Raising U.S. bank capital requirements to guard against future losses could increase the cost of credit but that may be justified to ensure the U.S. banking system is safe, Federal Reserve Chair Jerome Powell told Congress on Wednesday.
Testifying before the House Financial Services Committee, Powell was grilled by Republican lawmakers who worry the central bank may overreact to a March banking crisis with stringent new rules which they say could stifle lending and hurt the economy.
Powell was at pains to strike a balanced tone, arguing strong capital is of "central importance," particularly for large global banks, but acknowledging increases come with tradeoffs that must be considered.
"Strong capital requirements means we have a stronger banking system...yet we also know that at the margin, as the costs of capital for banks goes up, the costs of credit goes up," he said. "You just have to make a judgment call on that, and that's what we'll be doing."
Fed Vice Chair for Supervision Michael Barr is undertaking a holistic review of existing capital requirements and is expected to make several proposals strengthening bank rules after three lenders failed in March, forcing the government to backstop deposits.
Powell said the Fed has a "significant number of proposals in the works" but none have been finalized or brought to the board for a vote yet. Republicans repeatedly warned Powell against disrupting lending at a precarious point for the U.S. economy.
"Now is not the time to be engineering massive new regulatory changes or hindering regional banks which have already been under stress," said Representative Andy Barr, a Kentucky Republican.
Powell, who in the past has said he would defer to Barr as the top regulatory official at the Fed, insisted that any capital hikes will be justified. He also said he anticipates stricter requirements will fall primarily on banks with over $100 billion in assets, sparing small lenders.
He also noted that any new requirements would take months to finalize and even longer to be implemented, meaning they would likely take effect when the U.S. economic outlook is clearer.
Powell appeared before the House at the same time as the Senate Banking Committee advanced legislation that would allow regulators to claw back compensation from executives at failed banks, as well as give regulators stronger tools to punish executives for mismanagement.
The legislation, backed by the panel's top Democrat and Republican, now advances to the full Senate for potential consideration.
