Fed's Powell downplays crypto's threat to central banks

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WASHINGTON — Federal Reserve Chairman Jerome Powell downplayed the near-term ability of cyrptocurrencies to disrupt central banks' ability to manage currencies.

“We’re a long way from that,” Powell said during a press conference on Wednesday for the Federal Open Market Committee. “Digital currencies are in their infancy, so I’m not too concerned about central banks’ ability to carry out monetary policy because of cryptocurrencies or digital currencies.”

Powell was also asked about the threat posed by new digital currencies — such as Libra, a cryptocurrency unveiled this week by Facebook. Powell said the Fed had met with Facebook representatives ahead of their announcement and discussed their plans, and noted that the central bank meets with a variety of financial technology firms “all the time.”

But he warned that the Fed will be highly attuned to the potential risk of widely circulated cryptocurrency and would regulate such a currency rigorously.

“There are potential benefits here, there are also potential risks,” Powell said. “A currency could potentially have a large application, so I would echo what [Bank of England Gov. Mark] Carney said, which is that we will wind up having quite high expectations from a safety and soundness and regulatory standpoint if they decide to go forward with this.”

Powell also touched on other issues, saying banks have a clear understanding of the Fed’s supervisory expectations for leveraged lending — relatively high-interest loans made to companies that already have large debt loads.

"The issue isn't that the banks don't understand what the rules are,” Powell said. “The issue is that the risk isn't in the banks. It's out in those market-based vehicles.”

Leveraged lending has been an increasing source of concern, particularly among congressional Democrats, who held a hearing earlier this month to examine the risks posed by the large and growing business. Bank of America CEO Brian Moynihan said at an appearance in New York this month that leveraged lending could create “carnage” among firms with large exposures to leveraged loans and indebted companies if the economy took a sudden downturn.

Powell said that he thought the state of the leveraged loan market was “in a good place,” but noted that other advisory and regulatory bodies with a broader jurisdiction than the Fed — such as the Basel, Switzerland-based Financial Stability Board and the Treasury-led Financial Stability Oversight Council — are examining the potential risks that leveraged lending might pose to the financial system, particularly cross-border risks.

Powell also responded to reports that President Trump explored the possibility of demoting Powell as Fed chair, saying that he had no intention to leave and that he believed there was no legal basis for the president to remove him as chairman.

“I think the law is clear that I have a four-year term, and I fully intend to serve it,” Powell said.

This article originally appeared in American Banker.
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Leveraged loans Leveraged finance CLOs Digital currencies Digital banking Jerome Powell Federal Reserve Facebook