FRB Vice Chair Commits to “Making the Financial System Safer and Fairer”
On September 7, 2022, the Federal Reserve Board (“FRB”) Vice Chair for Supervision, Michael Barr, spoke at the Brookings Institution at Washington, D.C. and outlined his goals for “making the financial system safer and fairer.”
In this speech, Barr addressed the following categories relating to the safety and soundness of institutions:
Capital
According to Barr, “[n]othing is more basic to the safety and soundness of banks and the stability of the financial system than capital.” Capital enables financial firms to continue to lend to the community “through good times and bad” due to their ability to “is more basic to the safety and soundness of banks and the stability of the financial system than capital.”
Barr poses that maintaining a proper capital framework requires evolution focused on newly emerging risks and “activities that pose different potential for loss.” This framework should be tiered so that firms can “internalize the costs that their potential failure would impose on the broader financial system and thus on businesses and households.”
Resolution
Barr stated that the FRB will “need to continue to analyze whether firms are taking all appropriate steps” to limit the societal costs and negative impacts if the financial firm is not sufficiently capitalized. To do so, the FRB will work with the Federal Deposit Insurance Corporation (“FDIC”) “to rigorously review firms' plans, making clear when firms do not meet our expectations and when remediation is necessary.”
Bank Merger Policy Review
The FRB will be evaluating their approach to reviewing merger applications and proposed acquisitions of banks to ensure that the benefits of approving these transactions is worth the risk of reducing competition, “access to financial services in a geographic area by raising prices,” the range of financial services offered to the community, and a reduction in “the supply of small business or community development loans that rely on local knowledge.”
Stablecoins as Private Money
With the emerging forms of private money that is being created through stable coins, the FRB will engage in regulation and oversight of these practices to mitigate the historically-proven risk of “destabilizing runs, financial instability, and the potential for widespread economic harm.”
Financial Risks from Climate Change
Barr stated that in light of the emerging “risks to banks posed by climate change[,]” the FRB “is working to understand how climate change may pose risks to individual banks and to the financial system.” The FRB will “work with the Office of the Comptroller of the Currency (“OCC”) and the FDIC to provide guidance to large banks on how we expect them to identify, measure, monitor, and manage the financial risks of climate change.”
Additionally, the FRB is “considering how to develop and implement climate risk scenario analyses.” Pursuant to this goal, “next year [the FRB] plan[s] to launch a pilot micro-prudential scenario analysis exercise to better assess the long-term, climate-related financial risks facing the largest institutions.”
Innovation, Access, and Consumer Protection
Barr provided what he believes to be the “three essential elements of fairness in the financial system” as: “(1) financial capability, (2) financial access, and (3) consumer protection.”
Barr stated the FRB “has a role to play in ensuring banks disclose the costs and explain the conditions on the services they provide.” Specifically, the FRB must focus on “basing policy on a deeper understanding of human decision-making, and the contexts in which households and businesses make those choices.” The FRB must “work with other bank regulatory agencies” to regulate crypto activities and must establish policy that focuses “on access to fast, efficient digital payments.”
Community Reinvestment
Barr affirmed his support for the proposed amendments to the Community Reinvestment Act (“CRA”) and stated he “look[s] forward to contributing to the important work underway[.]”