — such as the liquidity coverage ratio — have drawn attention over concerns they force banks to load up on too many liquid assets. Some, including JPMorgan Chase CEO Jamie Dimon, say thate such regulations may have led to recent market distortions in the short-term funding market.
Powell has consistently opposed revising liquidity rules, however. He said in September that the Fed did not believe the LCR was calibrated too high. He echoed that view at a press conference after a meeting of the Federal Open Market Committee.
“It’s a big complicated marketplace, and one of the surprises as I mentioned was that banks that had told us that their lowest comfortable level of reserves was ‘here,' ” Powell said, indicating with his hand. “They were well above that, and yet they didn’t deploy that liquidity when there seemed to be great opportunities to do that. That didn’t happen, so why is that? And so we’re doing careful analysis of that.”
In an interview Tuesday with Bloomberg, Mnuchin agreed with Powell’s assessment that recent turmoil in the overnight repurchase markets was largely a technical issue, but appeared to give more credence to the idea that liquidity requirements might have contributed to those events than the Fed chairman has been willing to.
“The banks have raised an issue around intraday liquidity, and that is something that makes sense for regulators to look at,” Mnuchin said. “It’s a reasonable question: have we gone too far in the other direction in requiring the banks to maintain this excess liquidity for intraday operations?”
Powell added Wednesday that intraday liquidity is something the Fed could look at to ensure that liquidity is moving freely throughout the banking system, but not to adjust capital or liquidity requirements.
“There are just a few technical things that we can look at that would perhaps make the liquidity that we have — which we think is ample in the financial system — move more freely and be more liquid, if you will, and those are things that we would do, but only if we can do it without compromising safety or soundness or financial stability,” he said.
