Bank capital requirements to be tailored; Fed likely to hike rates 25 bps

The Washington Wrap is a weekly recap of financial regulation, news and chatter from around the capital.

At Congress

Federal Reserve Chair Jerome Powell told congressional committees that bank capital requirements will be tailored depending on institutions' sizes, and the Federal Reserve Board will eventually solicit comments on a public proposal.

Powell testified before the Senate Banking, Housing and Urban Affairs Committee on March 7 and the House Financial Services Committee on March 8.

"I think it's always a balance," he told the Senate committee. "We know that higher capital makes banks safer and sounder. We also know that you will, at the margin, provide less credit the more capital you have to have. But, I think it's never exactly clear that you're at perfect equilibrium. And it's a fair question, I think, to look at that."

In addition, Powell addressed the proposed rules related to the Community Reinvestment Act, or CRA, which the Fed issued in 2022 along with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. He told the Senate committee they are in the process of revising the CRA rules and agreed when Chairman Sherrod Brown, D-Ohio, asked if they will be finalized "as quickly as possible," but added that "it'll be some months."

FDIC Chairman Martin Gruenberg said last month that the agencies aim to issue final guidance under the CRA during the first half of 2023.

Republicans also asked Powell about the Fed's climate scenario analysis pilot.

Powell told the House committee there is a role for bank supervision and "making sure that banks understand and can manage their risks over time from climate. I think my colleagues and I all understand that it's a tightly circumscribed role that we're playing and that we're not looking to move into an area where we're actually becoming a climate policymaker."

"Over time that border needs to be very carefully guarded," he added.

At the Department of Labor

Total nonfarm payroll employment rose by 311,000 in February, while the unemployment rate increased to 3.6%, the U.S. Bureau of Labor Statistics reported. Notable employment additions were in leisure and hospitality, retail trade, government, and health care. Employment decline in February was noted in information, and transportation and warehousing, according to the report. The overall number of unemployed persons increased to 5.9 million in February.

Industry experts say the jobs report is expected to factor into the Federal Reserve's decision to raise Federal fund rates.

There is a possibility the Fed might raise the rates by 50 basis points in March, depending on the incoming data, but it is likely to deliver a 25-basis-point rate hike in the next three policies with a terminal target range forecast of 5.25%-5.50%, BofA Securities Economist Michael Gapen said.

"Our forecast would imply inflationary pressures are diminishing only slowly, potentially increasing the pressure on the Fed to move more forcefully," Gapen said.

There are elements in the jobs data that show softer wage inflation and an influx of workers, which support the case for a 25-basis-point hike at the Fed's next meeting.

"While hiring remained on [a] roll, there were hints that strong job growth need not come at the expense of fanning inflation pressures," Wells Fargo economists said in a note. "The bar for a 50 bps hike at the upcoming March meeting [looks] somewhat higher after today's report."

At the CFPB

House Republicans are pitting themselves against the Consumer Financial Protection Bureau for the foreseeable future.

Two House GOP members introduced a slew of bills aimed at the agency's power by changing its structure and funding.

On March 7, House Financial Services Committee member Rep. Blaine Luetkemeyer, R-Mo., introduced three bills. One would establish a bipartisan, five-person commission, while another would remove the CFPB director from the Federal Deposit Insurance Corp. board of directors and put term limits in place for FDIC board of directors members. The third bill would establish an independent inspector general solely for the CFPB. Currently, the CFPB shares an inspector general with the Federal Reserve.

Rep. Andy Barr, R-Ky., chairman of the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, reintroduced a bill that would turn the CFPB into an independent agency known as the Consumer Financial Empowerment Agency and give Congress authority over its funds.

The moves are likely to be the first to slash the agency's ability to crack down on banks, car dealers, mortgage originators and other institutions it believes are engaging in improper behavior.

The CFPB is "the most unchecked, unaccountable agency in the whole federal government," Barr said during a House hearing on CFPB reforms.

CFPB Director Rohit Chopra has been broadly overstepping his authority through press releases, blog posts and conference speeches to issue guidance and rules, Barr and other members of the committee said.

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Separately, top White House officials and the head of the CFPB vowed their support for state-level attacks on "junk fees." They urged state legislators to ramp up their efforts to combat such fees.

On March 8, the White House issued a guide for state lawmakers detailing how they can join the ongoing fight to crack down on junk fees. The handbook and subsequent virtual meeting with state legislators came out the same day the CFPB put forth a report detailing increasing problems with junk fees on bank accounts and other areas such as auto, student and mortgage loans.

At the Senate

In a letter to the American Bankers Association, senators expressed their concerns over increasing check fraud scams, including check washing. These scams cost consumers over $800 million in 2022.

The March 8 letter was co-signed by the chair of the Senate Committee on Banking, Housing and Urban Affairs, Sherrod Brown, D-Ohio; Catherine Cortez Masto, D-Nev.; and Elizabeth Warren, D-Mass.

Check washing is when someone steals a check belonging to an individual and removes the ink to change the payee's name and the dollar amount, followed by fraudulently depositing the check.

The lawmakers highlighted that check washing "has become an elaborate and organized method of successfully scamming consumers and banks." Check fraud increased by 84% in 2022, costing an estimated $815 million.

The senators pointed out that customers are facing trouble as banks delay the process of resolving their fraud claims by weeks and even months.

They asked the ABA to devise a plan on how to address this issue with its members by March 17.

At the Fed

There was a slight increase in overall economic activity in early 2023; however, the economic conditions are unlikely to improve in the coming months, according to the Fed's latest Beige Book.

Of the 12 Federal Reserve districts, economic activity remained unchanged in six districts, while it grew at a modest pace in the remaining six.

The Beige Book is an anecdotal summary of Fed officials' conversations with local contacts across the central bank's 12 districts.