Latest news with #MichelleBowman
Forbes
13 hours ago
- Business
- Forbes
From Basel To Baffling: It's Time To Simplify Bank Capital Rules
UNITED STATES - APRIL 10: Michelle Bowman, nominee to be Vice Chairman for Supervision, Board of ... More Governors of the Federal Reserve System, arrives for her confirmation hearing in the Banking, Housing, and Urban Affairs Committee in the Dirksen Senate Office Building on Thursday, April 10, 2025. (Bill Clark/CQ-Roll Call, Inc via Getty Images) This past week, thanks to the efforts of Fed Vice Chair for Supervision Michelle Bowman, the Fed hosted a conference titled the 'Integrated Review of the Capital Framework for Large Banks.' In his opening remarks, Fed chair Jerome Powell announced that the Fed is open to hearing new ideas and feedback on how to improve the capital framework, and he stressed the importance of reviewing the whole framework rather than examining its elements in isolation. This is a welcome bit of news after the controversial 2023 proposal to implement Basel III endgame. It's also a golden opportunity for the Trump administration to hugely improve the financial regulatory framework. Virtually every panelist at the conference agreed that the existing system is too complicated. But 'too complex' is a gross understatement. The existing system is a total mess. It contains volumes of rules with mind-numbingly complex details, many of which are (at best) redundant. It includes ill-defined concepts such as reputational risk and operational risk that contribute no marginal benefit to the basic capital and liquidity rules. It's very easy to make a case for scrapping the whole thing and starting over. Capital Framework Jenga The regulatory framework looks and feels sort of like a Whac-A-Mole board because that's kind of what it is—it's been cobbled together over decades by stacking new rules on top of old rules as new problems pop up. But regulators rarely get rid of the outdated leftovers. And while banks now have more and higher capital requirements than they did in the past, that does not equate to a better system. Higher capital requirements are costly and can create perverse incentives. Moreover, requiring higher capital does not automatically stabilize the financial system or prevent government bailouts. It's easy to forget, but U.S. commercial banks exceeded their minimum capital requirements by 2 to 3 percentage points (on average) for six years leading up to the 2008 financial crisis. More recently, when Silicon Valley Bank failed in 2023, their liquidity position was strong enough to meet more stringent liquidity rules. In both cases, though, financial turmoil resulted in regulatory overreaction. A Simple Capital Framework is Better As far as the bank capital framework goes, the community bank leverage ratio is one of the only good things to come out of the post-Dodd-Frank era. This provision, signed into law and implemented during the first Trump administration, allows small banks (those with up to $10 billion in total assets) an escape hatch from the complicated capital framework. All they have to do is agree to meet a higher, simpler ratio. And many of them happily took the tradeoff. (As of last year, according to discussions with the Federal Deposit Insurance Corporation, almost 40 percent of small banks took the deal.) It is unlikely that many of the largest and most complex banks would want to go this route, but federal regulators could still offer the choice. Regardless, there are many other ways that federal regulators could radically improve the existing system by simplifying it. For instance, the existing capital framework includes a standardized approach and an advanced approach. Neither one will ever be perfect, so just pick one and ditch the other one. The existing framework includes a common equity tier 1 ratio, a tier 1 capital ratio, and a total capital ratio. Just pick one. The existing framework has a risk-weighted leverage ratio, a supplemental leverage ratio, and an enhanced supplemental leverage ratio. Just pick one. The existing framework includes a stress capital buffer and a capital conservation buffer, figures that are added to the above-mentioned capital ratios. Ditch the buffers—if the capital ratio is too low, raise it. If the ratios are higher for the largest banks (the so-called Global Systemically Important Banks, or GSIBs), then the regulatory agencies can make these suggested changes without any new legislation. The framework would be much simpler and there's no objective reason this kind of simplification would weaken or destabilize the financial sector. In the interest of full disclosure: Some of these ideas for simplification are not entirely original. And, of course, there's much more that the agencies and Congress could do. Reforms Needed Beyond Capital Framework For instance, regulators could create a materiality threshold for all safety and soundness risks, as well as a materiality threshold for all federal regulatory directives, including Matters Requiring Attention. Even better, Congress could eliminate the ability of federal regulators to use reputational risk in their examinations. There's also very good reason to stop focusing so much on the capital framework for bank holding companies instead of those for the bank itself. That part of our system is really a holdover from the days when branch banking was prohibited, but that hasn't been the case since the 1990s. Congress could also drop supervisory stress testing. A simplified capital framework could be more easily reviewed each year or two, without having to worry about making changes based on the stress test results, and banks can publicize their own stress tests results if they like. (If they really feel like they must, banking regulators could still use stress tests, in the absence of a legal requirement, to adjust a slimmed down system every few years.) Some might view these changes as too risky or radical, but the risk-weighted capital framework wasn't formally