Federal Reserve governor Jerome Powell said Thursday that central-bank supervisors are nearing a point where they could look at the "living wills" of banks every two years, instead of annually, and simplify their annual health checks on firms known as stress tests.
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Living wills are submitted by the biggest banks deemed "systemically important financial institutions," or SIFIs, that are seen as being so large that their distress could put the economy at risk.
The plans involve banks trying to persuade regulators they could safely navigate bankruptcy without taking down the broader financial system, meaning that big institutions could fail and be restructured without causing a panic across the banking system.
"We have had many cycles of these plans now, and we have made a great deal of progress," Mr. Powell said in a panel conversation in Washington moderated by John Dugan, chairman of the financial institutions group at law firm Covington & Burling LLP. "We are getting to a point at which we will no longer need these annual, as you put it, 'convulsions.' I think it's probably time to [have] more of a two-year cycle."
A 2016 Government Accountability Office report suggested extending the annual filing requirement to every two years. The Fed responded to the GAO saying it would work to develop a new time frame.
Mr. Powell recently became the top banking regulator for the Fed, succeeding Daniel Tarullo as chairman of the committee on banking supervision and regulatory matters. His comments come amid speculation that President Donald Trump might tap Mr. Powell, a Republican and supporter of low interest rates, to succeed Fed Chairwoman Janet Yellen when her term as central bank chief expires early next year.
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In the discussion, the Fed governor also said the qualitative part of bank stress tests, which looks subjectively at their risk-management techniques, could become part of routine supervisory exercises. Mr. Tarullo suggested the same thing before leaving earlier this month.
Mr. Powell's comments came a few hours before Treasury Secretary Steven Mnuchin at a different gathering said the Trump administration will recommend "significant changes" to rules when it issues a report on financial regulatory relief in June.
Currently, the annual stress tests come in two parts: a quantitative test to see if firms are robust and can maintain the confidence of markets during severe hypothetical shocks, and the qualitative test of risk management. The qualitative part has resulted in large regulatory expenses for banks; some failed the test.
Mr. Powell said stress tests had been successful and the Fed wanted to preserve them. But he said the central bank had seen a great deal of progress and, "I do think we are getting to a point where qualitative supervision of risk management can no longer be part of the stress test, but will return to being part of the normal supervision of firms."
In a speech before the panel discussion, Mr. Powell indicated that the thrust of rules enacted in the wake of the 2007-09 financial crisis was sound but that he would be open to recalibrating parts to make them more tailored and less burdensome on bank boards of directors.
He said the financial system was "without a doubt far stronger" than it was precrisis. The biggest banks hold more capital today, are less reliant on short-term funding and are subject to routine tests of their resilience.
But while many of the rules were novel and important to safeguard markets, "it is not likely that we would have gotten everything exactly right on the first attempt," Mr. Powell said.
"I support adjustments designed to enhance the efficiency and effectiveness of regulation, without sacrificing safety and soundness," he said.
He said freeing up bank boards from heavy compliance and supervisory burdens could allow them to focus more on activities that can support growth and the overall strategic direction of their firms.
"We are currently reassessing whether our supervisory expectations for boards need to change," he said, "to ensure that these principles, and not an ever-increasing checklist, are the basis of our supervisory work."
Mr. Powell also said the Volcker rule, which bans banks from making speculative bets with their own money, needs simplifying. The rule, as written, forces banks to distinguish between proprietary trading, which is banned, and market making or hedging, which is allowed.
"We don't want insured depository institutions to have proprietary trading businesses that have nothing to do with serving their clients," he said. But "the rule as written applies to every bank...[and] is enormously burdensome for smaller institutions" so "we need to try to do it in a simpler, more effective way."
The Treasury Department has been holding a series of roundtables with financial regulators to sort through the priorities for recalibrating rules, and Mr. Powell said the Fed had been a contributor to those talks.
Write to Katy Burne at email@example.com
(END) Dow Jones Newswires
April 20, 2017 15:40 ET (19:40 GMT)