Regulations drive up costs, financial leaders tell Congress
As the leaders of America's top banks testified before the House Financial Services Committee on Wednesday, the U.S. Federal Reserve surprised few when it raised interest rates for the third time.
Federal Reserve Chairman Jerome Powell reiterated the Committee's 2% inflation rate goal. To support those goals, the Committee raised the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. The annual inflation rate in August was 8.3%.
“My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power,” Powell said in a press briefing Wednesday.
“Despite the slowdown in growth, the labor market has remained extremely tight with the unemployment rate at near 50-year low with job vacancies near historical highs. The labor market continues to be out of balance with the demand for workers substantially exceeding the supply of available workers,” Powell added.
With the news that interest rates rose, the market closed lower for the second day in a row, with the Dow Jones Industrial down by 522.52 points or 1.70% to close at 30,183.71. The Nasdaq Composite fell 204.86 points or 1.79% to close at 11,220.19, and the S&P dropped 66.11 points or 1.71% to close at 3,789.82.
Over on Capitol Hill, seven chief executive officers from the nation's largest banks by assets sat through a grueling 8-hour Q&A session with the House Financial Services Committee. The Committee, responsible for oversight of the U.S. banking industry, questioned financial leaders on various issues, including capital requirements, inflation, geopolitical issues, and risks.
Lawmakers asked what impact a new layer of capital requirements would have on the banks and their customers.
“We think that regulation ought to be tailored and follow the risk of individual institutions,” William Rogers, chairman and CEO Truist Financial Corporation,” said.
Trust, headquartered in Charlotte, North Carolina, has $545 billion in assets.
“I think that's consistent with the philosophy that we all support. Additional capital at a higher cost caused us to potentially impair lending or slow down lending. It may cause us to do other things from a competitive standpoint to cover the cost of additional capital,” Rogers added.
On the geopolitical front, Jaime Diamon, chairman, and CEO of JPMorgan Chase, Brian Moynihan, chairman and CEO of Bank of America, and Jane Fraser, CEO of Citigroup, committed to complying with any U.S. government demand to pull China if Beijing were to attack Taiwan.
“We'll follow the government's guidance, which has been for decades, to work with China. If they change their position, we will immediately change it, just as we did in Russia,” said Brian Moynihan, BofA's chief executive. Fraser and Dimon echoed his comments.
North Carolina-based Bank of America has assets of $3.1 trillion.
Citibank CEO Jane Fraser told lawmakers that things were happening internationally, and that the U.S. should be wary of its impact on the economy.
“The pandemic and the war have highlighted much fragility in the global economy,” Fraser said. Therefore, we must increase our concern around energy security, food security, cybersecurity, which will not necessarily all have an impact in the U.S., but there could well be spillover effects.”
The supply shocks in the energy markets that Europe is experiencing could affect the U.S. Economy in 2023. As demand slows and Europe likely enters a recession. The interdependencies and these fragilities are going to be the pieces the U.S. will have to keep an eye on, according to Fraser.
Congressional leaders were also interested in banks' different types of risks. Dimon told financial leaders that it was essential to watch out for systemic risk.
Representative French Hill (R-Ark.) was concerned about having less visibility on the more than 70% of the mortgage origination market that has migrated outside of the banking environment and the risk associated with it.
“I wouldn't call it systemic risk,” Dimon said. “It is riskier because the smaller companies cannot finance and advance funds to securitizations when there's a crisis the way we could and that we need to reform it for the sake of the industry.”
Lawmakers also grilled bankers on their promises to boost diversity within their ranks at the banks. Wells Fargo and Bank of America told lawmakers they had instituted employment programs at Historically Black, Universities and Colleges.
There were some contentious moments in the hearing when Democrats on the Committee wanted bankers to do more to curb gun violence as many transactions go through banks. But bankers said they could not legally tell customers how to spend their money.
In recent years, mergers and acquisitions have forced the closing of several smaller banks, creating what one lawmaker called a banking desert. Earlier this month, Michael Barr, the Federal Reserve's vice chair for supervision, said he would review the process of approving bank mergers.
“Mergers are a feature of vibrant industries, but the advantages that firms seek to gain through mergers must be weighed against the risks that mergers can pose to competition, consumers, and financial stability,” Barr said on September 7.
The leaders of CitiGroup, Truist, Bank of America, PNC Bank, JPMorgan Chace, US Bancorp, and Wells Fargo will be back on Capitol Hill Thursday for an oversight hearing with the Senate Committee on Banking, Housing, and Urban Affairs.
