HFSC Hearing with Fed Chair Powell

House Financial Services Committee

“Monetary Policy and the State of the Economy”

Wednesday, February 27, 2019

Key Topics & Takeaways

• Inter-Affiliate Initial Margin: Rep. Frank Lucas (R-Okla.) noted that transactions between affiliates are risk management tools that do not expose counterparties to each other’s risk, noting that the Commodity Futures Trading Commission (CFTC) and European regulators agree with exempting these transactions from initial margin requirements. He stressed that $38.8 billion in capital is held up due to initial margin for transactions that are not inherently risky and urged Powell to move soon to address this. Powell replied that while the Fed has not decided on this, it is looking at the issue and expects to have an answer soon. Reps. Blaine Luetkemeyer (R-Mo.) and Rep. Ted Budd (R-N.C.) also asked about the issue, and Powell replied that while there are “a lot of priorities” at the Fed due to implementing S. 2155, this issue is “certainly being worked on actively.”
• Volcker Rule: Rep. Bill Huizenga (R-Mich.) discussed the Volcker Rule’s covered funds provision, asking when Powell will address the issue, to which Powell noted that the Fed has received extensive comments on its Volcker proposal and that they are looking for ways to address concerns raised, but would not provide a date for when clarity will be provided. Huizenga also asked when the Fed will finish the Volcker tailoring rule from S. 2155, to which Powell replied that he will get back to him with a timeframe.
• Standardized Approach to Counterparty Credit Risk (SA-CCR): Lucas discussed the joint proposal between the Fed, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) on SA-CCR, and that the framework asked to hear from stakeholders about the need for an offset for client margin in the supplemental leverage ratio (SLR). He stated that the framework would significantly raise capital requirements for over-the-counter (OTC) unmarked swaps, making them more expensive. He noted the decline in the number of firms providing clearing services has an impact on end users in the derivatives markets, adding that the CFTC submitted comments raising concern over this. Powell replied that the Fed is currently reviewing comments received on the proposal.

Witness

• The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System

Opening Statements

Chairman Maxine Waters (D-Calif.), House Financial Services Committee

In her opening statement, Waters stressed the importance of an independent Federal Reserve (Fed). She expressed her concerns with the Fed’s actions following the deregulation path of the White House and presented the perceived influence of the Trump Administration over the Fed with regards to Dodd Frank and federal interest rates. She also highlighted the need for higher bank capital levels and reserve requirements. Lastly, she shared her concern overf the excessive income inequality that has persisted in the economy and her belief that the Fed should focus on this as a primary issue.

Ranking Member Patrick McHenry (R-N.C.), House Financial Services Committee

In his opening statement, McHenry praised Chairman Powell for his transparency and clear communication to Congress and the American people. He shared his concerns over the global uncertainty of international economic strength in Europe and China, highlighting how these risks effect the strength of the American economy, and expressed his desire for clear and vocal action from the Fed in response to these fears.

Rep. Emanuel Cleaver (D-Mo.)

Cleaver focused on the importance of the Fed maintaining its primary focus on maximum employment and stable prices, as well as the Fed acting as an independent agent that is not tempted by short-term political influences. He also noted how in today’s political landscape the pressure the Fed faces from Congress and the White House is unmatched by any other time in history.

Testimony

The Honorable Jerome Powell, Chairman, Board of Governors of the Federal Reserve System

In his testimony, Powell stressed the importance of the Fed’s independence from political actions and presented the continued priority of the dual mandate as the primary goal of the Fed. He stressed the advancements in transparency that the Fed has taken in recent years, specifically the Financial Stability Report and the Supervision and Regulation Report. Powell highlighted the strength of the U.S. economy, focusing on monthly job gains, household economic optimism and gross domestic product (GDP) growth. He continued by presenting certain concerns in the economy the Fed has been monitoring, such as income inequality, a decline in the labor force participation rate and global economic uncertainty. Specifically, he shared the concerns the Fed has been examining with regards to Brexit and the declining growth in the Chinese economy. Powell also shared that the Fed has worked towards shrinking its balance sheet and reducing reserve requirements for banks. He maintained his support of patience and data-dependent decision making as the cornerstone of the Fed’s monetary policy.

