Fed's Powell pressed on banking, climate, crypto regulations during Senate testimony

·3 min read

Monetary policy wasn't the only focus for Federal Reserve Chair Powell when he fielded questions from the Senate Banking Committee on Tuesday.

Republican lawmakers also pressed Powell for more clarity about capital requirements for big banks, cryptocurrencies, and climate regulation.

Banks fear the Federal Reserve is planning to increase the amount of funding financial institutions need on hand to absorb future losses following comments from the Fed’s Vice Chair of Supervision, Michael Barr, about a "holistic review" of those capital requirements given late last year.

Republican Ranking Member Tim Scott (R-SC) expressed concerns about this review in a letter to Powell last week and again during Tuesday’s hearing.

"Increased capital does not necessarily provide an increased benefit and requiring banks to hold capital that is not risk based and appropriately tailored to a bank size scope and activities can cause more harm than good," said Scott.

Powell assured Scott the Fed will follow the law when it comes to reassessing capital requirements and that any proposals will be tailored to the risk, size, and complexity of an individual bank.

Federal Reserve Chair Jerome H. Powell testifies before a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on
Federal Reserve Chair Jerome H. Powell testifies before a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on "The Semiannual Monetary Policy Report to the Congress" on Capitol Hill in Washington, U.S., March 7, 2023. REUTERS/Kevin Lamarque

Scott also asked Powell about a letter he and House Financial Services Chair Patrick McHenry (R-NC) sent to Securities & Exchange Commission Chair Gary Gensler asking him to rescind the agency's proposed climate disclosure rule that would require publicly traded companies to reveal their greenhouse gas emissions.

Scott said he found it troubling that the Fed is considering testing banks' ability to withstand climate-related scenarios.

"Banks have and continue to account for weather-related risks in their risk management. But efforts that attempt to predict climate change far into the future fall outside the scope of…their authority," said Scott.

"Importantly, the level of speculation required in these models should highlight their arbitrary and capricious nature at a time when our economy is suffering from historically high inflation."

Powell said he agreed the Fed does not have the authority to use its monetary policy to wade into climate policies. Powell stood by comments made in January the Fed should resist the temptation to broaden the central bank's scope to include social issues, including climate change.

In January, Powell said without explicit congressional legislation, it would be inappropriate for the Fed to use monetary policy to promote a greener economy. "We are not and will not be a climate policymaker," said Powell.

Powell was also asked about cryptocurrencies and their risks to financial institutions.

Powell said stablecoins on public blockchains have proven to be susceptible to fraud and money laundering, and thus are not tools "consistent" with sound banking. Though he said stablecoins that are regulated the same as comparable products could have a place in banking.

"Like everyone else we’ve been watching what’s been happening in the crypto space and what we see is quite a lot of turmoil, we see fraud, we see a lack of transparency, we see run risk, we see lots of things like that," Powell said.

"What we’ve been doing is making sure that the regulated financial institutions that we supervise and regulate are careful and taking great care in the ways they engage with the whole crypto space."

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