Sideways: Powell’s Basel III surrender makes strategic sense
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Sideways: Powell’s Basel III surrender makes strategic sense

The Fed chair has made a remarkable, virtually unconditional surrender to opponents of his plan for Basel III implementation in the US. The tactical withdrawal is embarrassing, but it makes strategic sense.

Photo: Reuters

Federal Reserve chair Jay Powell has a lot on his plate. It is an election year in the US and the central bank’s every move is being examined for signs of bias towards either Joe Biden or Donald Trump.

Powell was appointed to the top job at the Fed by Trump, but the former president has already said that he will replace his appointee if he is re-elected in November.

Trump has also said that Powell “is going to do something to probably help the Democrats”.

That was a reference to the impact of the rate cuts that the Fed has said it expects to begin at some point this year. In testimony to the House of Representatives on Wednesday, Powell reiterated that the central bank expects to ease rates, but added that officials want to see more evidence that inflation is easing before making a move.

He also delivered a retreat from plans for US implementation of the Basel III bank capital standards – the so-called Basel endgame – that was remarkable by regulatory standards.

Powell said that there will be “broad and material changes” to the proposals and that it was a “very plausible option” that they may be reissued entirely.

Ferocious opposition

The second admission effectively gave bank lobbyists everything they have been pushing for in their opposition to the proposed capital changes.

JPMorgan chief executive Jamie Dimon took a lead in public opposition to the plans for US implementation of Basel III, which were jointly made by a group of regulatory bodies but steered by Fed officials under vice-chair for supervision Michael Barr.

The implementation plan released by regulators last September was complex and – at 316 pages – extensive. The reaction from the banking industry was even more voluminous and virtually unanimous.

Nearly everyone hated the plan. Dimon played his usual role as the effective spokesman for Wall Street banks when he opposed the proposal at a Senate hearing in December, and he directed significant JPMorgan resources to backing his case with details.

But it was the near-unanimity as well as the ferocity of the opposition to the plans that seem to have prompted Powell to back down.

Has Powell just delivered the regulatory equivalent of Napoleon’s retreat from Moscow, combined with Robert E Lee’s surrender at Appomattox?

Democrat politicians joined Republicans in calling for a rethink, while some small banks lined up with big Wall Street dealers in complaints about the potential impact on credit provision of higher capital requirements, even though smaller lenders with assets under $100 billion would not be directly affected by the Basel III plan.

That seems to have been what convinced Powell to reverse course, and he admitted to lawmakers on Wednesday that the reaction was unlike anything he had seen before.

Has Powell just delivered the regulatory equivalent of Napoleon’s retreat from Moscow, combined with Robert E Lee’s surrender at Appomattox?

It is certainly an embarrassing climbdown, but the tactical withdrawal probably makes strategic sense for the Fed.

Like other US institutions, it is under growing pressure from widening political divisions in the country. Powell is an old-fashioned establishment figure, a registered Republican who prospered on Wall Street and served as a Treasury official before joining the Fed’s board of governors in 2012.

He is experienced enough to know that the main challenge faced by the Fed this year is the threat to its credibility as an interest-rate policy setter.

He is also tantalisingly close to engineering a “soft-landing” for the economy that seemed improbable when the Fed made a belated move to tame inflation with interest-rate hikes.

There is no real need to overshadow this success with a fight over the details of bank capital reform. And almost a decade and a half after the Basel III framework was proposed, what is another delay in US implementation of a year or so?

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