Fact Sheet: Deregulation at the Powell Fed

August 2021

Deregulation at the Powell Fed

Federal Reserve Board Chair Jerome Powell has presided over a broad deregulatory agenda since 2017 that has made our financial system less resilient, while also fortifying its role as a driver of wealth and income inequality. The Powell Fed contributed mightily to the overall assault by Trump-appointed regulators on bank regulations designed to prevent financial crises and promote a system that works for families and communities and for Main Street businesses, not Wall Street. This wave of deregulation has allowed Wall Street to increase speculation and profits but put the rest of us at risk.

The Powell Fed did more than water down Dodd-Frank reforms, the last major round of positive changes to financial regulation. It also weakened core supervisory tools that federal bank regulators have always used to monitor bank risk-taking and compliance with laws. Led by Chair Powell, the Fed has effectively turned off some of the early warning systems regulators used to detect emerging risks to the financial system.

This deregulation comes at a precarious moment. Banks and various financial markets received hundreds of billions of dollars of emergency support from the Fed in 2020, for the second time in 12 years. Even while many American households struggled with the economic effects of the pandemic, the Powell Fed provided a financial lifeline to banks and allowed many of them to distribute capital to their shareholders. Rather than lend more money to the real economy after receiving Fed support, banks chose to reduce critical cushions against economic shocks in order to turbocharge returns to shareholders.

Diluting core capital and liquidity rules. Chair Powell has voted and the Fed has acted to weaken various rules that require banks to maintain capital cushions against economic shocks. It watered down rules and lowered the equity capital minimums that are shock absorbers against the kind losses that have triggered bailouts of the financial system. The Fed removed its own ability to block banks from distributing capital to shareholders – thinning their cushions, so to speak – if banks demonstrated bad risk management. It also weakened liquidity rules that provide crucial defenses for banks against market disruptions and potential Depression-like bank runs.

A Republican-led Congress directed the Fed to weaken some regulations in a 2018 law, but the Powell Fed’s modifications went far beyond what lawmakers sought, as Governor Lael Brainard pointed out at the time. In that episode, the Fed allowed very large banks to lower their capital cushions and liquidity, leaving them more vulnerable to shocks. These banks also now face less stringent or less frequent requirements for stress testing and planning for their own bankruptcies – two vital protections that help guard against future bailouts.

Eroding rules deterring risk-taking. Dodd-Frank introduced stress tests to assess how a bank would perform in the face of economic shocks and to work in tandem with rules improving resiliency to those shocks.  The Powell Fed dumbed down the tests, and even revealed the criteria to banks beforehand, akin to giving students the exam questions in advance.  This allows banks to camouflage risk-taking. Dodd-Frank also required banks to write regular living wills that would provide a roadmap for regulators to handle an insolvent bank, a vital step towards ending taxpayer bailouts. The Powell Fed degraded these requirements too.

The Volcker Rule was a pillar of Dodd-Frank that restricted the ability of banks to speculate with federally-insured money. With Chair Powell’s vote, the Fed diluted both parts of the Volcker Rule: the restrictions on proprietary trading and the restrictions on bank investments in particularly risky vehicles, like private equity and hedge funds. The Fed also relaxed rules that would curtail risky derivative activities by banks. After these rule changes, bank exposures to derivatives can increase via complex and opaque transactions with their affiliates.

Promoting consolidation and limiting its own power to supervise banks. At a time when there is an increasingly widespread consensus that concentration in the American economy is a serious problem, the Powell Fed waved through mergers by large super-regional banks, increasing monopoly power and systemic risk. The Fed permitted acquisitions by very large banks of discount securities brokerage firms, further burying the now-lost but important separation between banking and securities businesses that mitigated systemic risk and conflicts of interest. Even as it fostered the creation of larger banks, the Powell Fed has decided to restrict the Fed’s own ability to supervise banks for risk-taking and legal compliance.

Allowing banks to weaken their balance sheets during the COVID-19 pandemic. Even as the pandemic raged and an unprecedented economic contraction took hold, banks did well, thanks to Fed support. Even as it provided this assistance, the Powell Fed also allowed further weakened capital standards and stress tests. Those banks then distributed capital, via dividends and share repurchases that benefited shareholders, effectively subsidizing upward wealth distribution. This policy also left banks more vulnerable to future shocks.

All these actions boosted bank profitability – already at quite high levels before this deregulatory spree – at the expense of the resilience of the financial system. Public interest groups, including Americans for Financial Reform, the Center for American Progress, Better Markets, and Public Citizen, warned against many of these measures in detailed responses to the Fed, and Governor Brainard voted against most of them, warning against the dangers they posed. But Chair Powell supported them and saw them through to completion.

View or download a PDF of the fact sheet here.