The Fed’s Vice Chair for Supervision Suggests Big-Bank Regulation Changes

on Jul14
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Michael S. Barr, the Federal Reserve’s vice chair for supervision, announced on Monday that he would be pushing for significant changes to how America’s largest banks were overseen in a bid to make them more resilient in times of trouble — partly by ratcheting up how much capital they have to get them through a rough patch.

The overhaul would require the largest banks to increase their holdings of capital — cash and other readily available assets that could be used to absorb losses in times of trouble. Mr. Barr predicted that his tweaks, if put into effect, would be “equivalent to requiring the largest banks hold an additional two percentage points of capital.”

“The beauty of capital is that it doesn’t care about the source of the loss,” Mr. Barr said in his speech previewing the proposed changes. “Whatever the vulnerability or the shock, capital is able to help absorb the resulting loss.”

Mr. Barr’s proposals are not a done deal: They would need to make it through a notice-and-comment period — giving banks, lawmakers and other interested parties a chance to voice their views. If the Fed Board votes to institute them, the transition will take time. But the sweeping set of changes that he set out meaningfully tweak how banks both police their own risks and are overseen by government regulators.

Mr. Katz said the expansion of tough rules to a wider set of banks was the most notable part of the proposal: Such a tweak was expected based on remarks from other Fed officials recently, he said, but “it’s quite a change.”

The bank blowups this year illustrated that even much smaller banks have the potential to unleash chaos if they collapse.

Still, “we’re not going to know how significant these changes are until the lengthy rule-making process plays out over the next couple of years,” said Dennis Kelleher, the chief executive of the nonprofit Better Markets.

Mr. Kelleher said that in general Mr. Barr’s ideas seemed good, but added that he was troubled by what he saw as a lack of urgency among regulators.

“When it comes to bailing out the banks, they act with urgency and decisiveness,” he said, “but when it comes to regulating the banks enough to prevent crashes, they’re slow and they take years.”

Bank lobbyists criticized Mr. Barr’s announcement.

“Fed Vice Chair for Supervision Barr appears to believe that the largest U.S. banks need even more capital, without providing any evidence as to why,” Kevin Fromer, the chief executive of the lobby group the Financial Services Forum, said in a statement to the news media on Monday.

“Further capital requirements on the largest U.S. banks will lead to higher borrowing costs and fewer loans for consumers and businesses — slowing our economy and impacting those on the margin hardest,” Mr. Fromer said.

Susan Wachter, a finance professor at the University of Pennsylvania’s Wharton School, said the proposed changes were “long overdue.” She said it was a relief to know that a plan to make them was underway.

The Fed vice chair hinted that additional bank oversight tweaks inspired by the March turmoil were coming.

“I will be pursuing further changes to regulation and supervision in response to the recent banking stress,” Mr. Barr said in his speech. “I expect to have more to say on these topics in the coming months.”

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