Federal Reserve Chair Jerome Powell said Tuesday that what big banks were to the 2008 financial crisis, nonbank financial institutions are to the pandemic era — but he drew the line on how far to carry that comparison.
"What the pandemic revealed were weaknesses in the nonbank financial sector, much as the global financial crisis revealed those weaknesses in the big banks and large large financial market utilities," Powell said. "There's a lot of effort going into and has been in what do you do about money market funds, what do you do about the Treasury market?"
Powell's remarks came during a question-and-answer session at a symposium on central banking hosted at the Sveriges Riksbank, Sweden's central bank.
Earlier in the panel, Powell noted that reforms implemented after the subprime mortgage crisis — specifically those in the Dodd-Frank Act of 2010 — strengthened the core of the financial system, which proved resilient in the face of COVID-19 disruption.
Yet he was quick to draw a line between the Dodd-Frank reforms and what is appropriate today. While nonbanks must undergo structural changes, regulators must compel those entities to reform themselves without bringing them fully into the regulatory perimeter, Powell said. Treating them like banks would entitle them to the Fed's lender-of-last-resort facilities or other financial support, he warned.
"Expanding the provision of central bank liquidity is not the not the desired response. It really is to strengthen these institutions," he said. "Our capital markets are quite vibrant and very different in what they do from what the banks do, and I wouldn't want to see the kind of prudential regulation that goes along with liquidity provision. It wouldn't be great to extend that too much into the nonbank financial sector, but rather work on structural reforms."
Nonbanks have emerged as a chief financial stability concern for the Fed in recent months. In its
Fed Vice Chair for Supervision Michael Barr and Gov. Michelle Bowman, despite holding differing opinions on bank supervision, both
Tuesday's symposium was focused on evolving trends affecting central bank independence. Powell's panel also featured Claudia Buch, vice president of Germany's Bundesbank, Mervyn King, a former governor of the Bank of England, and Kenneth Rogoff, a Harvard professor and former economist for the Fed and the International Monetary Fund.
During the event, Powell emphasized the importance of central bank independence from other governmental and political pressures.
"Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy," he said in prepared remarks. "The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors."
Yet, Powell was also quick to point out that, unlike some other central banks around the world, the independence of the Fed is not guaranteed by the Constitution, but rather granted by legislative statute, the Federal Reserve Act of 1913. Because of this, he said, it is crucial that the Fed live up to its end of the bargain, lest that independence be revoked.
"It's just an institutional arrangement that has served the public well, nothing more, nothing less, and as long as it does serve the public well over time, then I think it's safe and I think it's safe now," he said. "But that means we've got to be committed to achieving our goals, and to sticking to this precious grant of independence. To keep it, we need to deserve it, and that means stick to that work and don't look for broader things."
Specifically, Powell said it was not appropriate for the Fed to wade into politically divisive areas, such as climate-focused regulation. He said the Fed does have "narrow but important responsibilities" to monitor climate-related financial risks within banks through its supervisory practices, but going beyond that should not be done without express authorization from Congress.
"Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals," Powell said. "We are not, and will not be, a climate policymaker."
