Senator Vance: “I encourage you not to apply a regulation that doesn’t actually solve the underlying problem.”
WASHINGTON, D.C. – Senator JD Vance (R-OH) pressed Federal Reserve Chairman Powell on the Basel III proposal that would extend enhanced capital requirements to all regional banks over $100B in assets. The proposal would subject regional banks to the same stringent regulations that have been reserved for the largest “Too Big Too Fail” banks that have more than $700B in assets.
Senator Vance notes that the proposed regulations would make it difficult for smaller, regional banks to do business in Ohio. The Senator also outlined that the new requirements wouldn’t have stopped last year’s bank failures, and may have incentivized banks to further invest in the same long-term securities that caused Silicon Valley Bank to collapse.
Watch Senator Vance’s exchange with Chairman Powell here and read a transcript below.
Senator Vance: Thanks, Mr. Chair, and my gratitude to you and the ranking member for doing this hearing. And thank you, Chairman Powell, for being here. It’s good to see you again. I think these hearings are always very important, it actually gives us an opportunity to provide some oversight to what’s going on to the Fed and better understand some of the things that you guys are doing that affect our constituents. I wanted to sort of focus on the Basel III regulations, Chairman Powell, and specifically the way that they have – there have been various proposals to draw them down to focus on the regional banks.
To just go back to one of the most significant crises, obviously, in our banking sector, of course, the collapse of SVB and First Republic, you and I have spoken in private and I believe in public. But one of the concerns that I have is when we talk about increasing capital requirements on the banks, if the banks were under higher capital requirements in the run up to the crisis, there’s maybe an argument that SVB, for example, would have bought more long term treasuries, which would, of course, would expose their balance sheet to even more Treasury bond risk, and that, of course, would have maybe hastened the collapse of SVB.
And I guess I want to start here with, when we talk about some of the Basel regulations, what was the original intent? In other words, what was the original proposal for which banks would fall under those regulations and which will escape them?
Chairman Powell: You mean this time around or you mean earlier on?
Senator Vance: This time around.
Chairman Powell: So it’s the 37 largest banks, it’s down to – well, there’s four categories of banks, including the GSIBs , and this is down through the fourth category. The proposal that’s out there now, I think does extend to category four as well as three, two and one.
Senator Vance: What’s the what’s the minimum assets under management that you guys have proposed under the current Basel regulations?
Chairman Powell: $100 billion.
Senator Vance: $100 billion, and that sort of gets to my concern here, because I know there’s some discussion about whether you apply them at $700 billion of AUM or $100 billion of AUM, and maybe you could just walk me through that decision process at the Fed, where you guys are and what would justify drawing down from a $700 billion threshold to $100 billion threshold.
Chairman Powell: There’s the GSIBs, there’s the 8 identified GSIBs, and then there’s one category two I guess, and then there are the big regionals. And those tend to be the well-known, big regional banks and they’re category three, and one of them’s a two, I guess, but they have a different they have different tailored level of regulation.
And then category four had significant tailoring. And the question is, you know, we have to ask the question, since SVB was a Category four. We’ve got to ask the question what what, if anything, needs to be changed in the way they were regulated, supervised from a capital liquidity standpoint.
So there was tailoring all the way down and then below $100 billion, of course, those are community banks and that’s that’s a different regime as well. This makes sense. We want to have you know, we want to have a diverse banking sector that’s a great benefit to our country and very unusual for an advanced economy. So it’s something we wanna preserve.
Senator Vance: You know, I’m sure you know, Chairman Powell, but just to put this on the record, I mean, a lot of the commercial lending, a lot of the real estate lending, a lot of consumer lending, about half of that lending, consumer lending, is provided by the regional banks. I believe the Huntington in my home state of Columbus is the number one SBA lender in the entire country. So these, you know, to your point, I think these do provide incredibly important benefits to our economy. And, you know, you hear a lot of people talk about the American economic miracle.
And I do wonder if part of that is because we don’t have the same type of financial system that is sort of dominated in Western Europe and in other first world economies. I’m curious, in the process of amending the Basel requirements, have you guys made a decision about where to set the threshold yet and when do you expect to set that threshold?
Chairman Powell: We haven’t made any final decisions. We put out four proposals some months ago, a proposal, and we’ve gotten a lot of comments. As I’m sure you’re aware, we’re chewing through those and digesting them. And we’re just beginning now to sit down and talk about the changes that will that we’ll appropriately make to the original proposal.
Senator Vance: And when do you expect to sort of issue a final proposal?
Chairman Powell: I think it’s going to take some time. I think it’s more important to do it right than it is to do it fast. My guess is we’ll get through this and be done over the course of this year. But it could be faster than that. It could be slower than that.
Senator Vance: So I’m wondering, just being mindful of time, I have about 30 seconds left. Would you be willing to commit to to say that in the process of amending, the Fed will remove the regional bank, draw down and limit Basel’s application directly to the GSIBs or $700 billion or above?
Chairman Powell: I can’t get that specific at this point. But, you know, we’re we’re clearly looking at the whole tailoring issue.
Senator Vance: I appreciate that. And again, I just repeat, Chairman Powell, given what actually happened with the banking sector, with SVB in First Republic, I just encourage you guys not to apply a regulation that doesn’t actually solve the underlying problem. And I fear that if you apply this to banks of $100 billion and above, you actually are doing just that. So with that in mind, I yield. Thanks, Mr. Chair.
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