A key Federal Reserve official said regulators should consider pulling their
During a virtual event hosted by the Brookings Institution on Tuesday, Fed Gov. Christopher Waller expressed
"The blowback we've seen from the banking industry and [Capitol] Hill has shown that this is not necessarily a good rule — proposed rule — as it stands now," Waller said. "So, it's gotta have a major overhaul in my view to get a reasonable product, and possibly just taking it back and starting over."
Waller's remarks occurred on the final day for the public to weigh in on the Basel III endgame plan. The proposal would make a variety of changes to how risk-based capital charges are calculated, chiefly by replacing internal models with standardized ones for all banks with at least $100 billion of assets.
Waller and Fed
First, he said U.S. regulators stand to fall short of the Basel Committee on Banking Supervision's core mission of "harmonizing" regulatory standards — an exercise he and others view as being focused on bringing other jurisdictions up to the U.S. level of regulatory scrutiny.
"European banks, U.K. banks were not going to carry through. We decided to go ahead — that's not harmonizing," Waller said, referring to
Waller's second and more pointed criticism of the proposal was its
"We're basically going to impinge on capital market functioning, both in terms of products, services and pricing. I don't understand why we want to do that [for something that is not] seriously showing any threats," Waller said. "I made a big deal about operational risk, which is more than half of the increase, and the way it's calculated made absolutely no sense to me whatsoever."
Banks and their allies have argued that the
Regulators and their supporters argue that past operational issues are often a good indicator of future losses. They also note that allowing large banks to create their own models for such risks — as is the case currently — allows for too much variability throughout the banking system.
Waller said Fed officials are working on addressing issues with the proposal and will accelerate their efforts once the public comments are compiled and considered. He also reaffirmed Fed Chair Jerome Powell's
"[Powell] has said we want to have products go out with broad support on the board. That may be possible, if enough major things get redone, that we could get a broad support for it," he said. "But, it's got to have a lot of work, and like I said it might be best to just pull it back and then work on this and then put it back out at a later date."
Waller also weighed in on the Fed's
After collecting data from throughout the banking system on the true
"I don't want to pick winners and losers — there's no fun in having to do any of that — but Congress told us to do it, and we kind of just did it again, like we did roughly 14 years ago," Waller said. "So, I just try to keep the very focused, narrow legal view that Congress did and we're following that to a T."
Waller also weighed in on the Fed's effort to reduce its balance sheet by allowing assets to roll off without replacing them — a process known as
Though
"I don't think we need to taper the pace on MBS; we're not even hitting the cap … I, personally, don't really want to keep MBS on the balance sheet, so I'm all in favor of letting MBS kinda just continue to run off at the current pace," he said. "But Treasuries, we could start tapering that back and get reserves to where we want."
Waller said there is no leading theory about
"The optics of this are just bad. It has nothing to do with monetary policy at all [or] its effectiveness. Nothing. But, it just kind of looks bad when you're not turning over any seigniorage revenue to the Treasury, and you're delaying when you'll start doing it," he said. "And for that reason, you may want to think about not keeping your balance sheet too big, but that's … one of the few reasons for doing [QT]."