Yellen questioned over Fed’s independence, rate decisions and Wells Fargo
Good morning. We’ll be following the Yellen hearing, which should be interesting given all the news surrounding bank regulation.
Yellen is testifying just days after Fed Gov. Daniel Tarullo said the central bank may make stress tests easier for banks with less than $250 billion in assets.
More pertinently, Yellen is testifying as the outlook for two major banks are in question — both of which the Fed regulates.
Wells Fargo /quotes/zigman/239557/delayed /quotes/zigman/239557/lastsale WFC is under fire for opening millions of accounts without customer consent.
And Deutsche Bank /quotes/zigman/207002/delayed /quotes/zigman/207002/lastsale DB – a German bank with a big U.S. operation — is facing so many questions about its future that there is speculation the German government is readying a bailout.
Here’s her prepared remarks:
Federal Reserve Chairwoman Janet Yellen on Wednesday said the financial condition of the top U.S. banks has “strengthened considerably” since the financial crisis as she outlined steps the central bank is considering to make bigger banks have larger cushions and have smaller banks face less stringent requirements. The eight largest global systemically important banks have seen an increase of nearly $800 billion in common equity capital since 2008, Yellen said. “We must carefully monitor the impact of the regulatory changes we have made and remain vigilant regarding the potential emergence of new risks to financial stability,” Yellen said in prepared remarks before the House Financial Services Committee.
To better understand Yellen’s remarks, it’s a good idea to read Fed Gov. Daniel Tarullo remarks from earlier this week.
The key takeaways from Yellen and Tarullo.
* A new form of capital cushions for the giant banks called a “stress capital buffer.”
The leading idea that has emerged from our comprehensive CCAR review is to integrate CCAR with our regulatory capital framework. More specifically, the regulatory capital rules now include a firm-specific, risk-based capital surcharge for each global systemically important bank (GSIB) and a uniform capital conservation buffer requirement above the regulatory capital minimum for all firms. Under the approach we are considering, the existing capital conservation buffer would be replaced with a risk-sensitive, firm-specific buffer that is sized based on stress test results. Each firm’s buffer requirement would be set equal to the decline in its common equity tier 1 capital ratio in the supervisory stress test. The buffer requirement would be floored at 2.5 percent of risk-weighted assets, the current level of the capital conservation buffer, to avoid any reduction in the stringency of the regulatory capital rules. We call this idea the “stress capital buffer,” and it would effectively move the stress test to the center of our regulatory capital framework.
For the eight U.S. GSIBs, the move to the stress loss buffer–which would be similar in effect to including the GSIB capital surcharge in the CCAR post-stress minimum–would result in a significant aggregate increase in capital requirements. Thus, in addition to simplifying the capital framework by integrating CCAR with our regulatory capital rules, the stress loss buffer would advance our macroprudential goal of making GSIBs more resilient. In contrast, the move to the stress loss buffer approach generally would not entail a toughening of our requirements for the 25 large banking firms that are subject to CCAR but are not GSIBs. Nor would the move have any impact on community banks or other firms with less than $50 billion in assets.
Another key takeaway is that the Fed wants to make stress tests easier for all but the giant banks. These stress tests have become huge burdens for all the banks.
Yellen is now delivering a version of her prepared remarks.
It’s a good day in the stock market for Wells Fargo and Deutsche Bank. The longer term picture for both, however, is less sanguine.
Rep. Jeb Hensarling, the Texas Republican who chairs the committee, says he’s encouraged by some aspects of the Yellen testimony, notably making standards easier for community and regional banks.
Hensarling asks first question about designating non-banks as systemically important. Yellen is a member of the Financial Stability Oversight Council (which is led by Treasury Sec. Lew). Hensarling asks if all 11 criteria are weighted equally. Yellen said they look at those criteria firm by firm. Hensarling retorts that means there are 2048 different possibilities.
Hensarling asks if people at the Fed actually read the living wills, which can total as much as 42,000 pages. Yellen says you can safely assume they, as well as Federal Deposit Insurance Corp. officials, do.
Rep. Maxine Waters, the California Democrat who’s ranking member, asks about Fed willingness to take tougher tests if five big firms don’t correct their living will deficiencies the Fed and FDIC identified. Yellen says they do stand ready — but suggests it would be in form of higher capital, and not, say, a severe Fed-imposed breakup.
A reminder for those not familiar with how these hearings work — Sen. Elizabeth Warren is not here. Based on first set of questions, not expecting fireworks. But you never know.
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Will John Stumpf be CEO of Wells Fargo in a year’s time?
