‘Do your job’: Warren blasts Powell on bank rules

Banking regulators have been dragging their heels on finalizing rules set up to dampen the effect of another potential financial crisis like the one in 2008, and they need to hop to it, Sen. Elizabeth Warren (D-Mass.) said to Federal Reserve Chair Jerome Powell on Tuesday.

The regulations, known as the Basel III endgame, would require banks to keep more capital on hand, which would make them more stable in the event of an international meltdown but also less profitable businesses for investors.

“These rules are critical and long overdue, particularly in the wake of the Silicon Valley and Signature Bank failures, and as risks from the weak commercial real estate market and other economic threats ripple through the banking system,” Warren wrote to Powell in a Tuesday letter.

“You should do your job and allow the Board to convene for a vote on a 16% capital increase by June 30th, as global regulators determined was necessary to prevent another financial crisis.”

The highly interconnected financial sector teetered last year after Silicon Valley Bank failed due to its management’s failure to spot interest rate exposure problems with its bond holdings.

Regulators at the Federal Deposit Insurance Corporation (FDIC) responded by bailing out individual account holders well above the $250,000 limit while the Fed extended an extra line of credit to the financial industry backstopped by taxpayer money.

Private banks coordinated with the Treasury department to prop up and eventually shut down First Republic in the aftermath of the initial failure, averting a broader crisis.

Warren’s letter come as parts of the banking sector stand in a precarious position at the moment due to investments in the commercial real estate sector, which has become a lot less valuable as remote work has made office space less necessary.

Powell has said that he expects additional failures in the sector but that they should be contained to regional banks as opposed to the largest banks. Specific timing of those failures is not publicly known.

Banking regulators have been in the spotlight in recent months for failures of “culture” that are making them less effective as government agencies and in some cases brazenly immoral.

Following the failure of Silicon Valley Bank, Fed Vice Chair Michael Barr said his staff had observed a change in their own behavior.

“Staff felt a shift in culture and expectations from internal discussions and observed behavior that changed how supervision was executed,” Barr wrote in a review of his agency’s work last year.

Meanwhile, scandal has plagued the FDIC following a bombshell investigation by The Wall Street Journal last year that found sexual harassment, racial discrimination, and fear of supervisory retaliation were rampant at the agency. 

That investigation was confirmed by an outside legal investigation that echoed a 2020 report from the regulator’s inspector general that warned the agency did not have a proper system in place for dealing with sexual harassment and other problems of personal conduct.

More recently, the Journal revealed that bankers had been lobbying the ostensibly independent Fed to soften the Basel III rules, dropping down the effective required capital boost from 20 percent to 16 percent, a number tacitly endorsed by Warren in her letter.