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Powell: Fed cannot enforce FDIC and OCC on new capital proposal

Powell: Fed cannot enforce FDIC and OCC on new capital proposal
Powell: Fed cannot enforce FDIC and OCC on new capital proposal

Jerome Powell
Federal Reserve Chairman Jerome Powell told the House Financial Services Committee that the central bank is on an equal footing with other banking regulators in Washington.

Al Drago/Bloomberg

The Federal Reserve is “ready to move forward” with a new capital proposal for banks, but it cannot force other regulators to act on the matter, Fed Chairman Jerome Powell told Congress on Wednesday.

In his second appearance on Capitol Hill this week, Powell told the House Financial Services Committee that the Fed does not have regulatory dominance over the Federal Deposit Insurance Corp. or the Office of the Comptroller of the Currency and will not seek to pressure the other two agencies. Revisions to the common Basel III endgame Suggestion.

“I would say it’s a strict collaboration,” he said. “And I would say that our discussions with the FDIC, which (Fed) Vice Chairman (Michael) Barr has actually been leading, and the OCC have been very productive so far. So … we’ve continued to work on that, and I believe we’ll get to a resolution of the remaining process issue fairly soon.”

Powell’s latest comments come a day after he declared the Fed’s interest in re-proposing the so-called Basel III endgame package to give the public an opportunity to comment on the “comprehensive and significant changes” that have been made to him in recent months.

During the three-hour hearing on Wednesday, Powell declined to say what Hold up negotiations between the Fed, the FDIC and the OCC on how to proceed.

“I don’t want to say we disagree,” he said. “I just want to say we’re solving this problem together.”

He also declined to provide details on the changes the Fed has already made to the proposal, noting that “nothing is agreed until everything is agreed.”

Powell noted, however, that not all of the changes to the original proposal – which was introduced last summer and generated a wide range of public comments, the vast majority of which were contrary – would be incorporated into the new proposal.

“We’re focusing on one broad area, but there are institutions that have made comments from all areas and we read them all carefully. We’re not going to republish them all,” he said. “For some, we can just make changes and move on.”

Powell also corrected some of his statements from yesterday’s hearings. Instead of mentioning the “strongly held view of the Board” on the resubmission issue, he referred to “the strong view of a number of Board members.” He also clarified that while the capital rule could be finalized as early as the first quarter of next year, that is one of several possible timelines.

While he believes reproposing is appropriate and consistent with past regulators’ actions, Powell did not rule out the possibility of finalizing the rule without seeking additional public input. But if that option is on the table, committee members let Powell know that using it would face swift backlash.

“Sweeping and substantial changes to the Basel III endgame require a complete resubmission. Period,” said Rep. Patrick McHenry, R-N.C., who chairs the Financial Services Committee. “If that doesn’t happen, the House will vote on the Congressional Review Act immediately, as quickly as we can possibly process that.”

When asked for his opinion on the current capital level of the banking system, Powell told the committee it was “about right,” but noted that determining the optimal level of capital is not an exact science. He said his main goal in completing capital reforms is to put the U.S. on par with other major countries and banking jurisdictions around the world.

Powell added that the negative public reaction to the original Basel III endgame proposal – which by some estimates accounted for well over 90 percent of the total feedback – was an issue that needed to be addressed.

“Broad support would empirically mean a solid vote on the Fed board. I tried not to get specific about what that means,” he said. “But it also means broad support in the broader community of commentators on all sides.”

He also made it clear that the Fed will not pursue further regulatory reforms – such as new long-term debt requirements and liquidity standards – until changes to the capital proposal are agreed and presented to the public.

Powell said the Fed is allocating funds to improve the infrastructure underlying its lending facility of last resort, the discount window, adding that the current interface is “outdated.”

Another issue that repeatedly preoccupied lawmakers – both in the House Financial Services Committee on Wednesday and in the Senate Banking Committee on Tuesday – was the compensation of bank executives. Specifically, lawmakers wanted to know why the Fed did nott join the FDIC, OCC and Federal Housing Finance Agency to propose new limits on performance-based compensation for bank CEOs in May. The National Credit Union Administration and the Securities and Exchange Commission have pledged to take similar steps in the near future.

Section 956 of the 2010 Dodd-Frank Act required financial regulators to develop compensation policies to ensure that executives are not incentivized to take excessive risks. The Fed’s failure to comply with this requirement for so long has frustrated some members of Congress for years, but the issue has gained renewed relevance following the collapse of Silicon Valley Bank and other large regional banks last year.

Powell, who has said in the past he would like to better understand the problem regulators are trying to solve, testified that the Fed continues to look at the issue. At several points this week, he referred to guidance the Fed issued in 2010 on top executive compensation and noted that the agency’s examiners closely monitor banks to make sure they meet those standards. He said the Fed’s work is not done, but suggested Wednesday that it may have met its legal obligations.

“By the way, Section (956) requires a rule or guidance,” Powell said after an exchange with Rep. Nydia Velasquez, D-N.Y. “It does not require a rule.”

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