June 22, 2023

Scott Urges Federal Reserve Chair to Scrutinize Regulatory Process and Seek Accountability

Washington, D.C. – In his opening statement at today’s U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing with Federal Reserve Chairman Jerome Powell, Ranking Member Tim Scott (R-S.C.) called on the Chair to show thoughtful, independent leadership as the Fed navigates a response to supervisory failures in recent bank collapses and efforts to address the nation’s top economic challenges. Excerpts from the Ranking Member’s opener are below:

“Just yesterday, this Committee passed, as Chairman Brown just said, near-unanimous legislation to encourage good corporate governance. But not just that. We also wanted to focus on the supervisory failure that was a part of the legislation. Those are not the same actions taken by Michael Barr. I asked him twice when he was here before the Committee if he would fire bad bank supervisors for the supervisory neglect that contributed to the epic failures of SVB and Signature. He would not commit to doing anything. And I would ask you, in your role as the ‘active executive officer,’ if you would take some action, firing those responsible for missing what was glaringly obvious, known to all of America, certainly should have been obvious to the supervisors.”

“I've said from the beginning that this has been a failure in three parts—SVB and Signature. It was a failure of the bank execs. The actions that we took 21 to 2 yesterday [reinforce] Congress is willing to take the lead and hold bank executives accountable. Second failure was a supervisory failure, and that requires the Fed to hold folks accountable, just like Congress did. And third, the Biden inflationary economy that has [driven] prices really high and resulted in ten rate increases from you all. In the wake of Silicon Valley Bank’s downfall, as the Vice Chair released his report on the failures, we heard directly from you that your role was to ‘announce it,’ to ‘get briefed on it,’ but not necessarily to be ‘involved in the work of it.’”

“So, my question is, as you watch Vice Chair Barr roll out higher capital standards, it seems like your very clear statements [are] that you will be supporting as well as working to implement Vice Chair Barr's recommendations. But, as you know, that the other members of the Board and Governor Bowman has recently said that Mr. Barr wrote a report on Silicon Valley Bank's failure that provided ‘his conclusions’ and went on to state that the report should be used ‘to help guide discussions among policymakers,’ not necessarily just the rush towards implementation of Vice Chair Barr's recommendations.”

“I'd love to hear your thoughts on that path forward if, in fact, your job is to rubber-stamp the decisions of Vice Chair Barr or is your responsibility to take into consideration the Vice Chair's recommendations and then chart a path that seems to be consistent with what is in the best interest of our nation and frankly, of our financial institutions. I do not believe that increasing significantly the capital standards is in the best interest of small businesses or people looking for loans. The more capital we put on the sidelines, the less capital there is for us to see our financial institutions loaning the money out.”

Additionally, in Ranking Member Scott’s line of questioning to Chairman Powell, the Ranking Member specifically cited the economic struggles Americans are still enduring as inflation and interest rates remain high.

On Raising Capital Standards:

SCOTT: The higher the capital standards, the lower the capital for the private sector, which means fewer loans and less capital for those who are actually creating jobs. And so, when we have too much capital on the sidelines, and we have too little capital for actually creating and producing a vibrant economy. At some point, if you've raised it from single digits just a decade ago during the pre-crisis to now, frankly, rumors are as high as 20% for our G-SIBs, is a possible outcome. How much is too much?”

POWELL: Yeah, I think that's exactly the right question. As you point out, there is a tradeoff between making the banks safer, more secure, more resilient. You want them to be very strong, particularly the largest banks, so that they can continue to intermediate and lend money and things like that, continue to function during even stressful situations. But it's—with bank capital, it's always going to be a tradeoff between the availability and cost of credit and how much safety. And I think that's the question we're going to be addressing and answering as part of this process.”

On Fighting Inflation:

SCOTT: “We hear a lot of celebration around the jobs that are being created and the wage growth. But the way I look at it is a wage increase minus inflation has led to less spending power. Do you disagree with that?

POWELL:  “No, I think that's right.”

SCOTT:And so, in the end, as we celebrate what seems to be a healthy economy, the truth of the matter is that the average person in our nation today struggles to make their ends meet because of the inflationary impact on their bottom line. And what that means for them is that there's a crisis for a single mother like the one that raised me or seniors on fixed incomes. And we have yet to, as a nation, adjust for the 500 basis points increase and how we service our debt. Said differently, the more money we have to use for servicing our debt, the less money we have for meeting the needs of the American people. Therefore, printing and spending $4 trillion after COVID was over has led to the inflation that we're seeing, and that as a result led to the ten rate increases. So how do you, as Chairman of the Federal Reserve, talk to policymakers about the importance of being responsible from a monetary perspective? I know I've seen and heard your comments that that's not your lane, but certainly the actions that we take here impacts, frankly significantly what you have had to do in order to slow down Biden's absolutely explosive inflation.”

POWELL:…Real wages actually did go up at the lower end of the income spectrum. And now they are – but they're not as positive as we'd like to see… So, but to your real question, you know, I would just say this, that the US federal budget is on an unsustainable path. It has been so for a long time. We need to deal with that sooner or later, and sooner is better than later.”

On the Fed’s Bond Losses:

SCOTT: “At some point, I think it's your responsibility to talk about the importance of fiscal responsibility. That to the side, my last question for you is that SVB suffered because their bond portfolio ended up carrying water in a negative way. You have a $8 trillion balance sheet and beyond. Every report that I've read is that your bond portfolio, our bond portfolio, the Fed is underwater, as well. Can you talk to me about the losses that you're experiencing at the Fed from a bond perspective?”

POWELL: “…It's just a—it's an accounting fact. If we retained capital, then that would be a different—we’d look completely different, but we don't. We give all of our profits to the to the Treasury.”

SCOTT: “So, you were giving profits to the Treasury, now you're not—that has an actual effect. I mean, if I was getting ten bucks, and now I'm not, there’s an effect.”

POWELL: “Well, the Treasury, then, will have to have to borrow money that it doesn't get or raise taxes. It'll have to get the money to, you know, carry out the spending that Congress authorizes. But that's not going to really, it's not going to be, it's not going to affect interest rates and things like that much.”

SCOTT: “To me, I have the holistic view of our economy where if in fact, we have more fewer dollars coming in, which requires us to raise taxes, that in the end has a real impact on American taxpayers.”