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The chair of the Federal Reserve said it was likely to make “broad and material changes” to proposals to rewrite banks’ capital rules, as Republicans called for the existing interpretation of the so-called Basel III endgame package to be scrapped.
Jay Powell told lawmakers on Wednesday that he did “hear the concerns” from lenders over the US interpretation of capital standards crafted by global regulators that form the Basel Committee on Banking Supervision.
“I do expect that there will be broad and material changes to the proposal,” he said, as he gave his semi-annual testimony on monetary policy to Congress.
The Fed, together with other US regulators, has faced strong criticism from the banking industry over what would constitute the biggest change to capital requirements since the Dodd-Frank act was introduced in the wake of the global financial crisis.
The current proposals would require the biggest US banks to hold a greater amount of capital, which can absorb losses, against their assets. Banks have argued that this would constrain their ability to lend without making the financial system significantly safer.
They also complain the US interpretation is stricter than that of other countries, for example by requiring lenders to phase out any use of internal models to calculate risk weights.
Powell said he had never seen a regulatory proposal elicit so much criticism, adding that there were “real concerns” the plans could increase risks to the banking system and undermine market competition.
He said that while the Fed had not yet decided what changes to make to the proposal, it would not “hesitate” to make them if needed.
Advocacy groups for banks have taken the unusual step of broadcasting TV adverts against the Basel III endgame during high-profile American football games, and have also raised the prospect of suing the Fed should the central bank refuse to make big changes.
Banks have won allies from regular users of hedging products like farming groups as well as from the renewable power industry, which warned that the changes could hamper clean-energy projects.
They have also garnered the support of Republicans in the House, who called on the heads of the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency in a letter on Wednesday to “withdraw this flawed proposal”.
The Fed chair said he welcomed the industry’s “voluminous and very substantive” response to the proposals, which the central bank received by January when the window for feedback closed.
The letter from House Republicans claimed 97 per cent of those responses were negative.
“This broad-based opposition makes clear that it is not just the banking industry crying wolf against heightened capital requirements,” the letter said. “As issued, the proposal lacks justification, lacks rigorous quantitative analysis, and is procedurally flawed.”
In prepared remarks to lawmakers on the topic of the economy, Powell acknowledged “considerable progress” and said interest rates, currently at a 23-year high in a range of 5.25 to 5.5 per cent, were unlikely to rise again.
However, he told lawmakers that progress towards reaching the US Federal Reserve’s 2 per cent inflation goal was not “assured” and that rate cuts would have to wait until officials were more confident of hitting their target.
“Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2 per cent,” Powell said. “At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
The Federal Open Market Committee next votes on March 20, and its members have repeatedly said they want to gain “greater confidence” that inflation can sustainably hit 2 per cent.
Headline personal consumption expenditures inflation, the measure the Fed targets, rose 2.4 per cent in the year to January, down from 2.6 per cent in December. However, the month-on-month rate edged up slightly, sparking concern that the deceleration in price pressures could soon come to a halt.
Month-on-month core PCE, the Fed’s preferred gauge of underlying inflation, also rose between January and December.
Markets have trimmed their expectations of Fed cuts this year. Investors now expect three or four quarter-point moves beginning in the summer — a shift from earlier this year when they expected six cuts starting this month.
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