Seven things bankers should watch for in Powell’s nomination hearing

November 27, 2017 12:00 PM

All the same, coming before a committee as a quasi-interim head of supervision and facing a panel as the potential next leader of the world’s most powerful central bank makes a significant difference.

It helps that Powell is a relatively known quantity at the Fed and has been laying out some of his regulatory positions since he took over as the head of the Fed’s supervisory committee in April. Powell has also been confirmed by the Senate twice already, in 2012 by a vote of 74-21 and in 2014 by a vote of 67-24.

That said, there is still plenty for lawmakers to raise questions about, including his views on key issues he hasn’t addressed. It also remains unclear to what extent his positions might shift when he is atop the Fed’s hierarchy compared to when he was in a supporting role.

The Fed’s monetary policy levers also have the potential to put a damper on the Trump administration’s stated agenda of accelerating growth via tax cuts and other stimulative measures, so whatever signals Powell sends about interest rates will be watched closely.

There is a strong possibility that the policies that will most affect banks and their regulatory and supervisory structure simply haven’t been devised yet and likely won’t be for another six to 12 months. But what lawmakers ask Powell about now and how he responds can say a lot about what shape those policies might ultimately take.

Jerome Powell, governor of the U.S. Federal Reserve and President Donald Trump's nominee as chairman of the Federal Reserve, arrives to a nomination announcement in the Rose Garden of the White House in Washington, D.C., U.S., on Thursday, Nov. 2, 2017. If approved by the Senate, the 64-year-old former Carlyle Group LP managing director and ex-Treasury undersecretary would succeed Fed Chair Janet Yellen. Photographer: Olivier Douliery/Bloomberg

Olivier Douliery/Bloomberg

WASHINGTON — When Jerome Powell, President Trump’s nominee to head the Federal Reserve, goes before the Senate Banking Committee Tuesday for his confirmation hearing, it will not be the first time — or even the first time this year — that he’s faced tough questions from lawmakers.

All the same, coming before a committee as a quasi-interim head of supervision and facing a panel as the potential next leader of the world’s most powerful central bank makes a significant difference.

It helps that Powell is a relatively known quantity at the Fed and has been laying out some of his regulatory positions since he took over as the head of the Fed’s supervisory committee in April. Powell has also been confirmed by the Senate twice already, in 2012 by a vote of 74-21 and in 2014 by a vote of 67-24.

That said, there is still plenty for lawmakers to raise questions about, including his views on key issues he hasn’t addressed. It also remains unclear to what extend his positions might shift when he is atop the Fed’s hierarchy compared to his past positions iterated when he was in a supporting role.

The Fed’s monetary policy levers also have the potential to put a damper on the Trump administration’s stated policy of accelerating growth via tax cuts and other stimulative measures, so whatever signals he sends about interest rates will be watched closely.

There is a strong possibility that the policies that will ultimately most affect banks and their regulatory and supervisory structure simply haven’t been devised yet and likely won’t be for another six to 12 months. But what lawmakers ask him about now and how responds can say a lot about what shape those policies might ultimately take.

Here's what to watch for at the hearing:

How do Democrats react?

One might expect Democrats to reflexively block or at least oppose President Trump’s nominee to head the Fed out of a fervent opposition to the president himself, but so far the party has held its fire on Powell’s nomination. It is clear that Democrats were hoping for the current Federal Reserve chair, Janet Yellen, to be renominated, but thus far none of the more adamant Wall Street hawks have come out in open opposition to Powell’s pick.

Nonetheless, that might still happen. Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking Committee, said in a statement that he hoped Powell would not “have the same amnesia that plagues the rest of the administration” about the devastation wreaked by the financial crisis. And Sen. Elizabeth Warren, D-Mass., said in an interview with CNBC earlier this month that she was reserving her judgment for after Powell’s hearing.

“Powell has aligned himself with Janet Yellen on a regular basis, and that is a good sign, but look this is what hearings are about,” Warren said. “I’m going to ask him some tough questions and see what his answers are.”

Those tough questions are likely to revolve around Powell’s recent initiative to change the Fed’s procedures regarding what supervisory issues must be sent to bank boards of directors — a change that Powell has defended as practical and prudent but that critics have said amounts to giving bank boards a pass.

Another probable area of inquiry from Warren and other Democrats is the state of the Fed’s ongoing investigation and potential enforcement actions against Wells Fargo. Yellen said in September that she considered the bank’s behavior leading up to the cross-selling scandal “egregious and unacceptable” and hinted that further sanctions could be in the works. Warren will probably look for a similar commitment from Powell.