— Steve Goldstein (@MKTWgoldstein) September
Rep. Carolyn Maloney, the New York Democrat, takes aim at Donald Trump (without mentioning his name) by defending Yellen from charges she’s acting politically.
Yellen says U.S. economy adding about 180,000 jobs a month this year. “I’ve been pleasantly surprised that unemployment rate hasn’t fallen over that time,” she said, because people are going back into the labor force.
Yellen explains there’s “probably not that much” accommodation that will be needed to be removed if the economy continues on its current course. But it may come this year.
(A reiteration of her previous comments.)
Rep. Scott Garrett, a New Jersey Republican, say “less and less people” think Fed is not being political.
In fact he just quoted MarketWatch — I believe this article.
Rep. Garrett asks if Gov. Brainard — who has donated to Clinton campaign — has offered to recuse herself. Yellen doesn’t directly answer, but says she’s acting within Hatch Act rules.
“I don’t think there’s a conflict of interest there,” Yellen says of the possibility that Brainard may end up in a Clinton administration.
One precedent for the Brainard situation is when Ben Bernanke was nominated, while as a Fed governor, to join the Bush White House. He did not attend the Federal Open Market Committee while waiting to be confirmed.
That said, he did participate in votes while the possibility of him being nominated to be chairman of White House Council of Economic Advisers, which is more akin to the situation Brainard now finds herself in.
Brad Sherman flat out asks Yellen if she would break up Wells Fargo. She dodges, says holds big banks to “exceptionally high standards.”
— Pete Schroeder (@peteschroeder) September 28, 2016
Rep. Michael Capuano, a Massachusetts Democrat, isn’t impressed with the fine of Wells Fargo, saying it’s a “footnote” in their annual report.
Here’s the labor participation rate that Yellen just scrambled to find in her notes.
Rep. Stephen Lynch on what Fed should do to Wells Fargo — “Make their life hell.”
Yellen points out that the activities in question were regulated by the OCC and the CFPB, and not the Fed.
Rep. Steve Pearce, a New Mexico Republican, is asking about Boston Fed President Eric Rosengren’s concerns about risks to financial stability. Rosengren dissented from the September decision to keep rates unchanged in favor of a quarter-point hike.
Pearce asks whether Yellen has ever discussed in her meetings with Treasury Sec. Lew that low rates are itself a threat to financial stability.
That apparently has not come up in the Lew-Yellen discussions.
A couple of items worth pointing out as this hearing drones on
* Yellen pushed back against a study done by Larry Summers — who she famously beat to get the Fed chair job — that concluded the U.S. financial system isn’t safer than it was in 2008.
* The Fed’s plan to make it tougher for banks to conduct commodities regulation got some pushback. Rep. Mick Mulvaney of South Carolina went so far as to ask whether being located in New York could be considered to be a risky activity, noting the possibility of terrorist activity. Yellen seemed a bit surprised by the line of questioning.
* Yellen said the Fed is not seeking authority to buy equities, and in any case, can’t do so by law. She did allow that down the line that’s something Congress could consider.
“I have not been pressured in any way by the Administration,” Yellen just said about making interest-rate decisions.
The diversity of the Fed regional banks again has come up. Rep. Joyce Beatty notes there’s never been a minority head of a regional Fed bank and suggests a rule similar to the NFL rule for head coaches, where at least one minority needs to be interviewed for any opening.
One issue that just doesn’t go away is the Obama administration refusal to name a nominee to be vice chairman for supervision, as Dodd-Frank requires. (In practice, that job is being handled by Fed Gov. Daniel Tarullo.)
Then again, two Obama nominees to the central bank, Allan Landon and Kathryn Dominguez, probably never will get a vote in the upper chamber.
Yellen is asked about raising inflation target. She says it’s appropriate subject to do more research, but not something FOMC is actively considering.
She adds 2% inflation target is not a ceiling but a target.
As the chart shows, the Fed isn’t hitting that target.
When will America get a raise?
Yellen says productivity growth is needed for real wage growth. And there hasn’t been productivity growth of late. “Productivity growth has been very low, and I think that’s one of the things holding down improvements in living standards,” Yellen says.
Gavel. We’re done.
Lots of questions over Wells Fargo, a few scattered questions about the economy. Perhaps the real takeaway is that the Fed’s political independence is becoming a bit more of an issue, despite Yellen’s denial. In fairness, not many Republicans joined Rep. Garrett’s line of attack, and many GOP members (and a few Democrats) seemed pleased with the direction the Fed is going toward lessening the burden for community and regional banks.