Powell: Fed work on CRA rules can do better at raising flow of credit to lower-income households than lowering capital standards

Tools being used by the Federal Reserve and other regulators – including revamping of federal anti-redlining regulations – are effective methods for pushing more credit into lower income households, and not necessarily lowering capital standards for banks, the chair of the agency’s board indicated Wednesday.

In a press conference following a meeting of the Fed’s rate-setting Federal Open Market Committee (FOMC), Fed Chair Jerome H. (“Jay”) Powell discounted a suggestion by a reporter that high capital requirements for banks may be curtailing credit to lower-income households.

“Strong capital requirements are essential for banks, particularly for the largest banks,” Powell said. “An undercapitalized banking system – as we’ve seen – can be a real threat to the economy and, to the greater extent, people at the lower end of the income spectrum.”

He said looking back at the 2008-10 economic crisis, the banking system was undercapitalized. “So, higher capital requirements are really a good thing, because they allow banks to weather downturns and continue to perform the functions that they perform.”

He indicated that some of the tools that the Fed has – including the anti-redlining Community Reinvestment Act (CRA) rules – to assure the wide availability of credit to low- and moderate-income households do the job of making credit available. He specifically pointed to a new version of CRA rules being developed now by the Fed and the other federal banking agencies (including the Office of the Comptroller of the Currency [OCC], which recently rescinded its own revamp of CRA rules adopted just last year).

“We’re working on a new CRA proposal right now with the other banking agencies – and we think that it’s going to be good and will support the flow of credit to low- and moderate-income households,” Powell said. He also mentioned anti-lending discrimination statutes that the Fed enforces, and other programs that Congress has in place to support credit for lower-income households.

“I don’t think it’s capital standards at all,” Powell said, referring to the reporter’s question and assertion that higher capital standards may be shutting off credit to lower-income borrowers. “I think capital standards work the other way: It’s strong capital standards that enable banks to serve their communities, including low- and moderate-income communities,” the Fed chair said.