In advance of his testimony yesterday before the House Financial Services Committee, Federal Reserve Chairman Jerome Powell was the subject of a front-page story in The Wall Street Journal that touted his supposedly good relations with lawmakers of both parties. “Powell’s Support Inside Congress Is Deep,” read the Journal headline in the print edition.
However, Powell may find his support eroding if the Fed under his tenure keeps defying the plain language of the laws that Congress writes. As I wrote recently here, the Fed has proposed its own system to process real-time electronic payments, despite the fact that Congress explicitly mandated in the Monetary Control Act that the Fed may only launch its own financial services if “the service is one that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity.” That legislative ban would seem to apply here, because as noted by a new coalition letter that the Competitive Enterprise Institute signed, “the Fed’s proposal will directly compete with the private sector’s established Real-Time Payments system and additional emerging technologies.”
On top of this, hours before yesterday’s hearing, the Fed released a final rule that blatantly ignores legislative language granting regulatory relief to Main Street banks from one of the most onerous provisions of Dodd-Frank. As a result, banks headquartered far away from Wall Street will still be subject to the arduous Volcker Rule.
The Volcker Rule is an edict from the Dodd-Frank so-called “Wall Street Reform Act” of 2010 that generally forbids banks from using their own capital to trade in securities or invest in hedge funds and private equity funds. When it was enacted, proponents like former Federal Reserve Chairman Paul Volcker, the provision’s namesake, asserted with confidence that its restrictions would only affect the biggest Wall Street banks.
But almost immediately after the Volcker Rule was implemented, regional and community banks began to be harmed. Banks across the country began sounding the alarm that they couldn’t do the limited trading they had done for decades to hedge risks.
In 2018, Congress responded with a bipartisan compromise between House and Senate bills. The House passed the Financial Choice Act, which repealed the Volcker Rule in its entirety. The Senate bill—with the support of a significant number of Democrats—had more limited relief that exempted smaller banks and those that did more limited trading. In the end, a conference between the House and the Senate produced the Economic Growth, Regulatory Relief, and Consumer Protection Act that was signed by President Trump in May 2018.
The new law stated that banks subject to the Volcker Rule would not include any bank “that does not have and is not controlled by a company that has more than $10,000,000,000 in total consolidated assets; and [emphasis added] total trading assets and trading liabilities, as reported on the most recent applicable regulatory filing filed by the institution, that are more than 5 percent of total consolidated assets.” As former CEI policy analyst Daniel Press put it, due the word “and” in the statute, “to be covered by the Volcker Rule, a bank must have more than $10 billion in total assets and more than 5 percent total trading assets.”
In our comments to the Fed—and the four other agencies that jointly enforce the Volcker Rule—CEI further explained the legislative changes using an ice cream analogy that was picked up by Yahoo Finance. “Imagine that ice cream products, in general, have been an extensively regulated category, but then a new statute narrows that category to consist of only mint chocolate ice cream,” CEI wrote. “Clearly, to fall into that new category, an ice cream must be both mint and chocolate. If an ice cream is not mint, or if it is not chocolate, then it is excluded from regulation under the statute’s new, narrower definition.”
But in the final rule, the Fed and other agencies defied logic and the clear language of the law by insisting that “and” means “or” and that any bank meeting either of the conditions will still be subject to the Volcker Rule. If the Fed and other regulators do not reverse themselves or are not reined in by the courts, the practical effect will be that regional banks far away from Wall Street—such as Banner Bank in Walla Walla, WA; Heartland Financial in Dubuque; IA; and Glacier Bancorp in Kalispell, MT—will face the costly burdens of this onerous provision of Dodd-Frank from which Congress directed they be granted relief.
And Jerome Powell may find that his credibility is melting like mint chocolate ice cream on a D.C. summer day.
Competitive Enterprise Institute Research Associate Gabriel Greenspan contributed to this post.