The Federal Reserve didn’t give the megabanks Goldman Sachs and Morgan Stanley any special treatment when it declined to fail them in this year’s round of stress tests, Chairman Jerome Powell said Tuesday in defending the central bank’s actions against Democratic criticism.
“There’s no negotiation, there’s no haggling,” Powell said of the Fed’s interactions with the big banks on the stress tests.
This year, the Fed found during the tests that Goldman Sachs and Morgan Stanley would see their capital fall below regulatory minimums in a hypothetical crisis, thanks to one-time effects of the tax cuts, but nevertheless did not fail the banks.
Giving the banks a failing grade would have prevented them from making distributions to shareholders. Instead, the Fed allowed them to pay out dividends and buy back shares, but on a limited basis.
That decision drew criticism from Sen. Sherrod Brown, D-Ohio, who claimed that the Fed was “cozy” with the banks and that the tests were not real tests, citing reports that Fed staff had called bank officials to offer them the compromise to allow them not to fail.
At Tuesday’s hearing, Brown again criticized the decision, and said that he has “only become more worried about our preparedness for the next crisis.”
Powell, though, denied any preferential treatment of the banks. He said that Fed’s board voted for the stress test grades, and only then did Fed staff reach out to the banks to inform them of the decision. “This is the standard operating procedure,” he said.
