There is no plan to weaken bank stress tests, Powell tells lawmakers

Federal Reserve Board Chairman Jerome (“Jay”) Powell giving testimony July 17 before the Senate Banking Committee.

The head of the nation’s central bank testified Tuesday on monetary policy and faced questions from lawmakers over bank stress testing – which the agency chairman said remains an important supervisory tool – and implementation of the recently enacted financial industry regulatory relief law.

Jerome (“Jay”) Powell, chairman of the Federal Reserve Board, during a Senate Banking Committee hearing was forced to defend the Fed’s response to banking organizations’ recent round of recent stress tests, specifically the Fed’s “qualified non-objection” to the submissions by Goldman Sachs and Morgan Stanley.

The committee’s ranking member, Sen. Sherrod Brown (D-Ohio), pressed the Fed chairman on the Fed’s decision on these two despite the fact that their capital levels fell below regulatory minimums during the stress test. Powell told Brown that the penalty imposed was the same as if they had failed. As for the “qualified non-objection,” he said, “’We’ve done that many times. The reasoning for that was the timing of the tax bill.”

Brown asked how the public can trust the stress tests given the Fed’s current proposals to “weaken” them. In response, Powell said the Fed is committed to stress testing, calling it one of the three or four key supervisory tools the Fed relies on. “The program has to evolve; we want to make it more transparent,” he said.

Pressed by committee Democrats, Powell said the Fed has no plan to ease prudential standards for the supervision of foreign banking organizations operating in the U.S. To a question about the Fed’s proposed “weakening” of Dodd-Frank Act requirements such as the Volcker Rule, Powell said regulation “is not free” and that “nobody benefits when regulation is inefficient.” He said the Fed, in its effort to ensure regulation works well, is looking at requirements for smaller institutions and seeking to ensure regulation is being carried out in the most efficient way possible.

He was also questioned briefly about the interagency proposal on incentive-based compensation, which was released a few years ago by all the federal financial regulators and has yet to be finalized. “We seem to have revisited everything that was completed, but we cannot get this one done,” he said. Despite that, he said the Fed expects banks to have appropriate compensation plans in place and that they have improved.

Asked at the top of the hearing about the Fed’s progress implementing the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), Powell told panel Chairman Mike Crapo (R-Idaho) that regulators are seeking to get this done soon and pointed to the joint statement issued by the agencies July 6 that outlines their planned approach.

As for the stated reason for the hearing – to hear the Fed’s report on monetary policy – Powell testified that, “Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years.” Noting the uncertainty regarding trade and future effects of changes in fiscal policy, he described the risk of unexpected economic weakening as “roughly balanced” with the possibility of growth exceeding expectations.

Asked to elaborate on the likely effects of trade policy, Powell said that wasn’t in the Fed’s “lane.” But he did say that generally, countries with open trade – that don’t erect barriers to trade – have grown faster and had higher incomes. More protectionist countries, he said, have fared worse. On tax policy, he said it’s too early for the data to show.

Powell is scheduled to repeat his monetary policy testimony Wednesday morning before the House Financial Services Committee.

Testimony of Fed Chairman Jerome (“Jay”) Powell