The Federal Reserve’s vice chairman for supervision Michael Barr said in his first policy speech Wednesday that he would work to make the financial system more fair and safe on several fronts.
In a far-reaching speech that touched on mergers, digital payments, cryptocurrencies, and Basel III capital requirements, Barr said he’s focused on building on the work regulators have done since his job was created in the wake of the global financial crisis.
“Success in financial regulation and supervision does not mean standing still because finance does not stand still,” Barr said in his remarks at Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution.
He called on Congress to pass a “much needed” law to bring stable coins inside the prudential regulatory perimeter, as the central bank continues to study a potential digital-based currency for the U.S. Federal Reserve. Generally, prudential regulation may include minimum capital or liquidity requirements as well as supervisory inspection of an asset class.
In another effort, the Fed will also seek public comment on implementing regulatory capital requirements that align with the final set of Basel III standards. Barr said he’ll have more to say about that effort this fall.
The Fed is looking at regulatory oversight beyond globally systemically important banks, or G-SIBs to some of the other largest banks in the U.S. as they grow and as their significance in the financial system increases, he said.
“As we consider future policy actions in this area, the Fed will work with our colleagues at other banking regulatory agencies and seek public comment,” he said.
Barr said he’s working with the Federal Reserve to assess how it’s performing merger analysis and where it could improve.
“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, narrowing the range of services offered, and reducing the supply of small business or community development loans that rely on local knowledge,” he said.
Next year the Fed will launch a pilot program to examine how financial institutions manage risks related to climate change. While the effort won’t have any direct capital or supervisory implications, the Fed plans to work with the very largest financial players to begin understanding how risks associated with climate change are managed.
Barr said stable coins and some forms of digital currency could eventually help open up access to the financial system for people of more modest means, but cryptocurrencies are not doing a good job of that now because they’re not regulated.
“I plan to make sure that the crypto activity of banks that we supervise is subject to the necessary safeguards that protect the safety of the banking system as well as bank customers,” Barr said. “Banks engaged in crypto-related activities need to
have appropriate measures in place to manage novel risks associated with those activities and to ensure compliance with all relevant laws, including those related to money laundering.”
Dennis Kelleher, co-founder, president and CEO of nonprofit Better Markets, said Barr emphasized that he’s focused on the “appropriate level of financial regulation” on financial institutions tailored to each firm’s unique risks, based on its financial activities.
“It’s clear that the vice chair is focusing broadly on making sure that the financial system supports the real economy and is not a threat to it so that people’s jobs, saving and homes are not in danger from financial instability,” Kelleher said.
Among larger banks such as JPMorgan Chase & Co. JPM, 1.73% and Goldman Sachs Group Inc. GS, +1.32% one hot topic is the phasing in of Basel III capital requirements.
The U.S. Senate in July voted 66 to 38 to name Barr to a four-year term as vice chairman for supervision at the U.S. Federal Reserve.
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