What keeps Fed Chairman Powell up at night? Cyber risk

Central bank chief also talks cryptocurrency, S. 2155 implementation

Federal Reserve Board Chairman Jerome Powell on Wednesday told lawmakers he currently sees cyber risk as the top threat to the stability of the nation’s financial system.

Federal Reserve Board Chairman Jerome (“Jay”) Powell during July 18 House Financial Services Committee hearing.

Powell, during a House committee hearing, said regulators have spent the past 10 years on the effort to build capital in the banking system and getting banks to be more conscious of risks. “The thing that is really hard is the idea of a successful cyber attack,” he said.

Powell, appearing before the House Financial Services Committee to report on monetary policy (he did the same Tuesday before the Senate Banking Committee), was answering a question from Rep. Jim Himes (D-Conn.) about “what keeps you up at night” regarding present risks to the financial system stability. Powell’s response: “The clear answer to me is cyber risk.”

Himes asked what should be done to address it. “I would say as much as possible, then double it,” Powell replied.

Powell said regulators “do a great deal” to make sure banks are mindful of cyber risk. “A lot of it is cyber hygiene, implementing the latest [tools] coming out … planning for failure also,” he said. “What would we do if there were a successful cyber attack? [You’ve] got to have a plan for that too.”

Powell fielded a wide range of questions. Here are some of his responses to questions about cryptocurrency and issues related to the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA):

Cryptocurrency: Powell said cryptocurrency hasn’t grown to the point that it represents a serious financial system threat, though it poses a big risk for money laundering; and, as it lacks “intrinsic value,” it presents “serious investor risks.” He cited broad concern among central bankers that the public should be informed, but he said the Fed isn’t the one with authority to regulate cryptocurrency. Asked whether he sees cryptocurrency as impairing the Fed’s ability to implement monetary policy, Powell said “really, not at all.”

Asked if the Fed should have jurisdiction to regulate cryptocurrency, Powell said the Fed is not seeking it. He said investor protections are “right in the middle of the SEC’s turf,” he said, referring to the Securities and Exchange Commission. He supported strong regulation of cryptocurrency but said he didn’t think the Fed should be the one to do it.

Volcker Rule/proprietary trading: Powell said the Volcker Rule proposal out for comment now would give smaller institutions some relief and is streamlined from the current rule, but he said the largest institutions “shouldn’t be doing proprietary trading as a business line.” To reported concerns that the rule seems to affect more activities than originally covered, he said that’s not the intent and that the Fed expects it will learn about those concerns during the comment process.

Prudential standards: Powell was asked about the Fed’s anticipated approach to enhanced prudential standards under EGRRCPA for institutions with less than $250 billion in assets. (The law subjects only institutions with $250 or more to such standards, but it leaves the Fed some discretion to set such standards for those with $100 billion to less than $250 billion). He said the Fed will begin by seeking comments on a framework to assess financial stability of the smaller institutions, adding that the Fed anticipates many of the factors used to identify systemically important financial institutions (SIFIs) will be used. The Fed will be “coming forward on something like this very quickly” and will be focused on doing “what the law asks us to do,” he said.

Testimony of Fed Chairman Jerome (“Jay”) Powell

Monetary Policy Report (July 2018)

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