Fed’s Waller: Proposed capital standards should be pulled

The proposed Basel III endgame capital standards should be pulled and reintroduced after several problems are fixed, Federal Reserve Governor Christopher Waller said today. Speaking at a virtual event hosted by the Brookings Institution, Waller noted that he voted against the proposal when it was first introduced last year, and that time hasn’t changed his opinion that it is fundamentally flawed.

“The original intent, I believe, was not to have a big increase in capital, but that is what’s happening,” Waller said. “We’re basically going to impinge on capital market functioning in terms of products, services and pricing… I’ve made a big deal about operational risks, which is more than half of the increase, and the way it is calculated makes absolutely no sense to me. So there’s a lot of reasons why I was opposed to this and voted not to bring it up, and I think the blowback that we’ve seen from the banking industry and [Capitol] Hill has shown this is not necessarily a good rule.”

Waller added there needed to be a “major overhaul” to win broad support from the Fed board, but “it might even be best to just pull it back and work on this and then put it back on at a later date.”

Waller also spoke on the broader economy, saying he believes that the Federal Open Market Committee will be able to lower the target range for the federal funds rate this year, but only inflation doesn’t rebound and remain elevated. “Clearly the timing of cuts and the actual number of cuts in 2024 will depend on the incoming data,” he said in prepared remarks.