In a letter to Federal Reserve Board Chair Jerome Powell, Sen. Elizabeth Warren (D-Mass.) urged the Fed to resist bowing to industry pressure to curtail proposed rules aimed at strengthening capital standards for the nation’s largest financial institutions.
The Fed voted on July 27 to advance proposed rules implementing the remaining provisions of the international Basel III agreement, which was launched in response to the 2008 financial crisis and finalized in December 2017.
Warren’s concern stems, in part, from comments in Powell’s opening statement prior to the vote, during which he expressed his intent to consider “potential modifications to the proposals.” Warren wrote she views this statement as an indication Powell will seek to weaken the proposed rules – a move she believes would be “a grievous error.”
“I am concerned that even though you voted to advance the Fed’s proposed rule, your tepid embrace of the proposal seem to suggest that you may share Wall Street executives’ concerns that stronger capital requirements will eat into their bonuses,” Warren wrote. “Your opening statement on the proposal notes that you ‘support putting’ the proposal ‘out for comment’ but at no point did you indicate that you support the proposed rule or even recognize the need for it – a signal the media picked up on when noting that you ‘ha[ve] reservations’ that ‘underscore how deeply divided the Fed is on regulations, even as it has maintained striking unanimity in its far more visible interest rate-hiking campaign.’ ”
Powell indicated in July that the March 2023 bank crisis, which shuttered three small- to mid-sized banks, further highlighted the need to strengthen capital rules regulating the entire banking system, and not just the largest, most complex banks. He also expressed the need for a balanced regulatory approach, tailored to appropriately account for the various types of entities within the banking system.
“I believe that recent events have demonstrated the need to strengthen supervision and regulation for firms with assets between $100 billion and $250 billion,” Powell said in his opening statement. “Here too, however, we need to strike the right balance. Regulation and supervision should reflect the size and risks of individual institutions. That approach is essential if we are to allow banks of different sizes to thrive and preserve our diverse banking system.”
Warren’s letter pressed the Fed chair to act expeditiously in implementing the proposed Basel III rules without any modifications that might weaken their effectiveness. The senator also challenged Powell’s leadership and accountability with respect to his apparent “uncertain positioning on the Fed’s proposal,” as well as his handling of other matters during his tenure.
“Further delaying the rule’s implementation, the Fed allowed a 120-day comment period on the proposal – longer than usual – in deference to the bank lobby’s requests,” Warren wrote. “… I strongly urge you to accept accountability for your failures, resist industry pressure to weaken and further delay the rules and finalize this proposal as quickly as possible.”