The Federal Reserve's ongoing capital review will be a balance act between financial safety and economic support, Chair Jerome Powell told lawmakers Tuesday.
Powell told the Senate Banking Committee that if the current "holistic" review of requirements determines that capital levels should be higher, the Fed will be careful not to overdo it. But he added that determining minimum capital requirements is not an exact science.
"It's always a balance. We know that higher capital makes banks safer and sounder. We also know that you will, at the margin, provide less credit the more capital you have to have, but I think it's never exactly clear that you're at perfect equilibrium," he said. "It's a fair question, I think, to look at that."
Powell's testimony came as part of a two-day stint on Capitol Hill to deliver his semiannual monetary policy report to Congress.
The Fed's holistic capital review was a common line of questioning during the hearing. Several Republicans on the committee questioned whether banks really needed to hold more capital, given their ability to weather the financial distress of the COVID-19 pandemic.
Ranking member Sen Tim Scott, R-S.C., and the rest of the Republicans on the committee
"Yes, I can easily commit to that," Powell said. "We're very strongly committed to tailoring, and I can say that anything we do will reflect tailoring, which is a long held principle for us and also now a requirement of law."
Fed Vice Chair for Supervision Michael Barr called for the holistic capital review as one of his first acts after being sworn in as the central bank's chief regulator last summer. The effort is set to encompass all of the Fed's various capital standards to see how they work for their individual purposes and in totality.
Barr has not taken an official stance on how overall capital requirements should be changed, but has noted that capital in the U.S. banking system is at the
Powell did not go into specifics about what changes might come from the review or where in the process the Fed is. He added that capital reviews are something to be expected whenever the Board of Governors gets a new vice chair for supervision.
"In our system, we have a vice chair for supervision who has statutory responsibilities and when a new vice chair for supervision comes in, generally, they're going to want to take a fresh look [at capital rules]. That's what former Vice Chair [Randal] Quarles did and [former Fed Gov.] Dan Tarullo kind of had the job on an informal basis, and that's what he did," Powell said. "It's only natural that someone would come in and take a fresh look, and I think that's part of the process. The role of that person is to make recommendations on regulation and supervision to the full board, the role of the board is to consider those when made and, to me, this just comes under that heading."
Powell also fielded questions from senators on both sides of the aisle about regulatory policies on digital assets, including cryptocurrencies and stablecoins.
Powell noted that permissionless public blockchains, the networks through which digital assets are often traded, are of particular concern to regulators because of the high incidents of fraud and money laundering. He also reiterated his support for Congress to enact a "workable legal framework around digital activities."
Asked about whether stablecoins — digital assets that have their value tied to a specific currency, such as the dollar — could be integrated into the traditional banking system, he said they could but only after a regulatory framework is crafted to ensure they are treated like similar, existing financial products.
"People are going to assume when they deal with something that looks like a money market fund that it has the same regulations as a money market fund or a bank deposit, and so stablecoins need some attention in that respect," he said, adding that as activities once dominated by banks move away from the banking system, regulations should adjust accordingly.
Powell also addressed concerns around the Fed's new consideration of climate-related risks to the financial system. Several Senators questioned whether the
He said the Fed's only focus is on the safety and soundness of the banks involved and ensuring they are prepared to deal with the climate and policy risks within their business models.
"The climate scenarios are something that the banks are already doing themselves, and climate guidance is something that they're looking for. They want to know how we're thinking about this," he said. "But, we will try really hard not to get on a slippery slope and find ourselves becoming climate policymakers. It's just not appropriate for an independent agency."
Powell also provided a brief update on the Fed's Community Reinvestment Act reform effort. He said the central bank had reached agreement with the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency about general guidelines for modernizing CRA compliance evaluations, but it would be "some months" before the framework is finalized.
He said he expected to be briefed on where the effort stands sometime next week, adding that he might be able to provide an update after the next Federal Open Market Committee Meeting on March 21 and 22.
Powell is set to testify in front of the House Financial Services Committee on Wednesday morning.
