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Op-Ed | Jacobin | March 27, 2024

Jerome Powell’s Fingerprints Are on the Next Banking Crisis

BankingFederal ReserveFinancial Regulation
Jerome Powell’s Fingerprints Are on the Next Banking Crisis

One year after the collapse of Silicon Valley Bank, Federal Reserve chair Jerome Powell is obstructing the finalization of tougher capital requirements for banks — and increasing the chances of more turbulence.

This article was originally published by Jacobin.

It’s been roughly a year since the collapse of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank — the second-, third-, and fourth-largest bank failures by assets in US history — and yet very little has changed. Not only did Federal Reserve chair Jerome Powell’s post-2016 regulatory rollbacks and supervisory blunders contribute significantly to the 2023 banking crisis, his current opposition to stronger capital requirements is setting the stage for the next crisis.

The number of banks on the Federal Deposit Insurance Corporation (FDIC)’s “Problem Bank List” grew by nearly 20 percent in the final quarter of 2023 (from forty-four to fifty-two), the largest uptick since the failure of SVB. In addition, credit card and commercial real estate loan delinquencies reached their highest level in nearly a decade, portending additional turmoil. Indeed, during his semiannual testimony before Congress a few weeks ago, Powell predicted that “there will be bank failures” generated by commercial real estate losses.

Despite that, Powell is actively hindering the Biden administration’s effort to strengthen capital requirements for approximately three dozen of the nation’s biggest banks. At issue are draft rules proposed in July by the Fed, FDIC, and Office of the Comptroller of the Currency (OCC) that would require banks with at least $100 billion in assets to increase their capital reserves to protect against losses.

Those rules, part of an international standard-setting process called Basel III Endgame (which sounds like the most boring Avengers movie yet), are designed to help prevent future financial crises. Powell, however, seems hell-bent on courting disaster. During the aforementioned congressional hearings held earlier this month — the same venue where he told lawmakers that trouble is brewing — Powell advocated for “broad, material changes” that would weaken the robust proposal he professed to support when it was unveiled last summer.

The Fed chair’s about-face marks a victory for the big banks that have been lobbying against a strong rule, backed by dozens of congressional Republicans and a few Democrats. Experts have called it the most intense fight against a proposed regulation since the Great Depression. As the American Prospect’s Robert Kuttner explained recently, Wall Street and its lawmaking allies claim that “higher bank capital standards will reduce lending and be bad for small businesses,” when in reality, “the standards would reduce bank speculative activities and modestly cut into exorbitant bank profits and executive bonuses.”

Notably, Powell has not ruled out re-proposing a watered-down framework, calling it a “very plausible option.” If he goes that route, it would almost certainly push the process into a new presidential administration. According to Powell, such a move may be necessary to achieve an outcome that has “broad support at the Fed and in the broader world.” Powell is now portraying that unattainable standard — as opposed to the 4-2 majority vote with which the original proposal passed — as tantamount to maintaining the Fed’s vaunted political independence.

But as historian Peter Conti-Brown, an expert on central banking and financial regulation, observed recently: “Throwing away regulatory reforms preferred by the party that won the last national election does not preserve Fed independence. It makes a mockery of it.” In threatening to thwart a proposal put forth by President Joe Biden’s Democratic appointees and initially approved with Powell’s support, Powell is simply “intervening in a way that Republicans and bankers prefer,” Conti-Brown noted.

The Fed chair’s timing is remarkable. On March 7, the same day Powell warned of impending bank failures, it was announced that the floundering New York Community Bancorp (NYCB) would receive a $1 billion cash infusion from a group of investors led by Donald Trump’s former Treasury secretary, Steven Mnuchin. But as Kuttner wrote, “more capital was needed before the bank’s speculative tailspin, not after.” Ironically, because NYCB’s recent acquisitions pushed its total assets above the $100 billion threshold, the bank “would have had to proceed more prudently . . . had a stronger capital rule been in effect,” Kuttner pointed out.

It remains to be seen if Mnuchin et al.’s privately organized buyout will save NYCB and at what cost to ordinary people, but what’s clear is that “if Powell succeeds in eviscerating the capital rule, there will be more public bank bailouts,” Kuttner added.

Powell’s opposition to stronger capital requirements, let alone better regulation, is especially galling considering that when my organization urged Biden not to reappoint Trump’s Fed chair, Powell’s supporters, including Matt Yglesias, insisted that the former private equity executive would defer to the Fed’s vice chair for supervision (VCS) on regulatory matters. The Revolving Door Project never bought this argument, and its wrongheadedness has only become clearer as Powell intensifies his campaign to sideline VCS Michael Barr on Basel III Endgame.

Many of Powell’s supporters were willing to overlook what should have been disqualifying ethical failures and regulatory weaknesses because they swore that he was a committed and uniquely capable dove on monetary policy. But that was also incorrect. The Fed chair has jacked up interest rates and kept them high despite ample evidence that rising prices are largely attributable to supply chain shocks and corporate profiteering amid the coronavirus pandemic, Russia’s invasion of Ukraine, and other crises, including climate change.

So while Powell’s elevated interest rates are undermining green investment and exacerbating the housing affordability crisis, along with other cost-of-living struggles such as credit card debt, his long-standing penchant for deregulation is also jeopardizing the stability of the financial system.

In effect, Biden’s unforced error vis-à-vis Powell is imperiling his reelection chances, not to mention US democracy and the planet’s health. If he gets another chance, Biden must nominate a central bank leader who will pursue whole-of-government responses to inequality, greenhouse gas pollution, and other elements of our worsening crises.

The above photo of Fed Chair Jerome Powell is in the public domain.

BankingFederal ReserveFinancial Regulation

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