Peace Garden News

WASHINGTON – U.S. Senator Kevin Cramer (R-ND), during a Banking Committee hearing on the Semiannual Monetary Policy Report to Congress, questioned Federal Reserve Chair Jerome Powell on increasing capital and reevaluating existing liquidity requirements should another bank failure occur. 

“I can't fathom why the Fed would want to raise capital requirements when we could be facing what's a ‘credit crunch.’ Does that make sense to you? In a potential credit crunch, caused somewhat by higher rates, obviously, somewhat by design that doesn't make sense to increase capital requirements for banks and individuals,” asked Senator Cramer.

“That's always the tradeoff. Higher capital means more stable, stronger banks that can last through bigger crises and things like that, but it's a continuum because that also means slightly less capital being available and higher price of capital,” said Chair Powell. “I would also say the capital, in the form of what I've been briefed on, is the proposal where the big capital increases are really for the largest institutions, and much less so for institutions that are not among that, particularly the eight G-SIBs.”

“But what’s the motivation for that? You've just articulated the challenge, obviously, much better than I did, but why the big institutions? What's the situation that would require that?” asked Senator Cramer.

“We’ve spent many years raising capital and liquidity standards for the largest institutions. I supported all of that, and I'm glad I did. I think it's been warranted, and I think the banks and large banks have competed very successfully with the PSI capital. Further increases are going to be on the table. We always thought there would be some further increase at the end of Basel three globally, but I think you know, the bigger increases are going to need to be justified,” responded Chair Powell.

Senator Cramer then asked Mr. Powell about his interaction with Senator Thom Tillis (R-NC) earlier in the hearing regarding digital economy challenges and individuals’ ability to quickly transfer money between banks. 

“You didn't elaborate on what kind of changes you might be considering. Do you have some personal thoughts on it or things you've been talking about?” asked Senator Cramer.

“There are things are embedded in the net stable funding ratio and the liquidity coverage ratio that reflect an understanding of how fast a run happens. I think the regulatory response is going to be appropriate here, not just supervisory […] The Board is every bit as accountable as the San Francisco Fed on this. That supervision could have been much more forward leaning on the liquidity issue than it was, and we're going to address that,” responded Chair Powell.

Senator Cramer then compared the responsibilities of banking system supervisors with those of referees, demonstrating the importance of enforcing existing rules and regulations.

“If you warn the offender over and over but never throw up a card, they just offend worse the next time. I think that's an obvious finding, and I would concur with you, but the whole issue of the run itself is also problematic, while not maybe directly jurisdictional to any one regulator, as policymakers and regulators. Together we should find a better solution,” said Senator Cramer.

Original source can be found here.