Washington, DC – Today, Congressman Frank Lucas (OK-03) joined his colleagues on the House Financial Services Committee for a hearing entitled, “Monetary Policy and the State of the Economy.”
Lucas questioned Federal Reserve Chairman Jerome Powell on the impact of the upcoming Basel III revisions on derivative end-users, and whether the Fed is coordinating with the SEC and the Treasury. Lucas also urged the Fed to not engage in climate-policymaking and discussed the long-term plan to reduce the Fed’s balance sheet.
Lucas: “I’m sure you are keenly aware of how important it is for banks and companies to manage interest-rate risk, particularly during the last several years. Silicon Valley Bank made that very clear.
“Could you speak generally to how hedging interest-rate risk is an important risk management tool for US banks and companies?”
Powell:“I think you see the reality of it here when rates go up, banks are encouraged by their supervisors and their own internal personnel and risk committees that they need to manage that risk.
“Most U.S. banks did a good job of that. It is a fundament risk of banking – one of the most basic risks along with credit risks.”
Lucas: “On that point, I’ve heard concerns that the Fed’s Basel 3 Revisions could increase costs for derivative end users – whether hedging interest-rate risk or commodity price risk.
“I am optimistic that these concerns will be addressed. Having said that, these revisions to capital requirements do not exist in a vacuum: the SEC is proposing major changes of their own.
“Last week, I asked Secretary Yellen if Treasury is coordinating with the Fed and SEC on the economic analysis necessary to understand potential consequences of U.S. banks implementing both significant market structure changes and increased capital requirements associated with market activities.
“The Secretary responded that the Fed is, in fact, coordinating with Treasury on this analysis. Are you aware of this coordination and have you personally been a part of these conversations?“
Powell: “I have not been apart of those conversations but I do understand that that’s correct.”
On the Federal Reserve’s role regarding climate change:
Lucas:“You have assured this committee that the Fed is not a climate policy maker, and I appreciate your commitment to this.
“However, I’m concerned that the Fed’s regulatory toolkit would be utilized in a way that would, in effect, require the Federal Reserve to make policy decisions on climate change.
“We’ve seen other U.S. financial regulators embark on significant climate rule-making, such as the SEC. Chairman Powell, are there principals you keep in mind when ensuring the Fed doesn’t give in to – shall we say – political pressure around things like climate change?”
Powell: “There are, and one would be that we don’t see it as appropriate for us to tell banks what legal businesses they can lend to.
“What we do is supervise banks to make sure they understand and can manage the risks they are running. We are thinking of that as our point of contact with climate change in the sense that it’s another risk that overtime banks need to be able to analyze and assess.
“Climate change is going to be a very important issue for a long time and it needs to be addressed, principally by elected people because it has enormous distributive consequences and we don’t have a mandate to deal directly with climate change as a policy maker.
“It does arise in connection with bank supervision but that’s not the heart of bank supervision that’s just a small part.”
On the Federal Reserve’s long term plan to reduce the balance sheet:
Lucas: “I’d like to discuss the Fed’s balance sheet, which currently sits at just under $8.5 trillion.
“As you know, the size of the balance sheet more than doubled as the Fed worked diligently to stabilize markets during the height of the pandemic.
“Now, as the Fed begins to reduce the balance sheet, could you explain this process and describe the level of securities that the Fed will look to maintain in the long term?”
Powell: “The way the process works is, securities mature, and they roll off our balance sheet. That’s the way it works. There’s a cap among for mortgage back securities and also for treasuries so it doesn’t get too large.
“If you hit that cap month upon month it works out to roughly a little less than a trillion dollars a year in shrinkage – which is a whole lot faster than what we did in the last cycle.
“But then again, the balance sheet is that much bigger. In terms of the level we’re thinking about a level that will allow us to operate our abundant reserves regime with enough of a buffer on top of it so that reserves wont accidentally become scarce.”
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