Powell: Community banks may be spared from tougher capital rules
Federal Reserve Chairman Jerome Powell said he does not expect smaller community banks to be subject to higher capital requirements as part of any move by the central bank to strengthen the banking system in the wake of several failures earlier this year.
The chair made this point in response to a series of questions from lawmakers on the House Financial Services Committee as part of Powell’s semiannual testimony to Congress.
Some Republican committee members expressed concern that higher requirements would restrict lending, unfairly punish smaller community banks and perhaps even slow the economy.
“I don't know that there will be much in the way of capital increases proposed for banks other than the very large banks, but we'll have to see,” said Powell.
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Fed Vice Chair for supervision, Michael Barr, is overseeing a so-called holistic review of capital requirements. Barr has said that he believes higher requirements may be necessary for some mid-sized institutions, along with other changes to bank supervision. A proposal from the Fed is expected this summer.
The Fed’s approach to the banking industry was one of several topics covered by Powell during his three hours before the House committee, including the direction of inflation and the pace of interest rate increases. Even his affinity for the Grateful Dead came up.
Powell said inflation is still running high even though it’s moderated since the middle of last year. He also said there are signs the job market is coming into better balance, pointing to an increase in labor force participation, an easing in wage growth, and a drop in job vacancies.
But labor demand, he said, still substantially exceeds the supply of available workers.
"The process of getting inflation back down to 2% has a long way to go," said Powell. "It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation."
The central bank decided to hold off raising rates at its policy meeting last week but raised its interest rate forecasts for this year, signaling rates could rise to as high as 5.6%. That implied two additional rate hikes are likely this year. Three officials see rates rising closer to 6%.
"Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year," Powell said.
But Powell spent more of his time Wednesday discussing the possibility of new rules for US banks.
Committee Chair Patrick McHenry expressed concern about an idea Barr floated Tuesday for so-called reverse stress testing to improve the resilience of banks.