Fed chairman sees ‘low vulnerabilities’ in banking system; calls stress test ‘important tool’

Federal Reserve Board Chairman Jerome H. “Jay” Powell answers questions at a press conference following the meeting of the Federal Open Market Committee Wednesday in Washington.

The banking system, particularly among the large institutions, is experiencing low levels of vulnerability today – and if some weaknesses do arise, regulators have a greater ability to deal with those than before the financial crisis, the nation’s top central banker said Wednesday.

In a press conference following the meeting of the rate-setting Federal Open Markets Committee (FOMC), Federal Reserve Board Chairman Jerome H. “Jay” Powell said “you don’t see excess risk taking in great quantity the way you did before” the 2007-08 financial crisis.

“If you look at the banking system, particularly the large financial institutions, you see high capital, you see higher liquidity, you see them more aware of their risks and better able to manage them with stress testing,” Powell said in the press conference, in response to a question from a MarketWatch reporter.

“If something does go wrong, you have got better ability to deal with the failure of those institutions,” he added. “So therefore, you don’t see high leverage.”

The Fed board chairman called the stress test “a really important tool” applied for large and small financial institutions. “We regularly use that as a way to test against various market shocks, certainly for the larger institutions,” he said.

Powell also noted that also large financial institutions are no longer funded by higher levels of short term wholesale funding, which, he said, “can disappear quickly.”

“They are far less vulnerable to liquidity issues,” he said of the larger banks. “Overall, those aspects I think suggest low levels of vulnerability.”

In other comments, Powell acknowledged that provisions in the Senate’s financial regulatory relief bill (S.2155, Economic Growth, Regulatory Relief and Consumer Protection Act) gives the Fed the ability to perform supervisory stress tests periodically rather than annually – but he wouldn’t commit to support or opposition to that approach.

“We haven’t made any decision about that at all,” he said. “We want to think carefully about that, and we would, whatever we do decide that we put that out for comment, is it logistically possible? I would think it would be. But it’s certainly not something that we have decided to do.”