Jerome H Powell: Current US regulatory regime and areas for
reform
Remarks by Mr Jerome H Powell, Member of the Board of Governors of the Federal Reserve
System, at the Salzburg Global Seminar, Salzburg, Austria, 26 June 2017.
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I appreciate the opportunity to speak at the Salzburg Global Seminar. Today I will discuss our
current regulatory regime, and areas where we may be able to make adjustments. As always,
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the views I express here are my own.
We need a resilient, well-capitalized, well-regulated financial system that is strong enough to
withstand even severe shocks and support economic growth by lending through the economic
cycle. The Federal Reserve has approached the post-crisis regulatory and supervisory reforms
with that outcome in mind.
There is little doubt that the U.S. financial system is stronger today than it was a decade ago.
Loss-absorbing capacity among banks is substantially higher as a result of both regulatory
requirements and stress testing exercises. The banking industry, and the largest banking firms in
particular, face far less liquidity risk than before the crisis. And progress in resolution planning by
the largest firms has reduced the threat that their failure would pose. These efforts have made
U.S. banking firms both more robust and more resolvable.
Evidence overwhelmingly shows that financial crises can cause severe and lasting damage to
the economy's productive capacity and growth potential. Post-crisis reforms to financial sector
regulation and supervision have been designed to significantly reduce the likelihood and severity
of future financial crises. We have sought to accomplish this goal in significant part by reducing
both the probability of failure of a large banking firm and the consequences of such a failure were
it to occur.
As I mentioned, we have substantially increased the capital, liquidity, and other prudential
requirements for large banking firms. These measures are not free. Higher capital requirements
increase bank costs, and at least some of those costs will be passed along to bank customers
and shareholders. But in the longer term, stronger prudential requirements for large banking
firms will produce more sustainable credit availability and economic growth.
Our objective should be to set capital and other prudential requirements for large banking firms at
a level that protects financial stability and maximizes long-term, through-the-cycle credit
availability and economic growth. To accomplish that goal, it is essential that we protect the core
elements of these reforms for our most systemic firms in capital and liquidity, stress testing and
resolution.
With that in mind, I will highlight five key areas of focus for regulatory reform. The first is
simplification and recalibation of regulation of small and medium-sized banks. We are working to
build on the relief we have provided in the areas of call reports and exam cycles, by developing a
proposal to simplify the generally applicable capital framework that applies to community banking
organizations.
The second area is resolution plans. The Fed and the Federal Deposit Insurance Corporation
believe that it is worthwhile to consider extending the cycle for living will submissions from annual
to once every two years, and focusing every other of these filings on key topics of interest and
material changes from the prior full plan submission. We are also considering other changes, as
I discussed last week when testifying to Congress.
Third, the Federal Reserve is reassessing whether the Volcker rule implementing regulation
most efficiently achieves its policy objectives, and we look forward to working with the other four
Volcker rule agencies to find ways to improve that regulation. In our view, there is room for
eliminating or relaxing aspects of the implementing regulation in ways that do not undermine the
Volcker rule's main policy goals.
Fourth, we will continue to enhance the transparency of stress testing and the Comprehensive
Capital Analysis and Review (CCAR). We will soon seek public feedback concerning possible
forms of enhanced disclosure, including a range of indicative loss rates predicted by the Federal
Reserve's models for various loan and securities portfolios, and information about risk
characteristics that contribute to the loss-estimate ranges. We will also provide more detail on
the qualitative aspects of stress testing in next week's CCAR disclosure.
Finally, the Federal Reserve is taking a fresh look at the enhanced supplementary leverage ratio.
We believe that the leverage ratio is an important backstop to the risk-based capital framework,
but that it is important to get the relative calibrations of the leverage ratio and the risk-based
capital requirements right.
U.S. banks today are as strong as any in the world. As we consider the progress that has been
achieved in improving the resiliency and resolvability of our banking industry, it is important for us
to look for ways to reduce unnecessary burden. We must also be vigilant against new risks that
may develop. In all of our efforts, our goal is to establish a regulatory framework that helps
ensure the resiliency of our financial system, the availability of credit, economic growth, and
financial market efficiency. We look forward to working with our fellow regulatory agencies and
with Congress to achieve these important goals.
And finally, I would also like to note that work continues to address the risks identified with
existing reference rates. Just last week, the Alternative Reference Rates Committee (ARRC)
selected a new rate suitable for use with new derivative contracts. I am confident the broad
Treasuries repo rate, which the Federal Reserve Bank of New York has proposed publishing in
cooperation with the Office of Financial Research, is based on a deep and actively traded market
and will be highly robust. With this choice, the ARRC has taken another step in addressing the
risks involved with the LIBOR.
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These remarks are substantially similar to the testimony delivered at the Senate Committee on Banking,
Housing, & Urban Affairs hearing titled "Fostering Economic Growth: Regulator Perspective" on June 22, 2017.