Powell: Community Banks May be Spared From Tougher Capital Rules

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Federal Reserve Chairman Jerome Powell said he does not expect smaller community banks to be subject to higher capital requirements as part of any move by the central bank to strengthen the banking system in the wake of several failures earlier this year.

The chair made this point in response to a series of questions from lawmakers on the House Financial Services Committee as part of Powell’s semiannual testimony to Congress.

Some Republican committee members expressed concern that higher requirements would restrict lending, unfairly punish smaller community banks and perhaps even slow the economy.

“I don’t know that there will be much in the way of capital increases proposed for banks other than the very large banks, but we’ll have to see,” said Powell.

Fed Vice Chair for supervision, Michael Barr, is overseeing a so-called holistic review of capital requirements. Barr has said that he believes higher requirements may be necessary for some mid-sized institutions, along with other changes to bank supervision. A proposal from the Fed is expected this summer.

The Fed’s approach to the banking industry was one of several topics covered by Powell during his three hours before the House committee, including the direction of inflation and the pace of interest rate increases. Even his affinity for the Grateful Dead came up.

Powell said inflation is still running high even though it’s moderated since the middle of last year. He also said there are signs the job market is coming into better balance, pointing to an increase in labor force participation, easing in wage growth and drop in job vacancies.

But labor demand, he said, still substantially exceeds the supply of available workers.

“The process of getting inflation back down to 2 percent has a long way to go,” said Powell. “It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”

The central bank decided to hold off raising rates at its policy meeting last week, but raised its interest rate forecasts for this year, signaling rates could rise to as high as 5.6%. That implied two additional rate hikes are likely this year. Three officials see rates rising closer to 6%.

“Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” Powell said.

But Powell spent more of his time Wednesday discussing the possibility of new rules for US banks.

Committee Chair Patrick McHenry expressed concern about an idea Barr floated Tuesday for so-called reverse stress testing to improve the resilience of banks.

“[Barr is] pursuing a massive increase in capital standards for medium and large institutions and that this would limit banks’ ability to lend and starve consumers and small businesses of capital,” McHenry said.

Representative Andy Barr went as far as to say that Powell should revisit a 2010 law passed in the wake of the 2008 financial crisis to ensure that the vice chair of supervision only make recommendations, not unilaterally write his own preferred regulation.

Powell said in response, “We want to be careful not to regulate the smaller banks to the point where really their business models are challenged for all but the largest banks.”

Powell added any increase in capital will need to be shown to be justified.

New requirements that force banks to hold greater buffers have pros and cons. They will increase their stability but will also make it more difficult to earn robust profits and could cause banks to pull back on certain types of lending. Powell discussed this balance.

“It’s always a trade off,” he said. “More capital means more stable, resilient banking systems. It can also at the margins mean less credit availability…there is no perfect way to assess that balance.”

One lawmaker asked if higher capital requirements may have prevented any banks from failing earlier this year. Four institutions went down in March and May.

“This a hypothetical, unknowable question,” he said. “I think it might have helped.”

Powell made it clear that new rules that may be considered this year by the Fed board would not affect community banks and instead would impact the “biggest banks” and those in the range of $100-250 billion, which applied to Silicon Valley Bank before it was seized in March.

He even told a story about his own personal experience with community banks, saying that he received a mortgage from such an institution after an arrangement with a large bank “failed at the last minute.”

“I have a very positive experience with community banks,” he said.

Powell also confirmed another part of his experience: his affinity for the band Grateful Dead. Speculation about his fandom mounted on social media earlier this month when a photo circulated on Twitter of someone who looked like Powell at a Dead & Company concert on June 3. Dead & Company features several former members of the original band.

One lawmaker asked him how he liked the show.

“It was terrific, what can I say,” he said. “I have been a Grateful Dead fan for 50 years.”

Source : Yahoo!Finance