On September 7, 2022, newly-appointed Vice Chair for Supervision at the Federal Reserve (the “Fed”), Michael S. Barr, gave a speech outlining his near-term goals and the “holistic approach” he intends to take to achieve them. Building on the efforts made over the previous 12 years since the Global Financial Crisis to strengthen the banking system and oversight, Barr emphasized his top goals include making the financial system safer and fairer. While more specifics regarding Barr’s agenda will be forthcoming in the coming weeks and months, his speech signals a change in regulatory policy which could have a significant impact on banks, bank holding companies, and the companies that partner with them.
To achieve the safety and soundness of banks and stability of the financial system, Barr intends to focus on mitigating evolving risks through regulatory capital reform, resolution planning for large banks, and revisiting the criteria used by the Fed to analyze and approve large bank mergers. Regarding capital reform, Barr outlined the underlying principles to be used when recalibrating the capital requirements, such as a risk-focused framework and tiered requirements, but declined to provide specifics until “later this fall.” Barr also intends to work with the FDIC to review the resolution plans of globally systemically important banks and other large banks to ensure appropriate steps are being taken to limit the costs to society of potential failure. Finally, Barr’s goal of safety and stability includes renewed scrutiny of large bank mergers; Fed staff will be tasked with assessing how the Fed is currently performing merger analysis and where improvements can be made.
Barr also commented briefly on two of his other priorities: partnering with other regulatory agencies and Congress to address the risks that stablecoins (and other unregulated forms of private money) pose to the financial system and the financial risks posed by climate change. Regarding climate change, Barr indicated the Fed’s narrow focus is on its supervisory responsibilities and role in promoting safety and soundness. The Fed intends to pilot a mico-prudential scenario analysis exercise with several large banks to determine how best to build an approach to climate modeling.
In addition to his focus on “making the financial system safer,” Barr also stressed his intent to focus on fairness and identified 3 elements necessary to make the financial system fairer: (1) financial capability (e.g., transparency in the cost of services); (2) financial access (e.g., promoting access to affordable banking services to low- and moderate-income consumers); and (3) consumer protection (e.g., supervision and regulation). Barr also noted that innovative financial products, such as crypto and digital payment products, should be welcomed as tools for increasing access and lowering costs for banking services but the risks related to such innovations must be tempered by sound regulation and prudent safeguards to ensure the safety of the banking system and customers. Finally, Barr reiterated the Fed’s commitment to CRA reform and continuing the efforts led by the previous Vice Chair to strengthen and modernize CRA regulations.
While Barr’s statements may have less of an impact on smaller banks than on the globally significant financial institutions and large banks, his comments around capital reform suggest evolving views among the Fed and other regulators on the evaluation of risk, and the consideration of new types of risk, which could have a significant impact on all banks and bank holding companies. Third parties that partner with banks to provide products and services, including alternative lenders and fintech companies, may also be impacted.
Vice Chair Barr took office on July 19, 2022 for a four-year term.