Backing Basel?

Republican lawmakers have largely supported Powell’s nomination, with Senate Banking Committee Chairman Mike Crapo, R-Idaho, already saying he will vote for Powell and Senate Majority Leader Mitch McConnell, R-Ky., following suit. Both had voted against him when he was nominated to a Fed board seat in 2014.

But it will be interesting to see if Republican lawmakers follow the same lines of inquiry with Powell that they have in the latter months and years of Yellen’s tenure at the Fed — particularly related to international standard-setting committees, rules-based monetary policy and the speed with which the Fed intends to draw down its balance sheet.

The Fed has been criticized for years by Republicans for its participation in various international forums for establishing bank regulatory standards like the Basel Committee on Banking Supervision and the Financial Stability Board, with the concern being that those forums outsource U.S. decision-making authority to international regulators and away from Congressional oversight.

The Treasury Department said in its June report on banking regulations that it intended to stand by the Basel III accords in general, but with some possible adjustments to the applicability of the capital rules to smaller banks and some amendments to the heightened standards implemented in the U.S. versions of international capital rules. Powell will likely hew to the Treasury’s position — if Republicans raise it.

Interest payments to banks

Another perennial Republican criticism of the Fed’s post-crisis monetary policy regime is the advent of the payment of interest on member bank reserve balances as the primary tool for implementing monetary policy.

The criticism — which has been more prevalent in the House than in the Senate — argues that paying interest on reserves amounts to a bank giveaway and that as the Fed’s balance sheet winds down, the Fed should return to traditional open market operations to implement its short-term interest rate target.

Yellen has fervently supported the use of "interest on excess reserves" — known as IOER — for years, but only last week confirmed her view that the tool should remain in place even after interest rates and the Fed’s balance sheet normalize. There is more reason to expect that Powell agrees with this view than to think that he does not, but whether it comes up — and what he says about it — could be telling.

The future of stress testing

Powell has said in prior testimony that stress testing — along with increased capital, resolution planning and standardized liquidity requirements — are the cornerstones of what will be the financial crisis’ enduring legacy. He has also said that the Fed is working on some practical changes to the stress testing program that will make the process more transparent and give banks a clearer picture of how certain assets perform under the Fed’s models.

But the changes won’t stop there. The Fed has been in the midst of a dramatic retooling of the Comprehensive Capital Analysis and Review program — the more stringent and daunting of the Fed’s two stress testing exercises — for some time.

Former Fed Gov. Daniel Tarullo laid out a blueprint of a revised program that would use a bank’s previous stress test performance to determine what capital levels it would have to meet in the current year — a so-called stress capital buffer that takes banks’ individual holdings into account.

But banks have laid out a competing vision for CCAR, one that has the program gradually fade into the background of the Fed’s normal supervisory processes. Sen. Pat Toomey, R-Pa., even asked Yellen in February if she thought the program was duplicative and ought to be phased out entirely.

Powell may be asked to elaborate on where he sees CCAR going, since that is at least partially the responsibility of Fed Vice Chairman for Supervision Randal Quarles — who, to date, has limited his comments on stress testing to the near-term transparency initiative.

Whatever direction the Fed ultimately chooses to pursue on stress testing is enormously consequential to the nation’s largest banks.

Monetary policy views

Powell has been viewed as a team player on monetary policy, joining with the majority each time he has voted on the Federal Open Market Committee.

But lawmakers tend to have their particular axes to grind, with Democrats generally favoring a more accommodative policy and emphasizing full employment — particularly as it pertains to minorities — and Republicans preferring that the Fed return to a historically normal interest rate and balance sheet sooner rather than later.

Powell, like Yellen, has said that monetary policy has to be based on current data and therefore cannot be predestined — a position that frees him from making any specific promises about rates or the Fed’s balance sheet. He has also said that monetary policy rules have a place in the FOMC’s decision-making process, but that they should not be relied upon as the sole or even primary means of setting monetary policy. Whether he is asked to elaborate on, refute or reiterate those views would be worth watching.

Volcker Rule fixes?

The Volcker Rule — a provision of Dodd-Frank that bars banks from making trades on their own accounts — has been a particular headache for banks and regulators since the five-agency joint rule was first issued in late 2013.

Banks say that complying with the rule is one of their biggest compliance expenses, while even Tarullo said before his resignation that the rule is “too complicated” and the fundamental conceit of trying to determine a bank’s intentions behind an asset or trade doesn’t work and the agencies need to “try something else.”