Questions & Answer

Inter-Affiliate Initial Margin

Rep. Frank Lucas (R-Okla.) noted that transactions between affiliates are risk management tools that do not expose counterparties to each other’s risk, noting that the Commodity Futures Trading Commission (CFTC) and European regulators agree with exempting these transactions from initial margin requirements. He stressed that $38.8 billion in capital is held up due to initial margin for transactions that are not inherently risky and urged Powell to move soon to address this. Powell replied that while the Fed has not decided on this, it is looking at the issue and expects to have an answer soon. Reps. Blaine Luetkemeyer (R-Mo.) and Rep. Ted Budd (R-N.C.) also asked about the issue, and Powell replied that while there are “a lot of priorities” at the Fed due to implementing S. 2155, this issue is “certainly being worked on actively.”

Volcker Rule

Rep. Bill Huizenga (R-Mich.) discussed the Volcker Rule’s covered funds provision, asking when Powell will address the issue, to which Powell noted that the Fed has received extensive comments on their Volcker proposal and that it is looking for ways to address concerns raised, but would not provide a date for when clarity will be provided. Huizenga also asked when the Fed will finish the Volcker tailoring rule from S. 2155, to which Powell replied that he will get back to him with a timeframe.

Standardized Approach to Counterparty Credit Risk (SA-CCR)

Lucas discussed the joint proposal between the Fed, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) on SA-CCR, and that the framework asked to hear from stakeholders about the need for an offset for client margin in the supplemental leverage ratio (SLR). He stated that the framework would significantly raise capital requirements for over-the-counter (OTC) unmarked swaps, making them more expensive. He noted the decline in the number of firms providing clearing services has an impact on end users in the derivatives markets, adding that the CFTC submitted comments raising concern over this. Powell replied that the Fed is currently reviewing comments received on the proposal.

Housing Finance Reform

McHenry asked if it is important for Congress to prioritize housing finance reform, and Powell replied yes, that it is a “big unfinished piece of business” for the post-financial crisis era. Rep. Brad Sherman (D-Calif.) commented that Fannie Mae and Freddie Mac should continue to be federal government agencies and never again be semi-public/semi-private agencies that put taxpayers at risk.

Global Financial Stability

McHenry asked how China’s use of state-run banks to allocate credit impacts financial stability for the rest of the world. Powell replied that while China is trying to move to more of a market-based system, he is unsure if there are any implications for global financial stability.

Cleaver asked if uncertainty in trade impacts how the Fed creates healthy monetary policy, to which Powell replied that there is “a lot of uncertainty out there” and that it would be “good to have trade issues resolved,” adding that individual companies could be impacted by the uncertainty.

In response to a question from Rep. Bill Foster (D-Ill.), Powell stated that Brexit is an unprecedented event and that while they are unsure of its impact on the market, it may pass without much implication for the U.S.

Waters, McHenry and Rep. Katie Porter (D-Calif.) asked about stress tests and what sort of transparency the Fed plans on providing to institutions, to which Powell replied that it will not be providing the actual models, as that would be “giving away the test.” When asked about giving feedback on the tests, Powell replied that there is “a lot of feedback” at the staff level and above.

Leveraged Lending

Rep. Gregory Meeks (D-N.Y.) discussed leveraged lending, noting that while prudent lending to American businesses should be encouraged, he does not want to go back to practices that led to the financial crisis. Powell replied that it is an “important supervisory focus” but that he does not believe it poses systemic kinds of risk, adding that banks do not have excessively high exposures to corporations like they did before the financial crisis.

Diversity and Inclusion

Several Democrats discussed the importance of diversity and questioned the lack of it on the boards of the Fed’s regional banks. Powell replied that the Fed has made “big strides” in the last few years and that progress has been “quite broad.” He continued that “successful organizations value diversity and inclusion, and that is certainly true at the Fed.” Rep. Al Green (D-Texas) asked for the Fed to conduct a study on discrimination and its impact on the economy, covering race, gender, sex, and other factors, to which Powell replied he would get back to him on that.

