10 Takeaways From Michael Barr’s First Speech As Fed Oversight Czar

The Federal Reserve’s point person for banking supervision, Michael Barr, made his first public comments on Wednesday since joining the central bank in July, and while they were largely light on details, they can provide a model for its priorities. Here are 10 questions he raised during his speech at the Brookings Institution, potential timelines for action and key thoughts:

1. Merger Review.

Since President Joe Biden demanded “greater scrutiny” of bank mergers in a July 2021 executive order, the Fed and the Office of the Comptroller of the Currency (OCC) have shown a renewed commitment to the transparency of the process – the more visibly, organizing public hearings on the most important or controversial merger projects in the field.

Barr said Wednesday he would review the Fed’s approach to reviewing proposed acquisitions — working with central bank staff to assess how the Fed analyzes potential mergers, with the goal of finding areas for improvement.

Key quote: “A merged institution may be able to provide more competitive products and services, but it could also have the potential to reduce competition and access to financial services in a geographic area by raising prices, reducing the range of services offered and by reducing the supply of services. small business or community development loans that build on local knowledge.

Assessing these risks, he said, is crucial. But regulators must also consider threats to financial stability and a deal’s potential influence on the “convenience and needs” of low-income communities.

2. Climate change.

The Fed plans to launch a “scenario analysis exercise” next year to better assess the long-term climate-related financial risks facing the largest banks, Barr said on Wednesday.

The central bank aims to work with the OCC and the Federal Deposit Insurance Corp. (FDIC) “in the short term,” Barr said, to give guidance to big banks “on how we expect them to identify, measure, monitor and manage” climate. related financial risks.

Key quote: “The Federal Reserve’s mandate in this area is important but narrow.”

That may be reassuring, especially to Republican lawmakers who, during Barr’s confirmation hearings this year, Fed Vice Chair Lael Brainard and former nominee Sarah Bloom Raskin vehemently voiced concerns about the potential for Fed overshoot on climate policy.

Raskin ultimately withdrew his nomination when Sen. Joe Manchin, D-WV, said he could not support Raskin because of what his position on climate meant for his home state, a major coal producer. Sen. Pat Toomey, R-PA, previously delayed the confirmation process by leading a boycott of Raskin that alternately pointed to climate concerns and allegations of impropriety.

3. Crypto

The Fed plans to coordinate with other agencies to ensure that crypto activity within banks is “well regulated, based on the principle of same risk, same activity, same regulation, regardless of the technology” used by the platform.

To some extent, Barr’s comment here replicates the “same business, same regulation” adage that Fed Chairman Jerome Powell used to describe the central bank’s efforts regarding a digital dollar. Namely, regulated activities in the banking system should be subject to the same rules if they fall outside the jurisdiction of banking regulators.

Key quote: “As innovative financial products grow and scale rapidly, enthusiasm can overtake good risk assessment.”

The central bank ultimately wants oversight that ensures that participants in the crypto-sphere are fully aware of these risks and that banks have “appropriate measures” in place to manage them, including those related to money laundering. ‘silver.

“In a rapidly growing and volatile market, participants may come to believe they understand new products only to learn they don’t, and then suffer significant losses,” Barr said.

4. Stable Coins.

Barr said he looked forward to working with lawmakers and other regulators to address the risks of stablecoins, adding that Congress “should work quickly” to pass measures to bring stablecoins into the “perimeter.” prudential regulation”.

Key quote: “History shows that in the absence of proper regulation, private money is subject to destabilizing runs, financial instability and the potential for widespread economic harm.”

5. FedNow.

Barr reiterated the Fed’s commitment to facilitating “payments that work well for everyone,” adding that he looks forward to “doing everything I can to support this work,” including the launch of FedNow, the nascent central bank instant payments program intended for testing this month and wider availability in mid-2023.

Key quote: “Low-income households can ill afford to wait days for their income checks to clear, nor can small businesses. A three-day delay in payment is an annoyance for someone with sufficient savings and credit, but it’s a costly burden, and sometimes a serious problem for others.

Barr touted FedNow as an innovation with the potential to make financial access fairer, saying policy should be based on “a deeper understanding of human decision-making” — for example, how and why consumers use certain financial vehicles. Barr also expressed concern about the impact of overdraft and insufficient funds fees on low-income consumers.

6. BOW.

In another nod to low-income consumers, Barr lent his support to the proposal the Fed, OCC and FDIC released this year to revamp the anti-redlining Community Reinvestment Act (CRA).

The safety and fairness of the financial system “are interrelated and mutually reinforcing, so progress in one area will advance efforts in the other,” Barr said.

Key quote: “The CRA sends an unequivocal message that there is no room for discrimination in the financial system.

seven. Tiered capital requirements.

Financial institutions are expected to face “higher costs through tighter regulations as they grow in complexity, size and interconnectedness,” Barr said, adding that community banks, to the same extent, should cope with “simpler regulations”.

Key quote: “When calibrating requirements, we will strive to minimize unintended consequences, limit opportunities for play, and avoid excessive compliance costs that do not result in reduced risk.”

This means potential adjustments to the additional leverage ratio, countercyclical capital buffer and stress tests.

Barr pledged to align Fed standards with those of the “Basel Final,” and said he plans to work with other regulators and solicit public opinion on the issue this fall.

8. An aside on stress testing.

“Stress testing must continue to evolve,” Barr said, according to The Wall Street Journal, in a comment that was not included in his prepared remarks.

Key quote: “They’re meant to be stressful,” he said. “They are supposed to be tough. And I want to make sure they are like that.

While Barr’s climate-related comments may appear to appease Republicans, his stance here may appease Democrats who have claimed Barr’s predecessor, Randal Quarles, spearheaded policy that defeated stress tests.

9. Living Wills.

Barr said the Fed will continue to work with the FDIC — and seek feedback — to “rigorously” review banks’ plans to resolve in the event of bankruptcy “without costly bailouts.”

Key quote: “Beyond the global systemically important banks…we will look at the resolvability of some of the other largest banks as they grow and become more important in the financial system.”

Translation: The Fed will review the living wills of major regional banks such as US Bank, Truist and PNC.

10. Inflation.

Although not part of Barr’s prepared remarks, the Fed’s fight against inflation surfaced later in the questions.

“We’re not close to the Federal Reserve’s inflation target,” Barr said on Wednesday, according to The New York Times.

Recent reports have given “mixed” signals about the health of the economy, Barr said, adding that incoming economic data would inform the central bank’s near-term policy decisions.

Letting inflation stay too high was riskier than being too proactive in trying to contain rising prices, he added.

Key quote: “I think the balance of risk is on the side of making sure we deliver on our commitment to fight inflation.”