Bloomberg News
WASHINGTON — Federal Reserve Chair Jerome Powell said he expects the capital reform package for large banks to garner “broad support” from the central bank’s governing board when it comes time for a final vote.
Speaking at a press conference following the Fed’s Federal Open Market Committee meeting on Wednesday, Powell said the Board of Governors would take public comments on the so-called Basel III endgame proposal “very seriously” and put together a proposal that could be backed by a majority of the seven-member board.
“We’re a consensus-driven organization,” he said. “We’ll come to a package that has broad support on the board.”
Powell declined to specify what exactly he meant by “broad support.”
“It means broad support,” he said flatly from the dais.
The proposal, which was put forth in conjunction with Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency over the summer, would increase risk-weighted capital obligations for all banks with more than $100 billion of assets. The agencies estimate that Tier 1 equity requirements for bank holding companies would increase by 16% overall, with the largest institutions accounting for the brunt of that uptick.
At the time, the Board moved to issue the proposal by a split vote of 4-2. Powell, who voted in favor of the proposal, noted that he would like to see comments on several elements of the package, including the calibration of risk weights for market and operational risks, as well as the degree to which the new rules would be tailored to the size of individual institutions.
Fed Vice Chair Philip Jefferson, who also backed the proposal, raised questions about the economic impact of the proposal. He made clear that his vote to issue the proposal did not guarantee his support for a final rule.
“I will evaluate any future proposed final rules on their merits,” Jefferson said. “My views on any proposed final Basel III endgame requirements for U.S. banking organizations will be informed by the potential impact on banking sector resiliency, financial stability and the broader economy stemming from the implementation.”
Govs. Michelle Bowman and Christopher Waller voted against issuing the proposal, citing skepticism that the changes were necessary or appropriate.
During the press conference, Powell noted that the banking sector was healthy but credit conditions were tightening. He said the Fed is on alert for bank stress, especially as it relates to interest rate risk management, funding and the level of uninsured deposits.
“We’ve been working a lot with financial institutions to make sure that they have good funding plans and that they have a plan for dealing with the kind of portfolio unrealized losses that they have,” Powell said. “We do think the system is quite resilient … we don’t think these rate hikes have changed that.”
He emphasized that both banks and supervisors are placing a greater emphasis on funding and liquidity in the wake of three large bank failures this past spring.
Powell said the Fed board has not yet discussed whether it will renew the Bank Term Funding Program, an emergency lending facility set up to stem contagion from the failures. The facilities authorization expires next March.
“It’s November 1 and that’s a decision we’ll be making in the first quarter of next year,” he said.
During Wednesday’s FOMC meeting, participants voted to hold the Fed’s benchmark interest rate range steady at between 5.25% and 5.5% for the second consecutive meeting. The decision was unanimous, with all 12 committee members voting in favor.
Coming into the meeting, bankers were concerned about persistently high inflation and continued tightening by the central bank. Among industry participants surveyed for the Fed’s semiannual financial stability report, released two weeks ago, monetary policy was tied for the biggest concern, alongside credit losses from commercial real estate.
In his prepared remarks, Powell acknowledged that fears of continued tightening are not unfounded, given the continued strength of the U.S. economy.
“We are attentive to recent data showing the resilience of economic growth and demand for labor,” he said. “Evidence of growth persistently above potential, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
But, Powell said, the FOMC has several conflicting dynamics to factor into its decisions. These include inflation that has come down but remains well above target, a labor market that has been “rebalancing” but remains tight by historical standards, and gross domestic product growth that is exceeding expectations but is still forecasted to slow in the near future.
“As for the committee, we’re committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% overtime,” Powell said. “And we’re not confident yet that we have achieved such a stance.”
The decision to hold rates steady was largely expected in light of recent economic developments, including a reduction in the number of job openings and favorable readings from inflation indices. Also, a survey of Federal Reserve Board governors and reserve bank presidents released during the FOMC’s September meeting showed participants expected no more than one additional rate hike in 2023, with nearly half saying they felt the federal funds rate had already reached its peak for the year.
Powell emphasized that no decisions had been made about future policy moves and that a rate hike in December was far from guaranteed. He noted that the FOMC remains committed to not doing too little to combat inflation, but added that its policymaking process had become “more two-sided,” as risks of overtightening begin to mount.
“For the first year of our tightening cycle, the risk was all on the side of not doing enough,” he said. “It does feel like the risks are more two-sided now but we’re committed to get inflation back down to our 2% target. And we will.”
