STATE GOVERNMENT RELATIONS
Lawmakers May Nix State's Income Tax
Indiana lawmakers are considering eliminating the state individual income tax as part of its review of Indiana's tax structure. Lawmakers are already phasing down the state income tax – by 2027, Hoosiers will pay 2.9% on earned income, down from the current 3.15% rate. But someone making $50,000 a year would save an additional $1,450 a year if income tax was thrown out altogether. It also would mean Indiana could lose out on the almost $8 billion annually. That’s more than a third of the state's total tax revenue. If lawmakers decide to end the income tax, Hoosiers could pay more in other taxes, such as on goods.
FEDERAL GOVERNMENT RELATIONS
FDIC's McKernan Sees Lack of Justification for Proposed Capital Standards
Banking regulators have failed to make the case that the U.S. should adopt the so-called "Basel III endgame" capital standards, in part because the international Basel Committee on Banking Supervision had offered little to no explanation for some of its decisions in drafting the standards, Federal Deposit Insurance Corp. Board Member Jonathan McKernan said during a speech Wednesday in New York City.
McKernan and FDIC Vice Chairman Travis Hill voted against the proposed standards when they came before the board in July. In his speech, McKernan cited several concerns with the proposal, among them a lack of clarity about how the Basel Committee reach some of its conclusions, such as its decision to drop a proposed fix in a provision that could lead to overcapitalization of banks with high-fee revenues.
"That then leaves us simply guessing, unable to defend or perhaps even understand important aspects of the Basel standards we're trying to implement," McKernan said. "In short, and I would put some emphasis on this, the proposal amounts to a big leap of faith in the Basel Committee."
Bowman: Regulators Need to Rethink Review Process for Bank Mergers
Federal regulators have closed the door to a broad range of potential mergers by using an artificially narrow lens to evaluate competition concerns, Federal Reserve Governor Michelle Bowman said Wednesday. Speaking at a community banking conference in St. Louis, Bowman reiterated her view that banking regulators and the Justice Department need to update the framework they use to evaluate the competitive effects of proposed bank mergers. She said that their approach fails to consider how technology has transformed access to banking services and ignores bank competitors such as credit unions and financial technology firms.
"While one might naturally assume that approving mergers would always lead to a reduction of community bank lending, this result may not always be the case, as in markets viewed as less attractive or undesirable to large or regional banks, where the only option for community banks to survive may be to consolidate with other community banks in the same geographic area," Bowman said. "Surely, some level of consolidation is preferable to the closure of community banks and the perpetuation of banking deserts or zombie banks."
Bowman also said policymakers should re-examine the use of asset size when tailoring regulation. Instead, they "need a better framework to understand whether we should move beyond simple asset size thresholds when tailoring our regulatory rules to the risks that different banks pose based, perhaps not on size."
Fed: More Than 100 Institutions Using FedNow
A total of 108 institutions are now using the FedNow service, the Federal Reserve said Tuesday. In addition, 21 financial institutions are providing liquidity and settlement services, and 20 service providers are supporting payment processing in the instant payments infrastructure.
Bowman Seeks Third-Party Review of Bank Failure Response
Federal Reserve Governor Michelle Bowman reiterated her call for an independent, third-party review of the Fed's response to the recent bank failures, saying that such a review was needed to provide relevant data before proceeding with a regulatory response. Speaking at a joint Tennessee Bankers Association and Mississippi Bankers Association conference, Bowman acknowledged that an independent review was outside the norm for the central bank, but that so far its internal reviews of the Silicon Valley Bank failure and subsequent fallout "have not reached entirely consistent conclusions."
"Before making conclusions about appropriate responses going forward to address causal issues, we need accurate, impartial and thorough information to inform the debate about what specifically may be needed to fix any problems in our supervision and regulatory framework," Bowman said. "While the [Fed] board has made some confidential supervisory information about SVB available to the public, an outside party has an inherent disadvantage in probing the events surrounding the failure of a bank – they do not have access to the full supervisory record, and they have no ability to conduct extensive staff interviews." She added that independent third-party review would allow the agencies to "fully understand what led to the failures" and would be a "logical next step" in holding regulatory bodies accountable.
Bowman noted that the Fed and other banking agencies are moving ahead with reforms based on their internal reviews. She said the agencies should instead "pause and reflect" on whether those proposals are appropriately calibrated and executed. "The trend seems to be that regulators are engaging in supervision with a more heavy-handed approach, focusing primarily on quarterly call report data in some cases without the benefit of direct engagement with the targeted financial institutions."
Barr: Rates May be Held at Restrictive Level for Some Time
The Federal Reserve must "proceed carefully" as it considers making monetary policy more restrictive to rein in inflation, with the question not being whether further rate hikes are needed this year but how long it will need to hold rates at a sufficiently restrictive level to achieve its goals, Fed Vice Chairman of Supervision Michael Barr said Monday during a speech in New York City.
When committee members last met in September, the Federal Open Markets Committee voted to hold the target range for the federal funds rate at 5.25-5.5%. Barr said that he expects the full effects of the FOMC's past monetary policy tightening to take months to play out. His baseline projection is for real GDP growth to moderate somewhat over the next year as restrictive monetary policy and tighter financial conditions restrain economic activity, with some further softening in the labor market.
As far as how long the Fed will need to maintain a restrictive policy stance to return inflation to its target 2% range, "I expect it will take some time," Barr said. "I will continue to evaluate a range of incoming data as I make my assessments at upcoming meetings."
Lawmakers Approve Stopgap Spending Measure
The House and Senate on Saturday approved a continuing resolution to fund the federal government at current levels through Nov. 17, avoiding a government shutdown. The resolution includes disaster relief funds and extends National Flood Insurance Program authorization.
McCarthy Removed as House Speaker
The House Tuesday voted 216-210 to remove Rep. Kevin McCarthy, R-Calif., as speaker, with Democrats and eight Republicans voting in favor of a motion to vacate brought by Rep. Matt Gaetz, R-Fla. House Financial Services Committee Chairman Patrick McHenry, R-N.C., will serve as speaker pro tempore until the House elects someone to fill the role for the remainder of the current congressional session.