Sen. Cotton quizzes Fed chairman on Dodd-Frank stress tests for banks, workers’ wages

Sen. Tom Cotton, R-Ark., used his time on the Senate Banking Committee on Tuesday (Feb. 26) to quiz Jerome Powell, chairman of the Board of Governors of the Federal Reserve System. Powell was providing his semi-annual testimony to the Senate committee.

The exchange between Cotton and Powell centered on stress tests on banks between $10 billion and $100 billion, bank examiners’ adherence to Fed policy, and why wages went through a near decade of stagnant workers’ wages.

The Cotton-Powell transcript was provided by Cotton’s office and a video can be viewed at the bottom of this post.

Senator Cotton: Thank you, Chairman Powell for being here. I want to start talking about stress tests for midsize banks. Reform legislation that the Congress passed to the Dodd-Frank Act last Congress increased the threshold for stress tests from $10 billion banks to $100 billion banks. Can you tell us why so many of us still hear from banks in that window who are larger than $10 billion, but smaller than $100 billion, are still hearing from their examiners that they need to undergo such stress tests?

Chairman Powell: Let me say the new law is that banks between 10 and 100 are exempt from the DFAS stress tests, that should be crystal clear. I think you are referring to the guidance, which we are in the process of looking at and revising and I would think addressing that issue.

Senator Cotton: Right, but to be perfectly clear banks between $10 billion and $100 billion are not required to undergo Dodd-Frank stress tests?

Chairman Powell: Correct.

Senator Cotton: When I was in Afghanistan and Iraq, young soldiers used to complain about the rules of engagement. And if you looked at the rules of engagement that the four-star commanders had issued, they are actually pretty flexible, that had been filtered down in a different way to the front lines, though. Do you think it’s possible that your guidance that you just gave gets filtered down to examiners on the front line in a slightly different way?

Chairman Powell: I think that’s something that happens, yes, and I think again we are looking at this guidance that is still outstanding. Some of these banks are still going to want to do stress testing and we’re not going to discourage that. It’s actually a good practice, but so we are going to be looking at that guidance to make sure there’s no question that banks between $10 and $100 billion in assets are not required by law to do stress tests.

Senator Cotton: Okay, thank you because these examiners, they hold a lot of power in their hands, obviously, when they are on the front lines and they are in one of these smaller community banks and when they say something may be voluntary you know that is heard by the banker in a different way than they may intend it. It reminds me of my old basketball coach who used to have voluntary shootarounds before school and on Sunday afternoons and it just so happened that the players that reported to those voluntary shootarounds seemed to be the ones that got playing time on Tuesday and Friday night.

Chairman Powell: We try to communicate, and I think our examiners do a good job, basically. But, you know, we know we need to work hard to make sure that the message gets out clearly. And we find that our people do listen, so we’re alert to that.

Senator Cotton: Thank you. I want to turn now to a different question. I know there’s been some talk here about the unemployment rate, which is pretty low, and the labor force participation rate, which is increasing. I want to talk about wages and wage growth. There were some recent data out from the Bureau of Labor Statistics that was highlighted in a recent Wall Street Journal article that said, despite these factors, that income to employees in the form of pay and benefits continues to decrease.

It’s down to 52.7 percent of our gross domestic income. It was as high at 59 percent in the 1970s and 57 percent in 2001. By the same token, business income, profits to businesses whether they’re the biggest corporations or small businesses, have gone from 12 percent to up to 20 percent. Can you give me your thoughts on why we’re seeing more income going into the hands of owners in this country and less into the hands of workers?

Chairman Powell: Yes. So, that’s the labor share of income is what you’re talking about. And really, if you look back through history, it zigs and zags, but it generally zigged and zagged at a higher level. And then right around the year 2000, labor’s share went down sharply for about 10 years and then, broadly speaking, has been about flat since then. You know, it goes up and it goes down, but it’s basically flat. And the question is why. It’s a really good question, and there are a lot of different answers. Honestly, there’s no clear, easy answer.

Wages, as a separate matter, are actually growing at a level that makes sense. The problem is the level. It’s not the growth rate that wages and benefits are growing at around three percent, a little better. That’s a healthy growth rate in an economy with one percent productivity increase and two percent inflation. The problem is there were 10 years when that didn’t happen, from 2000 until 2010. So, you know, it can have to do with a lot of – globalization is a big answer there. That was right around the time of China joining the WTO. Some researchers will connect it to that. So, in any case, we welcome these wage increases for this reason.

Senator Cotton: Well, I do as well, and I hope that we’ll continue to see them and see a little bit more of that growing economic pie going into the hands of our workers. Thanks.