Chairman Powell: It’s All That Anzejs And Have An Output Of a High Capital Base

Final remarks from Chairman Jerome Powell Monday as he meets with Capitol Hill Democrat Congressman Jim Cooper (IN-4) this afternoon and members of the House Financial Services Committee Tuesday afternoon.

JIM COOPER INTERVIEW: You brought up J.P. Morgan Chase. You emphasized more and more that they remain vulnerable to price shocks and disruption that come from changes in the outside world.

The investment that they have and so forth is protected from that. Is that one thing that could separate them from the major banks that have high portfolio valuation or asset quality problems right now?

POWELL: Well, and I do appreciate the point you make. They certainly have a more diversified base. But you know, we shouldn’t forget what happened in 2008 and 2009.

If you think about it, what happened in 2008 and 2009, financial institutions with excessive market risk and/or high concentrations of assets and/or very little diversity in asset classes. Those are the kinds of vulnerabilities that we are more concerned about now in the financial system than we were before.

You can’t have all risk concentration. You can’t have all asset concentration. You can’t have too much credit linked to people who are too vulnerable to what’s going on in the broader economy.

So it’s all that, with an overlay of a high capital base. And you know, once you get past that and a high capital base, you can go about the business of serving your customers and taking advantage of new opportunities when they arise and things kind of smooth out.

I recognize there is a debate going on inside J.P. Morgan Chase as to whether they would be more vulnerable and not more resilient in a shock. And I think that’s one of the reasons that they are much more in touch and I have told them so personally, about the kind of stresses and uncertainty on markets and what can happen in the economy. And I would tell you I don’t think they are a lot more than other financial institutions in that regard.

COOPER: Could you possibly finish the, I guess, $40 billion worth of monthly bond buying this year?

I would want to say something to J.P. Morgan Chase. My understanding is that their portfolio value has gone up quite dramatically as a result of that buying, and quite notably there’s been some really good tax cuts, not only in corporate tax rate but some lower taxation of individuals.

And do you know that many of your bank’s biggest clients are involved in the very firms that would be most hurt in a kind of a crash or some kind of disruption from economic turbulence?

POWELL: We could always consider whether to buy any more notes, but we’re not forced to do it for tax reasons. We’re buying them to get full credit enhancement. We would only do so if we thought that they were well capitalized. But I think the point you’re making is a good one. If capital quality of a firm is deteriorating over time, particularly in the banking sector, it can be harder to manage when you have all these risks to get to any real capital cushion.

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