10 Key Regulatory Takeaways from the HFSC Humphrey-Hawkins Hearing

The U.S. House Financial Services Committee held its semiannual hearing on monetary policy and the economy with Federal Reserve Chair Jerome Powell earlier today. Apart from questions surrounding the Fed’s interest rate trajectory, Chair Powell weighed in on a wide range of regulatory topics, including forthcoming changes to the supplementary leverage ratio, the Fed’s role in international standard-setting and supervisory practices such as the Fed’s latest decision to discontinue examining banks for “reputational risk.”

Here are some takeaways from the hearing:

1. The Fed’s forthcoming supplementary leverage ratio proposal aims to strengthen Treasury market intermediation and reestablish the ratio as a genuine backstop.

Rep. Andy Barr (R-KY): “Chairman Powell, we’re looking forward to this rulemaking later this week addressing Treasury market liquidity. Can you talk about how banks are constrained from holding U.S. Treasuries and other low-risk assets on their balance sheets as a result of these restrictive leverage ratios?”

Chair Powell: “Yes. When, when banks are bound by the leverage ratio, when that’s the binding capital constraint, then that’s going to make low-risk, low-return assets, you know, something you don’t want to hold. And so lots of fairly low-risk intermediation, including Treasury market intermediation, gets taxed to the point with capital requirements that you just see less of it. So, we always thought that it would be better if we had a leverage ratio that was a backstop rather than the binding thing, and that’s what this proposal is going to do.”

2. However, the current proposal does not explicitly exclude Treasuries from the SLR, despite recommendations from senior Administration officials.

Rep. Mike Flood (R-NE): “Secretary Bessent, earlier this year, had argued that such a change could serve as a boost for banks and their ability to intermediate in the Treasury market, and could potentially pull Treasury yields down 30 to 70 basis points. Chairman Powell, do you agree with the Treasury Secretary’s comments on the potential positive impact of SLR reform on the Treasury market, and what is the rationale for not excluding Treasuries from the SLR calculation in the proposed rule?”

Chair Powell: “So, I agree that when the leverage ratio is binding, it discourages banks from undertaking low-margin, fairly safe activities such as [inter]mediation in the Treasury markets. So, this should encourage more [inter]mediation. I don’t have a numerical estimate of how much that would matter, but I do think it would matter. I think it was important. I’ve supported leverage ratio reform for a very long time, since before 2021. In terms of the structure of the thing, I think we’re seeking comment on a particular proposal that doesn’t involve exclusion, but we’re also asking a question about exclusion.”

3. The proposal also diverges from prior Fed relief that effectively supported Treasury market intermediation during periods of stress.

Rep. Mike Flood (R-NE): “Mr. Chairman, considering the Fed temporarily excluded Treasuries from the SLR calculation during the COVID pandemic. Were you aware of any safety and soundness or financial stability problems that arose as a result of that decision? And if not, why was that relief terminated in 2021?”

Chair Powell: “So, that was an emergency measure from the beginning and end. It was an emergency measure. I think you know my long-held view is that we should have a permanent measure, and now we’re going to. We have an open board meeting on Wednesday afternoon, and after I finish my hearing on the Senate side, I’m very much looking forward to putting this proposal out for comment.”

4. Powell said he was “open to the conversation” when it came to exploring derivatives netting to support Treasury market participation.

Rep. Frank Lucas (R-OK): “In your view. Would allowing netting mechanisms for derivatives on Treasuries encourage participation in the market? And would you consider looking at that with your prudential counterparts?”

Chair Powell: “This is for derivatives? My first phone call on that would be to Vice Chair Bowman to ask her what she’s planning. But I’m certainly open to that conversation. Absolutely.”

5. Powell agreed that the U.S. should lead, not follow, on international regulatory standards like Basel III Endgame.

Rep. Tim Moore (R-NC): “I want to touch on international standard-setting bodies like the Basel Committee on Banking Supervision. Their goal is to promote better harmonization for global capital flows and regulatory standards. But the Biden administration’s implementation of Basel III endgame demonstrated the pitfalls when the U.S. was a follower instead of a leader in the international arena. That’s why both Democrats and Republicans shot down former Vice Chair Michael Barr’s proposal, which made capital less acceptable and put U.S. firms and businesses at a global disadvantage. Do you agree that the United States should only implement international standards in a way that is consistent with our own domestic legal and regulatory scheme?”