Current Expected Credit Loss (CECL)

Powell fielded questions from several members regarding the impact on CECL and whether a quantitative review has been conducted. Powell replied that the Fed is giving banks a three-year phase-in starting in 2020 and that the Fed is doing everything it can to avoid a lending disruption, noting that the Fed will be watching the impact of CECL “carefully.” Luetkemeyer noted that CECL will have a “devastating” impact on the home lending market, especially with the government-sponsored entities (GSEs) and asked if Powell has any concerns that costs will be passed on to consumers. Powell replied that while he knows “regulation has a cost,” the Fed is trying to make it as efficient as it can. Rep. Scott Tipton (R-Colo.) asked if stress tests will incorporate CECL before it is applied to all banks in 2022, to which Powell replied CECL will not be added for the next couple of cycles.

Community Reinvestment Act (CRA)

Multiple Democrats discussed the CRA and noted how Comptroller of the Currency Joseph Otting is “hopeful” other regulators will join the CRA reform proposed by the Office of the Comptroller of the Currency (OCC) later this summer. Powell replied that one agreed upon framework for CRA would be the best outcome and that the regulators are working together on this with a goal of a joint rulemaking.

Upcoming Final Regulations

Huizenga noted that the Fed, OCC and FDIC issued a proposal in October 2018 to replace the current exposure method with a more risk-sensitive methodology and asked for an update on its finalization, to which Powell replied that it is “coming soon.”

Global Systemically Important Bank (G-SIB) Surcharge

Rep. Andy Barr (R-Ky.) questioned whether the GSIB surcharge puts U.S. banks at a disadvantage, as it is more stringent than what was agreed by the Basel Committee. Powell replied that he believes the levels of capital are “about right,” especially in the largest institutions, but that he is open to evidence proving otherwise. He added that U.S. banks are competing “very well globally” with their international competitors.

Cybersecurity

Rep. Lee Zeldin (R-N.Y.) discussed the 2016 cyber heist from the Bangladesh Bank and asked if measures have been taken at the Fed to rectify problems, to which Powell replied that there have been actions at the international level regarding principles to follow and that the Fed continues to think of other ways systems could be invaded so that an issue like this does not happen again.

Tailoring Regulations

Rep. Barry Loudermilk (R-Ga.) asked when the rule on tailoring prudential regulations for U.S. subsidiaries of foreign-owned banks will be produced, and whether it will be similar to the regional bank proposal. Powell replied that the Fed is working on the rule and it will be conceptually similar to the regional bank proposal.

Tipton noted that there are more stringent standards on larger institutions than what Basel III requires and asked if it would be appropriate to recalibrate some of the international standards. Powell replied with his belief that capital levels in the banks “are right,” echoing his earlier comment that he is open to any evidence showing that this is not the case, and until then the capital standards will remain at their current levels.

Insurance Regulation

Reps. Sean Duffy (R-Wis.) and Budd asked about the new international capital regime being developed for insurance companies, specifically about whether it will be a new set of regulations that the U.S. will have to comply with or if Powell will push to have the U.S.-based model recognized internationally. Powell replied that he is working with the international group to ensure what is adopted works with the U.S. system, adding he will not implement something that does not work with the U.S. model, but that there may be some things “take[n] on board that sound like a good idea.”

Realtime Interbank Settlement System

Members on both sides of the aisle asked about the Fed’s consideration for developing a real-time interbank settlement system, to which Powell replied that the Fed has received a lot of comments and that it is figuring out if it should move forward with the development. He added that the Fed will also have to ensure such a system is fully compatible with private sector networks.

Balance Sheet

Multiple members asked about normalizing the Fed’s balance sheet, to which Powell replied that several Federal Open Market Committee (FOMC) meetings have focused on this and that they are “close to finalizing a plan” and will communicate that plan when it is agreed on.

For more information on this hearing, click here.