
Next Wednesday and Thursday the House Financial Services Committee and the Senate Banking Committee will have their semiannual hearings on monetary policy with Federal Reserve Board Chairman Jerome Powell. While Monetary Policy is in the hearing’s title, and there is much to talk about on that front, there have also been a few hiccups in financial regulation land involving the Federal Reserve that you may have heard of.
While we at FinRegRag do not hold elected office, that doesn’t mean we can’t dream of asking Chair Powell a few questions. Like the following, where we at FRR would really like more insight. Some of these are better suited as hearing questions, while others might make good questions for the record.
(Also, while the Fed did not have much of a role in Signature Bank, it is included for the sake of completeness.)
Bank Stability
1. When were you first made aware that SVB, Signature, and First Republic were in danger of failure?
2. To what extent was the Federal Reserve Board involved in deliberations over how to handle SVB, Signature, or First Republic, prior to, during, and after their failures?
a. Please provide any minutes of those meetings or discussions.
3. Please describe in detail the allocation of authority for bank supervision between the Board and regional banks as actually practiced. What communications between regional banks and Board staff occurred in the past three years regarding SVB, Signature, and First Republic?
a. Please provide any minutes of those meetings or discussions.
4. Should supervisory initiative rest with the Board or with the regional banks?
5. Going forward will regional bank staff have more discretion to bring matters to the attention of the Board?
6. Will the Board engage an independent review of the Federal Reserve’s supervision of SVB, as requested by Governor Bowman? If not, why not?
7. Likewise, could you describe the process used to create the Federal Reserve’s review of SVB? As Governor Bowman noted it was apparently not reviewed by the full board before publication. Why was that?
8. How does the Federal Reserve see systemic risk post SVB? Is there a way the Federal Reserve can articulate, ex ante what needs to happen for an incident to qualify as systemically significant or must it always be a “know it when you see it” situation?
9. Do you consider a goal of banking regulation to prevent bank failures or mitigate the collateral damage of bank failures? I ask because actions taken by the Federal Reserve and others to stabilize banks, such as the BTFP, could be seen as the government insulating banks from market discipline. Is that appropriate?
10. We have seen deposit flight to the largest banks, at least in part because they are seen as “too big to fail.” Is having a few very large firms be seen as too large or important to be allowed to fail consistent with the American conception of capitalism? Fairness? Efficiency? If not, what can be done to remove the need for TBTF?
11. Can you describe what coordination, if any, occurs between the Federal Reserve’s monetary policy and bank supervisory staff? As Governor Waller said in a recent speech, the Federal Reserve’s rapid increase in interest rates was pursued to fulfil its mandate for price stability, but at least viewed by many as playing a role in the recent bank failures. While Governor Waller is right that the Federal Reserve should not abandon its mandate to protect banks, it does raise the question of how well information is being shared within the Fed to help supervisors adapt to monetary policy changes.
CBDC
1. As Nicholas Anthony of the Cato Institute has pointed out, there is a lack of clarity as to whether you believe that the Federal Reserve would need congressional approval to issue a CBDC that is used by members of the public but is intermediated by financial firms, or if that authorization is only necessary if the Fed directly issues the CBDC to the public. Would you clarify your position on when the Federal Reserve would need congressional authorization?
2. Regardless of the answer above, would you commit that the Federal Reserve will not issue a CBDC that is to be used by the public, even if distribution is through intermediaries, without first obtaining approval from Congress?
Climate and other risks
1. Do you agree with your colleague Governor Waller (and Brian Knight) that climate risk should not be singled out as unique but is rather a potential input into more traditional risk concerns such as credit risk?
Obviously, there is a lot more we could ask about, but we only get five minutes, right?