Fed's top regulatory official faces uphill battle to overhaul bank
capital
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[July 20, 2023] By
Pete Schroeder
WASHINGTON (Reuters) -A plan by the top U.S. banking cop to make the
sector more resilient may have gotten a boost from the recent banking
crisis, but still faces numerous challenges.
Fed Vice Chair for Supervision Michael Barr has laid out a plan to
increase capital requirements for the nation's largest banks in the wake
of recent bank failures and is expected to unveil the broad proposal to
implement new risk-based capital requirements on July 27, according to
three industry officials.
The proposal, which will kick off an ambitious agenda for Barr, plans to
fully implement the globally agreed Basel bank capital agreement. He has
said subsequent efforts will include expanding annual "stress tests" of
banks' health, and pursuing tougher rules around liquidity, compensation
and interest rate risk.
Banking lobbyists, who declined to be named, and analysts, admit Barr
should have enough support to advance his priorities at the relevant
agencies. A trio of regulators -- the Fed, Federal Deposit Insurance
Corporation and Office of the Comptroller of the Currency -- would have
to sign off on proposed and finalized versions of new bank rules,
including votes by the boards of the Fed and FDIC.
"The mini-liquidity crisis just poured gasoline on Michael Barr's fire
and gave him an enormous amount of political capital," said Isaac
Boltansky, director of policy research for brokerage BTIG.
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Still, the industry and its allies plan to make it difficult, as Barr
must grapple with their complaints, dissent from fellow regulators,
skeptical Republican lawmakers, and a crowded schedule, according to
analysts and six banking lobbyists.
"Vice Chairman Barr is going to face economic, political, procedural and
even personal hurdles in getting these regulatory changes done. But
there is no reason to believe that he will be stopped," added Boltansky.
Spokespeople for the Fed and the FDIC declined requests for official
comment.
BANKING OPPOSITION
The banking industry is not waiting for details before trying to disrupt
the effort, arguing it could hinder economic activity, curb lending, and
kill lines of business.
Members of the industry are leaning on lawmakers as a way of pressuring
Barr, according to three industry lobbyists, without specifying which
lawmakers.
At the center of the industry's complaints is a belief the capital hikes
are not justified, and that Barr's process of reviewing existing rules
has been opaque.
"We don’t think there’s any substantiation of the need to raise
capital," said Kevin Fromer, president and CEO of the Financial Services
Forum, which represents large global banks.
That message is already resonating with some members of Congress,
particularly Republicans. When Fed Chair Jerome Powell testified in
June, he was pressed repeatedly on the pending rules. Powell, who in the
past has said he would defer to Barr on regulatory matters, acknowledged
there are tradeoffs that come with higher capital, but said stronger
capital meant a stronger system and regulators need to find the right
balance.
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![](../images/072023PIX/busine26.jpg)
Federal Reserve Vice Chair for
Supervision Michael Barr testifies before a Senate Banking, Housing,
and Urban Affairs Committee hearing in Washington, U.S., May 18,
2023. REUTERS/Evelyn Hockstein/File Photo
![](http://archives.lincolndailynews.com/2023/Jul/20/images/ads/current/graue_lda_GREYTRUCKpreowned_070323.jpg)
Earlier this month, two members of the House Financial Services
Committee, Republican Andy Barr and Democrat Bill Foster, sent a
letter to Barr seeking more details and for testimony to explain the
effort. Spokespeople for the lawmakers declined or did not respond
to requests for comment.
“This is a broad and sweeping proposal. The changes laid out today
should be based on a formal quantitative impact analysis rather than
anecdotes," said a spokeswoman for Senator Tim Scott, the top
Republican on the Senate Banking Committee.
The criticism is also emerging among some Republican bank
regulators, who appear likely to oppose the plans. Fed Governor
Michelle Bowman has warned in several speeches against Barr's
approach, and Republican members of the FDIC board have also warned
against sweeping changes.
A group of five of the industry's largest trade groups said they had
"serious concerns" with Barr's plans in a letter sent last Thursday
to Powell. They argued they need at least four months to digest and
comment on the proposal, which is expected to be technical and
lengthy.
CROWDED CALENDAR
Beyond external pressure, Barr must also contend with a crowded
calendar. Barr is already one year into his four-year term, and is
also looking to propose changes to accounting and long-term debt
requirements for smaller firms, annual bank stress tests, liquidity
and compensation rules, and Fed bank supervision.
The initial rewrite is expected to take substantial time. Regulators
will have to digest numerous and voluminous comments from the
banking industry dissecting their plans.
And there is only so much time. Elections in the fall of 2024 could
see Republicans take full control of Congress and the White House,
which would up pushback. A Republican-held Congress could even vote
to throw out recently completed rules under the Congressional Review
Act.
![](http://archives.lincolndailynews.com/2023/Jul/20/images/ads/current/guzzardos_sda_HEROS_2023.png)
The Fed would likely need to complete rules in the summer of 2024 to
ensure they could not be repealed by that route, according to one
bank lobbyist.
And in the meantime, banks are expected to continue hammering that
higher capital requirements means a smaller economic role for banks
and are not needed.
"It's kind of hard for me to sit here and say that we won't be
commenting forcefully that we are very well capitalized," said
Morgan Stanley CEO James Gorman on a quarterly earnings call
Tuesday. "I would hope and expect that they're going to listen," he
added later.
(Reporting by Pete Schroeder; Editing by Megan Davies and Andrea
Ricci)
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