After a relatively quiet May on the financial regulatory front, an item from an atypical source caught our attention. We don’t always troll the cable news outlets for authoritative information on financial regulatory matters, but the June 1 interview that Federal Reserve Board (Board) Governor Jerome H. Powell gave to CNBC sparked our interest because his remarks seemed to signal a course correction—but nothing more than that—in the federal government’s handling of bank regulation and supervision. Powell’s status as Chairman of the Board’s Committee on Supervision and Regulation means that he speaks with substantial authority on financial regulatory matters, so his remarks hold weight in this area and are worth sharing.
During the interview—which covered diverse financial topics such as the economy and monetary policy—Powell was asked about “the regulatory things important to all investors out there.” Below is a summary of what he said in response:
- On Dodd-Frank Act stress-testing: The Federal Reserve Board is committed to transparent and effective stress-testing, which Powell described as a “very successful, very important” post-financial crisis innovation. However, he suggested that the Board was working on changes that will provide more guidance on quantitative and qualitative supervisory stress-testing expectations.
- On Dodd-Frank in general: Describing the financial reform program as “mostly completed” and “mostly successful,” Powell suggested that the regulatory authorities have an obligation to review whether aspects of financial reform are “redundant or inefficient or utterly essential” and that “there are going to be some adjustments.”
- On the Volcker Rule and other parts of Dodd-Frank that should be changed: Powell observed that regulators are working on a less burdensome way to implement the Volcker Rule as well as a “reset” on how bank supervisors interact with bank boards of directors. On the latter point, Powell suggested that the regulatory authorities will be moving toward a more principles-based approach, with the emphasis on assuring that bank boards oversee and hold management accountable and don’t get involved in “running the company.”
Amidst all the loud and inconsistent talk about undoing Dodd-Frank and applying the hard brakes on bank supervision, Powell’s remarks signal that, as far as the Board is concerned, these rollbacks are not going to happen without the enactment of substantive (and in our current view, unlikely) financial reform legislation. That said, Powell’s remarks also indicate that adjustments to the regulatory framework are necessary and will be made, although fundamental changes apparently are not in the offing. In other words, what Powell (and presumably his fellow Board governors) have in mind are course corrections—not course reversals—on bank regulation and supervision activities.