Tough standards for biggest banks not going away: Fed’s Powell

WASHINGTON — The Federal Reserve has no plans to lower or significantly alter capital and supervisory expectations for the largest banks despite lobbying by such institutions, Chairman Jerome Powell said Wednesday.

Indeed, speaking during a press conference following the Federal Open Market Committee's meeting, Powell left open the possibility of an additional capital buffer on the largest banks in the near future.

The Fed has focused much of its regulatory agenda to date on providing adjustments to small and midsize institutions, whereas the eight U.S. global systemically important banks, or G-SIBs, have received little in the way of attention. Powell said the rationale for this was to tailor the rules for smaller institutions so that they did not face the toughest requirements designed for the largest banks. Asked whether the Fed plans to eventually ease requirements for G-SIBs, Powell said such a move isn't imminent.

“With larger institutions, we want regulation to be effective and efficient,” Powell said. “I wouldn’t want to materially change capital levels, because I think it’s important that the largest financial institutions ... be held to the highest standards and higher expectations. While we may tailor some of those regulations, those fundamentally high expectations are not going to change.”

Andrew Harrer/Bloomberg

The Fed has long espoused the goal of “tailoring” its regulatory rules and supervision — that is, focusing oversight and backstops on those institutions that pose the greatest risk. That trend appears to have continued with the confirmation of Powell in February as Fed chairman and Randal Quarles as Vice Chairman for Supervision last October.

In April, the Fed proposed a so-called “stress capital buffer” that would swap out a variable minimum capital requirement based on the previous year’s stress test results for some of the myriad minimum capital standards that have been in place since the crisis. The Fed estimated that the proposal would require the eight G-SIBs to retain between $10 billion and $50 billion in additional capital, while smaller banks would experience lower capital requirements.

More recently, the Fed in late October unveiled its proposal for applying enhanced prudential standards to banks between $100 billion and $250 billion in assets, though the proposal went further and included regulatory changes for banks up to $700 billion in assets. But the G-SIBs received virtually no changes to their regulatory requirements, and Powell at the time suggested that this was by design.

“The proposals before us would prescribe materially less stringent requirements on firms with less risk, while maintaining the most stringent requirements for firms that pose the greatest risks to the financial system and our economy,” Powell said.

But the Fed has also been under pressure from the largest banks and their allies in Congress to offer them some regulatory relief, particularly with respect to the G-SIB surcharge. That rule requires the G-SIBs to hold an additional capital buffer of between 1-4.5% to their minimum capital requirements based on various aspects of their risk profiles, including reliance on short-term wholesale funding. Powell’s comments, while not definitive, suggest that the agency does not have immediate plans to adjust the surcharge.

Powell also said during the conference that he was leaving the door open to a possible increase in the Fed’s countercyclical capital buffer. That buffer — a 2016 Basel III-related rule that allows the Fed to instruct banks with more than $250 billion in assets or $10 billion in nonbank liabilities to retain additional capital at the top of the business cycle — has never been deployed, but Fed Gov. Lael Brainard said recently it may have “advantages” in the current business cimate.

“That’s a tool that I am absolutely willing to use and happy to use at such a time as that test is met,” Powell said. “We meet and discuss that on roughly an annual basis. I think we’ll be doing it early next year, we’ll be doing that then.”

Powell noted that he has said in the past that he felt that the systemic risks were not elevated enough to warrant an increase of the countercyclical buffer, but would not let his previous comments dictate his position when the Fed revisits the issue.

“I recently gave a speech saying that I thought that financial stability vulnerabilities are roughly at a moderate level,” Powell said. “But I would like to leave my mind open on that. I’ll have that discussion with my board colleagues when the issue arises.”

Powell’s comments come as the FOMC voted Wednesday to increase the federal funds rate for the fourth time this year to between 2.25-2.5%. The decision was not unexpected, but was made in the face of near-constant tweets and public comments from President Trump exhorting the Fed not to raise rates. The rate hike was approved by all ten voting members of the committee, though two nonvoting participants suggested they would have preferred not to raise the federal funds rate.

But the committee appears divided on how aggressively to raise rates in 2019. In September, a majority of the committee’s members anticipated three rate hikes in the coming year, while after Wednesday’s meeting four members preferred only one rate hike, five anticipated two hikes and six members continued to believe that three hikes were warranted. Two additional members preferred not to raise the federal interest rate in 2019.

The committee said in its statement that “further gradual increases … will be consistent with sustained expansion of economic activity strong labor market conditions, and inflation near the committee’s 2% objective over the medium term.”

The committee’s economic projections were only slightly changed, but the subtle changes were notable. Unemployment rates for 2018 and 2019 were unchanged, and the committee made only slight downward revisions for its inflation estimates. But the committee revised downward its GDP projections for 2018 and 2019, estimating only 3% growth this year and 2.3% growth next year. In September the committee had estimated 3.1% growth in 2018 and 2.5% growth in 2019.