Chair Powell: “I do.”

6. Banks, not regulators, should decide their own business practices.

Rep. Tim Moore (R-NC): “I appreciate the Federal Reserve’s announcement yesterday to end the use of reputational risk during banking examinations. This supervisory practice was used as a tool to pressure banks to refrain from offering financial services to politically disfavored individuals or industries. What further steps is the Federal Reserve taking to help usher in these changes, such as ending examination practices that informally encourage banks to close certain accounts without written justification?”

Chair Powell: “So, we’re developing — I should say, Vice Chair Bowman is developing — a range of policies that will help in that area, and I should let her speak to it. But as you know, we’ve eliminated reputation risk, largely, in a thoughtful way from those things. I think we became more aware of that problem over the course of last year and, like the other agencies decided to move away from that. We’re very conscious of the fact that we shouldn’t be telling banks who they can lend to. That’s a decision for them.”

7. That includes banks’ engagement with lawful digital assets activities.

Rep. Bryan Steil (R-WI): “How is the Fed evaluat[ing] and overseeing banks and other regulated entities that are in the digital assets or crypto space?”

Chair Powell: “Our view is that banks get to decide who their customers are. That’s not our decision. And so banks are free to provide banking services to the crypto industry, to crypto companies, and banks are also free to conduct crypto activities as long as they do so in a way that is protective of safety and soundness.”

8. The Fed is moving forward with repealing the 2023 CRA rule and returning to the prior framework, as previously announced.

Rep. Mike Flood (R-NE): “In March, the Federal Reserve together with the FDIC and the OCC announced that they intend to issue a notice of proposed rulemaking to repeal the 2023 Community Reinvestment Act and replace it with the legacy CRA framework. Nearly three months have passed since this announcement. What is the status of this project?”

Chair Powell: “Well, we’re going to do what we said we were going to do. It’s just a question of execution, and I think you’ll see that coming. This would be… so, Vice Chair Bowman has the job of sequencing these things, and that one’s certainly coming.”

9. Cybersecurity remains a major priority for banks and regulators, exacerbated by recent geopolitical events.

Rep. Josh Gottheimer (D-NJ): “Chairman Powell, as a member of the Intelligence Committee, I’m deeply concerned about the threat of Iranian cyber attacks on our financial system as retaliation for our strikes on their nuclear facilities. In its cybersecurity report last year, the Fed acknowledged that critical infrastructure, including financial services, [are] at risk with rising geopolitical tensions. Iran has a history of targeting American infrastructure companies and financial institutions and banks, which could obviously threaten and cause economic damage. What actions is the Fed taking now to monitor and defend against Iranian or proxy cyber threats targeting our country’s financial institutions?”

Chair Powell: “So, we’re in touch with the other regulators and the parts of the government that work on cyber as you know. And you know, we’re in touch with the banks to say, you know, for people to be on the alert for things like that to happen. And also, we’re on the alert because, you know, we’re a target as well. So, you’re right to raise it. It’s a, you know, it’s a big issue.”

10. The Fed is considering both short-term and long-term implications of AI in the labor market.

Rep. Bill Foster (D-IL): “Now, one of the things I’ve been very concerned about is in terms of the job market is artificial intelligence and the coming impact there. I was just wondering what sort of analysis is the Federal Reserve doing about that job shock, and how is it going to affect your dual mandate when it lands, perhaps as early as the next year or two?”

Chair Powell: “I think economists everywhere are doing work analyzing the potential implications of AI for employment and some of the things, the very things that you mentioned, and we’re certainly both consumers and producers of that kind of research, you know? And I don’t think anybody… I certainly can’t make any positive statements with great confidence about what will happen, But, there’s certainly a possibility that, at least at the beginning, AI will replace a lot of jobs, rather than just augmenting people’s labor over the long run. The history shows that generally, new technology raises productivity and creates new jobs over time. But it can be disruptive in the very short term. And AI, anyone who’s been exposed to AI, has to be kind of stunned with what it’s capable of. And you think, ‘oh, this is just the beginning.’ Two years from now, things you’re looking at will be left behind by the continued development. So, I think it is certainly everything you would want in a transformational technology.”

Learn more about the supplementary leverage ratio: