Banks will face tougher merger controls, says new Fed chief regulator

The Federal Reserve’s new chief regulatory officer said Sept. 7 that the central bank is considering how to take a closer look at bank mergers and could strengthen how it forces some banks to plan their own demise.

Fed Vice Chairman Michael Barr’s comments, his first in public since taking office on July 19, suggest a more aggressive approach to Wall Street surveillance than his Republican predecessor Randal Quarles.

Barr said he aimed to assess how the Fed reviews bank reconciliation proposals and assess “where we can do better,” speaking at an event hosted by the Brookings Institution, a Washington think tank.

The remarks are consistent with those of others made by the Biden administration and its top regulators, which seek to address concerns that the steady growth of the country’s largest regional banks has introduced new risks to the financial system.

While these firms may not have the vast trading floors and international operations of megabanks such as JPMorgan Chase and Bank of America, the balance sheets of the largest regional corporations are now approaching the size of some of the so-called systemically important banks. .

The drive to revamp the way regulators assess big bank mergers is in its infancy, but could make bank reconciliations more difficult.

“These risks can be difficult to assess, but this consideration is key to assessing how we do merger analysis and where we can do better,” Barr said Sept. 7.

The remarks were being closely watched by banks and officials to get a sense of Barr’s priorities.

He talked about so-called living wills or plans for banks to dissolve in a crisis without government bailouts. Barr said regulators must continue to analyze whether companies are taking “all appropriate steps to limit the costs to society of their potential failure.” He also warned against the so-called resolvability of some large regional banks which have grown in size and importance to the financial system.

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Barr’s remarks did not say whether he planned to alter banks’ capital and liquidity levels by changing central bank regulations or its annual ‘stress tests’, which seek to determine how big lenders would react. to a drastic market and economic shock.

Still, he suggested he was looking for ways to strengthen stress tests, the value of which some critics say has eroded over time, becoming less stressful for banks. “Stress testing needs to continue to evolve,” Barr said. “They are supposed to be stressful. They are supposed to be tough. And I want to make sure they are like that.

He said he would have more to say on some bank capital requirements in the fall. Barr has previously said he wants to get an overview of the requirements before asking for adjustments to the rules piece by piece.

Industry groups, such as the Bank Policy Institute and the Financial Services Forum, had no immediate comment on Barr’s remarks.

Barr’s supervisory role is the government’s most influential banking supervisor, responsible for developing a vision for the regulation of large banks and other financial firms. This includes making policy recommendations for the Fed’s board and overseeing its regulatory staff, which oversees some of America’s largest financial firms, including JPMorgan, Bank of America and Citigroup.

Quarles, who previously held the Fed’s supervisory role, focused on simplifying financial regulations enacted after the 2008-09 financial crisis. Proponents say these measures have clarified or better calibrated central bank rules. Some Democrats say they have significantly softened the impact of the Wall Street settlement. Quarles left the Fed in December.

At the event, Barr also touched on monetary policy. He said inflation was too high and the Fed was committed to bringing it down. Acknowledging that the Fed’s rate hikes risked slowing the economy further — and even hurting — he said it was far worse to let “inflation continue to be too high.”

He did not specify to what level the Fed’s benchmark interest rate should rise.

Barr was the last of five candidates nominated by President Biden for the central bank. Fed Chairman Jerome Powell and three other appointments have been confirmed in recent months.

A former dean of public policy at the University of Michigan, Barr also served in the Treasury Department during the Clinton and Obama administrations, including as a top lieutenant to then-Treasury Secretary Timothy Geithner. Barr played a role as the architect of the 2010 Dodd-Frank financial overhaul, including the creation by law of the Consumer Financial Protection Bureau.

Write to Andrew Ackerman at [email protected]

This article was published by Dow Jones Newswires, another service of the Dow Jones group

James V. Hayes