July 15, 2021

Warren to Fed Chair Powell: The Federal Reserve Needs to Be Tough Enough to Protect our Economy from the Next Crisis

“I see one move after another to weaken regulation over Wall Street banks—and that worries me.”

Washington, DC - At today's Senate Banking, Housing, and Urban Affairs Committee (BHUA) hearing, United States Senator Elizabeth Warren (D-Mass.) raised concerns to Federal Reserve Chair Jerome Powell regarding the steps he has taken to weaken financial regulation during the past four years of his tenure. Her questions focused on two areas of weakened regulation: living wills and the Volcker Rule.

To prevent taxpayer bailouts, banks are required to have living wills to show every single year how they could be shut down without wrecking the entire economy. In 2019, Chair Powell weakened the rules so that the thirteen banks with $250 billion to $700 billion in assets could submit full living wills once every six years instead of every year.

The Volcker Rule separates commercial banking from Wall Street risk-taking. In 2019, Chair Powell exempted more short-term trading holdings from the rule and in 2020, weakened the rules to let the banks invest more of their assets in high-risk private equity and hedge funds.

Citing research from the Minneapolis Federal Reserve that found that banks would have faced up to $300 billion in losses in 2020 if not for fiscal stimulus from the government, Senator Warren argued that Fed rules were not strong enough for banks to withstand the pandemic without, once again, calling on American taxpayers to back them up.

“I see one move after another to weaken regulation over Wall Street banks—and that worries me,” said Senator Warren. “There’s no doubt that the banks are stronger today than they were when they crashed the economy in 2008. But that’s the wrong standard. The question is whether or not they are strong enough to withstand the next crisis—and whether the Fed is tough enough to protect the American economy and the American taxpayer.”

Transcript: The Semiannual Monetary Policy Report to the Congress
U.S. Senate Banking, Housing, and Urban Affairs
Thursday, July 15, 2021

Senator Elizabeth Warren: The Chairman of the Federal Reserve has two basic jobs: Monetary policy, which everybody likes to talk about, and regulatory oversight, which is often way down in the weeds but keeps our economy safe from another banking meltdown.

You’ve been chair for four years now, and have gone through the process of what you describe as tailoring the regulations put in place after the 2008 financial crisis. Now there were a lot of changes, but I want to talk about a couple in particular.

To prevent taxpayer bailouts, banks are required to have living wills. This means that banks must be able to show every single year how they could be shut down without wrecking the entire economy. In 2019, you changed the rules so that the thirteen banks with $250 billion to $700 billion in assets could submit full living wills only once every six years instead of every year. So that test is now weaker.

Chair Powell, has the Fed done anything over the past four years to make living will requirements stronger?

Chair Jerome Powell: Making living will. We've done a lot of things to strengthen regulation and capital but I--

Senator Warren: No, but on living wills. I just--

Chair Powell: No. I can explain what--

Senator Warren: Okay. So let’s move to another regulation: the Volcker Rule—the rule that worked like a sort of Glass Steagall-lite to separate commercial banking from Wall Street risk taking. In 2019, you exempted more short-term trading holdings from the rules, so banks could take on a little more risk. Now that weakened the rule. Then, in 2020, you eased up the rules to let the banks invest more of their assets in high risk private equity and hedge funds. So the Volcker Rule got weaker again.

So, let me ask. Mr. Chairman, during the past four years, has the Fed done anything to make the Volcker Rule stronger and limit risky trading for the largest banks?

Chair Powell: I think by clarifying it, we made it more effective at what it's supposed to do, which is just what you said.

Senator Warren: Well, I have to say, it's whether or not you did anything to make it stronger. Not just whether or not you made it clearer. It's whether or not you made it stronger or harder for banks to engage in speculative trading. I'm taking it that the answer here is no.

I’ve highlighted two examples of weakening regulations, but there are a whole lot more: reducing capital requirements, easing liquidity requirements, shrinking margin requirements, scaling back on supervision, weakening the stress tests.

It's a long list. And I realize that you think these are good changes. But I’m trying to look at this from a regulatory perspective: Is the Chairman of the Federal Reserve making banking rules stronger or weaker?

So tell me, Mr. Chairman, is there a big rule change that I missed? Can you name a change that strengthened the rules and made the actual rules tougher?

Chair Powell: Well, let me say, we did not weaken capital requirements for the largest banks and we-- I actively resisted any move in that direction. And in fact, the stress capital buffer, which we implemented quite recently after years of consideration, raises capital standards for the largest banks. By the way, stress tests. They're really bound by the stress test. We maintained the very high stringency of the stress test through this period.

Senator Warren: So, but what I was asking about anything tougher. Look, what I'm looking for is that the Fed’s record over the past four years, I see one move after another to weaken regulation over Wall Street banks—and that worries me.

There’s no doubt that the banks are stronger today than they were when they crashed the economy in 2008. But that’s the wrong standard. The question is whether or not they are strong enough to withstand the next crisis—and whether the Fed is tough enough to protect the American economy and the American taxpayer.

In 2020, the giant banks that are the beneficiary of these weakened rules made it through the crisis. But the researchers from the Minneapolis Fed found that the banks would have faced up to $300 billion in losses if not for fiscal stimulus from the government. In other words, the current Fed rules were not strong enough for the banks to withstand the pandemic without, once again, calling on American taxpayers to back them up.

And that’s the heart of my concern. I understand that the next crisis may feel far away. But, like the pandemic, it may come at us fast and from an unexpected direction. It is the job of the Federal Reserve and specifically the job of the Chair of the Federal Reserve to use the regulatory tools that Congress has created in order to make sure that banks remain strong and that taxpayers will never be called on again for a bailout.

Thank you, Mr. Chairman.

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