September 28, 2021

At hearing, Warren Presses Fed Chair Powell on Record of Deregulation, Opposes Renomination As Fed Chair

Warren to Fed Chair Powell: “Your record causes me grave concern: over and over you have acted to make our banking system less safe. That makes you a dangerous man to head up the Fed, and that’s why I’ll oppose your re-nomination.”

Video of Hearing Exchange

Washington, D.C. — 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 his tenure, including: 

  • Weakening stress tests. Stress tests were originally designed to demonstrate whether big banks can survive without a taxpayer bailout. In 2019, the Fed began providing significantly more information about the models used in the tests to the largest banks, essentially giving them the information they need to pass the tests under the guise of “transparency.” The Fed also eliminated the ability of bank supervisors to object to a bank’s planned capital distributions on qualitative grounds if there were deficiencies in the models and assumptions banks used to estimate losses.
  • Eliminating Volcker Rule restrictions. 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. In March 2021, Archegos Capital Management—which was classified as a family office-- and its investment bank financiers started liquidating huge stock positions, causing significant turbulence in capital markets that caused banks to suffer $10 billion in losses
  • Easing liquidity requirements. In 2019, the Fed weakened the Liquidity Coverage Ratio which requires banks to hold enough "high-quality liquid assets" to meet their obligations. The result has increased risks to financial stability of banks and the country’s financial system. 

Transcript: CARES Act Oversight of the Treasury and Federal Reserve: Supporting an Equitable Pandemic Recovery
U.S. Senate Banking, Housing, and Urban Affairs Committee
September 28, 2021

Senator Elizabeth Warren: Chair Powell, during your time as chair you've taken plenty of actions to weaken the Fed’s regulatory oversight of our largest banks. So today I want to talk about three instances of that, and ask you to think about them in hindsight. First, the stress test. Now these are designed to tell whether or not big banks can survive without a taxpayer bailout. When the tests were first set up, bank supervisors could restrict stock buybacks and dividend payments to strengthen the bank's balance sheet. In 2019, you took that power away and we now know from the Fed’s own research that when the economy hit choppy waters last year, those banks needed stimulus from the taxpayers, and without this taxpayer help, they would have faced up to $300 billion in losses, meaning that they were in a sharply weakened position to withstand the stress. Chair Powell, do you regret weakening the stress test?

Chair Jerome Powell: I don't think we have weakened the stress test and I'm not sure what you're referring to. When banks fail the stress test, their distributions are limited.

Senator Warren: So I laid it out here that you took away the power to restrict stock buybacks and dividend payments that could be used to strengthen the balance sheet. You don’t see any changes you made to the stress tests and handing the stress tests out in advance?

Chair Powell: Senator, capital in the largest banks is at multi-decade highs.

Senator Warren: That's not my question. I'm looking at the Fed’s own research, which says that without the help that you had to put into the economy last year, they would have faced up to $300 billion in losses. So, look, I don't want to argue with you about what’s happened-

Chair Powell: Which they would have met. Which they would have been able to absorb without difficulty.

Senator Warren: Let, let me ask you the question then. I take it you don't have any regrets about any changes to the stress test?

Chair Powell: I, not really. I mean I'm prepared to look at anything we did is, is fair game to look at again, but I don't think so.

Senator Warren: Ok. Let me ask about another action. In 2020, the Fed along with the other agencies, removed the Volcker Rule restrictions on whether banks could co-sponsor so-called family funds. And then earlier this year we watched the collapse of a “Family Fun” called Archegos, which causes banks, caused banks to suffer a quick $10 billion in losses. Given the Archegos collapse, do you regret weakening the Volcker rule?

Chair Powell: You know the, that's actually a family office, Archegos is. I don't know that there are any Volcker Rule implications for Archegos. I will say, we've looked at the Archegos situation closely. Those losses were, and I think learn, learned our lessons from that.

Senator Warren: Learn your lessons, but do you have any regrets about weakening the Volcker Rule around family funds, having watched what Archegos did?

Chair Powell: I’d have to understand the Archegos connection. Generally the, it was widely agreed that the Volcker rule as implemented was complex and not workable.

Senator Warren: Ok. I’ll take that as a no. I just want to make sure I can get through all three of these. One last example, in 2019, the Fed weakened liquidity requirements, the rules that ensure that firms have adequate cash to meet their obligations. For banks between $250 and $700 billion dollars in assets, the liquidity requirement was cut by 15%. So, let me just ask, do you regret slashing liquidity requirements designed to protect markets from crashing like they did in 2008?

Chair Powell: So that was, that was tailoring which, which the law that had been passed through this committee required, I don't, I don't see that there has been any evidence that that was a bad idea, but it's one that could certainly be looked at again.

Senator Warren: Okay, so you'd be willing to at least look at that one again?

Chair Powell: Yes.

Senator Warren: Yeah, okay, this cut by 15%. You know Chair Powell, the elephant in the room is, whether you're going to be re-nominated for a second term as Fed Chair. 

Re-nominating you means gambling that for the next five years, a Republican majority at the Federal Reserve with a Republican chair, who has regularly voted to deregulate Wall Street, won't drive this economy over a financial cliff again. And with so many qualified candidates for this job, I just don't think that's a risk worth taking. 

I know that some argue that your deregulatory actions are mostly harmless. I disagree. I think they've put taxpayers at risk for hundreds of billions of dollars, but even at that, so far you've been lucky. But the 2008 crash shows what happens when the luck runs out. The seeds of the 2008 crash were planted years in advance by major regulators like the Federal Reserve, that refuse to rein in big banks. 

I came to Washington after the 2008 crash to make sure that nothing like that would ever happen again. Your record gives me grave concern. Over and over, you have acted to make our banking system less safe. And that makes you a dangerous man to head up the Fed, and it's why I will oppose your renomination. Thank you Mr. Chair.