March 4, 2024

Federal Reserve Chairman Jerome Powell prepares to testify at a hearing of the Senate Banking, Housing and Urban Affairs Committee on Thursday, June 22, 2023, in the Dirksen Building, titled “Semi-Annual Monetary Policy Report to Congress.”

Tom Williams | Cq-roll Call, Inc. | Getty Images

New rules expected to require banks to retain more capital will almost certainly not apply to smaller institutions, Federal Reserve Chairman Jerome Powell said on Thursday.

Powell told committee members on concerns over proposals to tighten controls on big banks Senate Banking Committee The rule is still in draft stage.

At the same time, he worries about what higher capital requirements will do to loans.

“More capital means more stable banks and stronger banks, but there are trade-offs,” he said on the second day of his semi-annual monetary policy testimony. “You have to be judgmental about your boundaries.”

Powell said banks with less than $100 billion in assets would not be affected by any new requirements. That came as a relief to Republican lawmakers who questioned whether the changes were necessary, as Powell faced multiple questions about the future of regulation and oversight.If so, the new rules would affect the top 25 or so banks in the US

The issues, along with the move to review regulations, follow industry turmoil in March, when Silicon Valley Bank and two other large regional banks were shut down due to deposit runs.

Lawmakers and Biden administration regulators have been pushing to return to the stricter requirements after reforms in larger districts gained a respite in 2018.

Fed Chair Powell: We understand the importance of community banks

In separate testimony Thursday, FDIC Chairman Martin Gruenberg said the forthcoming rules could apply the so-called Basel III international standard to banks with assets between $100 billion and $250 billion. The changes are not expected to be implemented until sometime in 2024. Michael Barr, the Fed’s vice chair for supervision, said the changes could take years to be fully implemented.

“The capital requirements will be very, very skewed towards the eight largest banks,” Powell said. “Other banks may increase some capital. It won’t affect banks under $100 billion.”

Even with exemptions for smaller institutions, the looming change represents a shift in thinking that Powell had previously championed, notably that regulation should target small and medium-sized banks. For example, Ed Mills, Washington policy analyst at Raymond James, said in a client note that Grunberg’s comments “support our view that bank regulators favor higher capital levels.”

The American Bankers Association criticized the move to raise the requirement, which was reported to be 20 percent higher.

“We have long believed that regulation should be tailored to a bank’s risk and business model,” ABA President Rob Nichols said in a statement. “Arbitrary assets not backed by rigorous data and evidence Thresholds and changes are a mistake and will only make it harder for banks of all sizes to meet the needs of their customers, clients and communities, while pushing financial activity to less regulated non-banks.”

Despite concerns over the Silicon Valley bank’s failure, Powell has met with little hostile questioning.

He did face some grilling from Sen. Elizabeth Warren, D-Mass., a frequent critic who accused Powell on Thursday of being “ultimately responsible for the executive team that failed when SVB failed.”

Powell replied that the Fed “learned some lessons” from the incident.

“The main responsibility I have taken on is to learn the right lessons from this and work on fixing them so we don’t have a situation where a large bank fails unexpectedly and spills over into the banking system. It shouldn’t be like this. “It happened and we need to take appropriate steps to make sure it doesn’t happen again,” he said.