Federal Reserve Chairman Jerome Powell recently attended a closed meeting with a bunch of CEOs of major banks and encouraged them to work with the Fed to avoid a years-long legal battle over the Biden administration’s landmark capitalization proposal.
Powell told bank chiefs, including Jamie Dimon of JPMorgan Chase & Co. and Jane Fraser of Citigroup Inc., that the general public would have a likelihood to comment on key changes to the plan, say individuals with knowledge of the meeting last month hosted by the Financial Services Forum, an industry association of the most important U.S. banks.
While it’s commonplace for Powell or other Fed governors to satisfy with the panel of top bank executives, the discussion is the newest sign that he’s using his influence to construct consensus between the industry and Fed governors – and get the package through the finish line. The proposal, a response to the 2008 global financial crisis, has been within the works for greater than a decade. It has faced stiff opposition from the industry, which is bracing for possible litigation.
The Fed has already submitted a significantly watered-down version of capital reform to other regulators, worrying some agency officials. That has led some observers to ponder whether the central bank’s board, which prides itself on consensus, will give an excessive amount of ground on the proposal often called the Basel III endgame.
“I was troubled by Powell’s statement in his last appearance on Capitol Hill, when he said he expected the final Basel endgame rule to have ‘broad support in the broader community of commentators on all sides,'” said Jeremy Kress, a former Fed banking policy lawyer who now teaches economic law on the University of Michigan. “That’s a dangerous standard because it makes the Fed bend to the will of the banks.”
Other Fed observers imagine Powell is merely following the rules set by law.
“There is a legal requirement that the Federal Reserve must follow when setting important banking policies,” said Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City and now a distinguished senior fellow at George Mason University’s Mercatus Center. “It’s not about building consensus, but rather about setting the right policy and getting input and comment from the industry to make sure the policy achieves the intended results.”
A Fed spokesman and a representative of the Financial Services Forum declined to comment on the meeting.
The July 19 event in Washington was also attended by Brian Moynihan of Bank of America Corp. and Ted Pick of Morgan Stanley, in response to people acquainted with the meeting. Fed Vice Chairman Michael Barr, considered the architect of the unique proposal, was not present, a number of the people said.
The original draftto be released in July 2023 by the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, called for a 16% overall increase within the capital that banks must hold as a buffer against financial shocks.
But the Fed later presented other regulators with a three-page document detailing potential revisions that suggested a rise of as much as 5%. The revisions could roll back key parts of the landmark proposal – including one that may have had a significant impact on large banks with significant trading business.
Powell told U.S. lawmakers last month that there was no final decision on any changes to the proposal – but “quite a bit of progress.” Some FDIC and OCC officials had privately indicated they might oppose any capital increase they considered too low.
Others expressed concern that the Fed might go it alone to push forward a revised proposal if the three regulators fail to succeed in a standard position.
“For a single agency to make a new proposal – but with the expectation that a future final rule will be issued jointly by all three agencies – would be unprecedented, would create confusion and would give rise to a number of practical and legal questions,” Federal Deposit Insurance Corp. Republican Vice President Travis Hill said last month.
At the Financial Services Forum meeting, Powell was asked whether the Fed would act independently of other regulators in announcing major changes and soliciting public comment, in response to people acquainted with the event. Some of them said they felt that was possible.
Powell told lawmakers in July that it was essential that regulators find yourself with something comparable to other large countries. At the meeting with bank chiefs, he mentioned the European Union’s Basel initiative, noting that that version would result in a complete capital increase of 10%, in response to people acquainted with the meeting. The average increase in Britain would about 3%.
Powell’s comments to banks on the capital proposal were described as very general, specializing in how he plans to succeed in a final rule, including by soliciting latest public comments and releasing a study on the proposal’s impact, it said.
The chairman told banks they need to take their problems to the Fed now to avoid legal trouble, the people said.
The Bank Policy Institute said in January that it had hired white collar litigator Eugene Scalia to take motion against regulators in the event that they fail to agree on a final rule with significant changes.
The Washington-based trade group, in addition to the Financial Services Forum, the Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce, sent a letter to the authorities on the grounds that the capital plan violated the Administrative Procedure Act, which regulates the strategy of drafting regulations.
“In a world where people feel compelled to go to court more and more often, and where the courts listen, banking regulators must be more sensitive to the rights of the banks they regulate and the impact of those rights,” Scalia said in March in a podcast with Bloomberg Intelligence analysts Nathan Dean and Elliott Stein.
