© Reuters. FILE PHOTO: Michael Barr is sworn in as Vice Chairman of the Federal Reserve under the supervision of U.S. Federal Reserve Chairman Jerome Powell in the press room at the William McChesney Martin Federal Reserve Board Building in Washington, U.S., on July 19, 2022.
WASHINGTON (Reuters) – The U.S. Federal Reserve is conducting a “comprehensive” review of bank capital requirements, plans to conduct an analysis of lenders’ financial risks linked to climate change next year and may impose tougher rules on large regional lenders, its new regulatory chief said said on Wednesday.
In his first public speech since joining the central bank in July as vice chairman of oversight, Michael Barr outlined an ambitious program that could be a major shake-up for the country’s big lenders, who enjoyed a lighter touch under the central bank’s previous Republican leadership.
“We are taking a holistic look at our capital instruments to understand how they support the stability of the financial system, individually and in combination,” Barr told an audience at the Brookings Institution’s Washington think tank, adding that the review could make adjustments to the annual bank. stress tests”, the additional leverage ratio and the countercyclical capital buffer, the three key capital levers.
“We will work to minimize unintended consequences, limit opportunities for gaming, and avoid excessive compliance costs that do not reduce risk,” he continued.
Barr also said the central bank plans to launch a pilot “micro-prudential scenario analysis” next year to better assess the long-term climate-related financial risks facing lenders.
The Fed is also examining how easily large regional lenders, which have grown dramatically following a series of mergers in recent years, could be liquidated in the event of a crisis and possible policy changes at such lenders, Barr said.
Barr’s role gives him broad powers to oversee the nation’s biggest lenders, and the industry and analysts are eager to understand how he plans to use them.
Barr, appointed by Democratic President Joe Biden, was widely expected to take a much more aggressive stance on Wall Street than his Republican predecessor, Randall Quarles.
As a former senior Treasury official, Barr helped draft the 2010 Dodd-Frank Act, which created a supervisory role for the Fed and imposed a host of new rules for lenders after the 2007-09 financial crisis.
With Barr, all major financial regulatory bodies are now filled with Biden’s pick, meaning other joint reform efforts, such as overhauling fair lending rules, could also be accelerated. Barr said his to-do list also includes a review of how the Fed handles large bank mergers and increased oversight of the risks associated with cryptocurrencies.
“It’s very important that Biden is appointed to this position,” said Todd Phillips, director of financial regulation at the Center for American Progress, a liberal think tank. “Barr’s presence allows Biden’s bank regulation agenda to roll out.”