a part of the U.S. system until the 1980s. Risk-weights will always be subject to error, and nobody should be under the impression a risk-weighted system can't lead to harmful outcomes. Dodd-Frank Was Misguided Finally, since we're marking its 15th anniversary, let's talk about getting rid of the Dodd-Frank Act itself. It should surprise nobody that I favor getting rid of the whole thing, but Congress should at least consider amending it. Dodd-Frank was cobbled together in the heat of the 2008 financial crisis based on the political narrative that deregulation had caused the crisis. It spawned hundreds of separate rulemakings, expanded the authority of existing federal regulators, and created new federal agencies. It imposed unnecessarily high compliance burdens, failed to solve the too-big-to-fail problem, and didn't end bailouts. Somewhat tragically, it seems to have further cemented the notion that the federal government should plan, protect, and prop up the financial system. The Dodd-Frank Act stands not as a triumph of reform but as a case study in how sweeping legislation and regulation can miss the mark. Banks do not want to fail, members of Congress will always want political cover for providing bailouts, and capital requirements will never guarantee financial stability. Any review of the regulatory framework should start with these facts in mind.
CNN
2 days ago
- Business
- CNN
Trump is quietly changing the Fed, even without firing Powell
Sweeping changes are coming to the world's most powerful central bank, President Donald Trump and his top advisers have said — and they're already starting to make good on that promise. Treasury Secretary Scott Bessent last week made it clear that the Trump administration intends to shake up the Federal Reserve — just as it has done with the rest of the federal government. Change at the central bank will accelerate once Chair Jerome Powell steps aside at the end of his term in May 2026 — or earlier if he resigns or Trump manages to fire him. Those changes include the rules that impact the largest US banks, which are already being reviewed, and on the Fed's workforce of tens of thousands across the country. 'What we need to do is examine the entire Federal Reserve institution and whether they have been successful,' Bessent told CNBC on July 21. 'All these PhDs over there, I don't know what they do.' 'This is like universal basic income for academic economists,' he said. In June, Trump began to etch the legacy of his second term on the Fed by elevating Michelle Bowman to lead banking regulation as a vice chair on the central bank's Board of Governors. She had been a member of the board since 2018. A cornerstone of Trump's economic agenda is to slash regulations, and Bowman is widely expected to deliver on that goal when it comes to the banking industry. She has already begun to do exactly that: The Fed is in the process of revisiting and easing a raft of banking rules that came about in the aftermath of the global financial crisis of 2008. For example, the Fed last month — after Bowman assumed her new role — proposed an overhaul of how much buffer global banks must have against their total leverage, or assets that carry some risk, such as loans and Treasury holdings. The board approved the proposal in late June. The nation's largest banks cheered the decision, arguing that it will allow them to lend more to businesses and consumers. But critics say the overhaul 'puts our banking system at risk by weakening capital of the largest banking organizations,' Fed Governor Michael Barr, who led banking regulation before Bowman, said after the proposal was approved. Reconfiguring banking rules was the focus of a day-long conference Bowman spearheaded last week at the Fed's headquarters in Washington, DC. By the end of the event, one thing was clear: The banking industry wants simpler regulation, and the Fed is now poised to deliver with Bowman in a key leadership role. 'Thirty-five years ago, the capital rules were simple and weak, and today they are complex and strong,' Mike Mayo, a Wells Fargo research analyst, said at a panel discussion at the event. 'Let's make them simpler and strong.' The Fed is already moving to trim headcount, but Trump officials have suggested that won't be enough. In May, Powell sent a memo to the central bank's roughly 24,000 employees announcing plans to reduce its workforce by 10% in the coming years, citing 'government-wide efforts to improve efficiency.' Fed employees are employed at regional banks across the country, with about 3,000 based in Washington, DC. Powell's announcement came after various government institutions went through staffing overhauls by the Trump administration this year. But recent comments suggest the White House is looking for even more cuts to the Fed. Bessent has called for a more aggressive downsizing and Kevin Warsh, a former Fed governor seen as a potential choice to succeed Powell, told Fox Business in a July 7 interview that there's 'plenty of deadwood' at the central bank. Since mid-2022, the Fed has operated at a loss of more than $220 billion because it raised interest rates aggressively to tamp down high inflation, raising the interest costs tied to the debt holdings on its portfolio. Bessent frequently points to those losses in his criticism of the Fed. The Trump administration's criticism of the Fed's $2.5 billion renovation project — which the president seems to have backed off from after his Thursday tour — is also indicative that administration officials view the central bank as an excessive spender. Conducting mass layoffs at the Fed, however, may not be so simple, according to Bill English, a former senior Fed adviser. 'The chair has the authority to dismiss senior staff at the board, but to do a broader downsizing of the institution would require a vote of the board,' English told CNN. 'The new chair may want to do that, but it's hard to say how seriously the other board members would want to change the institution.'
CNN
2 days ago
- Business
- CNN
Trump is quietly changing the Fed, even without firing Powell
Sweeping changes are coming to the world's most powerful central bank, President Donald Trump and his top advisers have said — and they're already starting to make good on that promise. Treasury Secretary Scott Bessent last week made it clear that the Trump administration intends to shake up the Federal Reserve — just as it has done with the rest of the federal government. Change at the central bank will accelerate once Chair Jerome Powell steps aside at the end of his term in May 2026 — or earlier if he resigns or Trump manages to fire him. Those changes include the rules that impact the largest US banks, which are already being reviewed, and on the Fed's workforce of tens of thousands across the country. 'What we need to do is examine the entire Federal Reserve institution and whether they have been successful,' Bessent told CNBC on July 21. 'All these PhDs over there, I don't know what they do.' 'This is like universal basic income for academic economists,' he said. In June, Trump began to etch the legacy of his second term on the Fed by elevating Michelle Bowman to lead banking regulation as a vice chair on the central bank's Board of Governors. She had been a member of the board since 2018. A cornerstone of Trump's economic agenda is to slash regulations, and Bowman is widely expected to deliver on that goal when it comes to the banking industry. She has already begun to do exactly that: The Fed is in the process of revisiting and easing a raft of banking rules that came about in the aftermath of the global financial crisis of 2008. For example, the Fed last month — after Bowman assumed her new role — proposed an overhaul of how much buffer global banks must have against their total leverage, or assets that carry some risk, such as loans and Treasury holdings. The board approved the proposal in late June. The nation's largest banks cheered the decision, arguing that it will allow them to lend more to businesses and consumers. But critics say the overhaul 'puts our banking system at risk by weakening capital of the largest banking organizations,' Fed Governor Michael Barr, who led banking regulation before Bowman, said after the proposal was approved. Reconfiguring banking rules was the focus of a day-long conference Bowman spearheaded last week at the Fed's headquarters in Washington, DC. By the end of the event, one thing was clear: The banking industry wants simpler regulation, and the Fed is now poised to deliver with Bowman in a key leadership role. 'Thirty-five years ago, the capital rules were simple and weak, and today they are complex and strong,' Mike Mayo, a Wells Fargo research analyst, said at a panel discussion at the event. 'Let's make them simpler and strong.' The Fed is already moving to trim headcount, but Trump officials have suggested that won't be enough. In May, Powell sent a memo to the central bank's roughly 24,000 employees announcing plans to reduce its workforce by 10% in the coming years, citing 'government-wide efforts to improve efficiency.' Fed employees are employed at regional banks across the country, with about 3,000 based in Washington, DC. Powell's announcement came after various government institutions went through staffing overhauls by the Trump administration this year. But recent comments suggest the White House is looking for even more cuts to the Fed. Bessent has called for a more aggressive downsizing and Kevin Warsh, a former Fed governor seen as a potential choice to succeed Powell, told Fox Business in a July 7 interview that there's 'plenty of deadwood' at the central bank. Since mid-2022, the Fed has operated at a loss of more than $220 billion because it raised interest rates aggressively to tamp down high inflation, raising the interest costs tied to the debt holdings on its portfolio. Bessent frequently points to those losses in his criticism of the Fed. The Trump administration's criticism of the Fed's $2.5 billion renovation project — which the president seems to have backed off from after his Thursday tour — is also indicative that administration officials view the central bank as an excessive spender. Conducting mass layoffs at the Fed, however, may not be so simple, according to Bill English, a former senior Fed adviser. 'The chair has the authority to dismiss senior staff at the board, but to do a broader downsizing of the institution would require a vote of the board,' English told CNN. 'The new chair may want to do that, but it's hard to say how seriously the other board members would want to change the institution.'
Zawya
2 days ago
- Business
- Zawya
Fed rates are going nowhere fast: Mike Dolan
(The opinions expressed here are those of the author, a columnist for Reuters.) LONDON - Incoming U.S. inflation signals are offering the Federal Reserve little or no justification to resume interest rate cuts, and it's hard to see that changing before September. Following an unscheduled visit to the Fed last week, President Donald Trump said he thinks the Fed may be ready to lower rates again. To be sure, at least two of his appointees to the Fed board - Christopher Waller and Michelle Bowman - have indicated they might vote for a cut as soon as this week. But they may be alone. Markets certainly remain unconvinced. Futures pricing shows virtually zero chance of a move on Wednesday and only a 70% chance of a cut at the following meeting in September. Markets now even doubt we'll see two rate cuts this year - the median of Fed policymakers' forecasts published just last month. While some clarity on the uncertain trade picture should emerge from this Friday's deadline, the effective overall import tariff rate is still set to be almost 20% higher than at the start of the year. And the impact from that may take months yet to filter through. But there are enough other signals that higher import levies and a weaker dollar are already irking the U.S. price picture, at least enough to keep the Fed wary. As it stands, inflation remains well above the 2% target, and long-term market inflation expectations, now the highest of any G7 country, are above target too and creeping up. The Fed's favored inflation gauge, from the personal consumption expenditures basket, is due for release on Friday, and the annual core rate excluding food and energy is expected to be 2.7% - the same as last month. Consumer price inflation data for the month that has already been released shows pockets of price pressure in key areas affected by the limited tariffs enacted so far. Producer price data was more subdued, but that series doesn't include imported goods. Moreover, manufacturing firms last week continued to show outsized gains in input prices in July. S&P Global's monthly survey of purchasing managers registered an input price reading of 64.6, still far above the 50 threshold between expansion and contraction. Unlike the PPI, that captures imported inputs. By contrast, European manufacturers registered an equivalent input price reading of 49.9. EARNINGS NOISE Tariff-related readouts from the roughly one-fifth of S&P 500 companies that have reported second-quarter updates have been noisier. But economists warn that two aspects of the earnings season could potentially be disguising the tariff impact. The first is significant front-loading of imports in the first quarter to beat the tariffs, the enormous scale of which led to a small GDP contraction in the first three months of 2025. As that tariff-free inventory is run down, costs should rise as tariffs begin to hit. The hiatus may have allowed many firms to keep prices steady or avoid taking significant margin hits through the second quarter. The second aspect economists warn about is the degree to which major companies may want to avoid any public statements on negative tariff hits or any pass-through to consumers due to fears of political backlash. All of which leaves a foggy inflation picture going forward and one unlikely to be clarified much by September. MANDATE To be sure, the Fed has a dual mandate, which includes both keeping prices stable and maintaining maximum employment, and one argument, from Waller at least, is that the labor market is showing signs of softening. And yet employment reports out this week are unlikely to offer much support on that front either, with recent weekly jobless claims data painting a robust picture. While monthly payroll growth is expected to slow in July, the unemployment rate is set to remain near historic lows at about 4.2%, with annual wage growth one percentage point above core PCE inflation. What's more, second-quarter U.S. GDP updates this week are also expected to confirm a brisk bounce-back in overall economic growth to 2.4% after the trade-distorted first-quarter hiccup. Lazard chief market strategist Ron Temple reckons the Fed won't cut at all this year, just like seven Fed policymakers indicated last month. "My logic is that inflation is likely to re-accelerate meaningfully by year-end due to tariffs," he wrote on Friday. "Thereafter, stricter immigration enforcement is likely to create another inflationary force," he said, adding that rising deportations of workers could push up wage inflation, keep unemployment stable, and cause GDP to slow. "That is not a scenario that argues for Fed rate cuts." If the Fed does signal it's ready to ease again, it may struggle to make a cogent case for why it is doing so. The opinions expressed here are those of the author, a columnist for Reuters -- Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn. Plus, sign up for my weekday newsletter, Morning Bid U.S. (by Mike Dolan; editing by Rod Nickel)
Reuters
2 days ago
- Business
- Reuters
Fed rates are going nowhere fast
LONDON, July 28 (Reuters) - Incoming U.S. inflation signals are offering the Federal Reserve little or no justification to resume interest rate cuts, and it's hard to see that changing before September. Following an unscheduled visit to the Fed last week, President Donald Trump said he thinks the Fed may be ready to lower rates again. To be sure, at least two of his appointees to the Fed board - Christopher Waller and Michelle Bowman - have indicated they might vote for a cut as soon as this week. But they may be alone. Markets certainly remain unconvinced. Futures pricing shows virtually zero chance of a move on Wednesday and only a 70% chance of a cut at the following meeting in September. Markets now even doubt we'll see two rate cuts this year - the median of Fed policymakers' forecasts published just last month. While some clarity on the uncertain trade picture should emerge from this Friday's deadline, the effective overall import tariff rate is still set to be almost 20% higher than at the start of the year. And the impact from that may take months yet to filter through. But there are enough other signals that higher import levies and a weaker dollar are already irking the U.S. price picture, at least enough to keep the Fed wary. As it stands, inflation remains well above the 2% target, and long-term market inflation expectations, now the highest of any G7 country, are above target too and creeping up. The Fed's favored inflation gauge, from the personal consumption expenditures basket, is due for release on Friday, and the annual core rate excluding food and energy is expected to be 2.7% - the same as last month. Consumer price inflation data for the month that has already been released shows pockets of price pressure in key areas affected by the limited tariffs enacted so far. Producer price data was more subdued, but that series doesn't include imported goods. Moreover, manufacturing firms last week continued to show outsized gains in input prices in July. S&P Global's monthly survey of purchasing managers registered an input price reading of 64.6, still far above the 50 threshold between expansion and contraction. Unlike the PPI, that captures imported inputs. By contrast, European manufacturers registered an equivalent input price reading of 49.9. Tariff-related readouts from the roughly one-fifth of S&P 500 companies that have reported second-quarter updates have been noisier. But economists warn that two aspects of the earnings season could potentially be disguising the tariff impact. The first is significant front-loading of imports in the first quarter to beat the tariffs, the enormous scale of which led to a small GDP contraction in the first three months of 2025. As that tariff-free inventory is run down, costs should rise as tariffs begin to hit. The hiatus may have allowed many firms to keep prices steady or avoid taking significant margin hits through the second quarter. The second aspect economists warn about is the degree to which major companies may want to avoid any public statements on negative tariff hits or any pass-through to consumers due to fears of political backlash. All of which leaves a foggy inflation picture going forward and one unlikely to be clarified much by September. To be sure, the Fed has a dual mandate, which includes both keeping prices stable and maintaining maximum employment, and one argument, from Waller at least, is that the labor market is showing signs of softening. And yet employment reports out this week are unlikely to offer much support on that front either, with recent weekly jobless claims data painting a robust picture. While monthly payroll growth is expected to slow in July, the unemployment rate is set to remain near historic lows at about 4.2%, with annual wage growth one percentage point above core PCE inflation. What's more, second-quarter U.S. GDP updates this week are also expected to confirm a brisk bounce-back in overall economic growth to 2.4% after the trade-distorted first-quarter hiccup. Lazard chief market strategist Ron Temple reckons the Fed won't cut at all this year, just like seven Fed policymakers indicated last month. "My logic is that inflation is likely to re-accelerate meaningfully by year-end due to tariffs," he wrote on Friday. "Thereafter, stricter immigration enforcement is likely to create another inflationary force," he said, adding that rising deportations of workers could push up wage inflation, keep unemployment stable, and cause GDP to slow. "That is not a scenario that argues for Fed rate cuts." If the Fed does signal it's ready to ease again, it may struggle to make a cogent case for why it is doing so. The opinions expressed here are those of the author, a columnist for Reuters -- Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn. Plus, sign up for my weekday newsletter, Morning Bid U.S.
