Fed’s Top Banking Regulator Signals Tougher Merger Reviews

Federal Reserve’s Michael Barr highlights priorities in initial public remarks

Sept. 7, 2022—The Federal Reserve’s new regulatory chief said Wednesday that the central bank is considering how to more-closely scrutinize bank mergers and may beef up the way it requires certain banks to plan for their own demise.

Read Barr’s entire remarks here “Making the Financial System Safer and Fairer”

The remarks from Fed Vice Chairman Michael Barr, his first in public since taking office July 19, suggest a more aggressive approach to overseeing Wall Street than his Republican predecessor Randal Quarles.

Mr. Barr said he aims to evaluate how the Fed reviews proposed bank tie-ups and to 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 from others made by the Biden administration and its top regulators, who are seeking to address concerns that the steady growth of the nation’s largest regional banks has introduced new risks to the financial system. While these firms might lack the vast trading floors and international operations of megabanks such as JPMorgan Chase & Co. and Bank of America Corp., the biggest regionals’ balance sheets are now approaching the size of some of so-called systemically important banks.

The push to revamp the way regulators assess the mergers of large banks is in its early stages but could make bank tie-ups more difficult.

“These risks may be difficult to assess, but this consideration is critical to assess how we are performing merger analysis and where we can do better,” Mr. Barr said Wednesday.

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

He spoke about so-called living wills, or plans for banks to wind themselves down in a crisis without a government bailout. Mr. Barr said regulators need to continue to analyze whether firms are taking “all appropriate steps to limit the costs to society of their potential failure.” He also warned about the so-called resolvability of some larger regional banks that have grown in size and in importance to the financial system.

Mr. Barr’s remarks didn’t go into detail on whether he plans to alter bank capital and liquidity levels through changes to the central bank’s rulebook or its annual “stress tests,” which aim to determine how large lenders would react to drastic market and economic shock.

Still, he suggested he was looking at ways to beef up stress tests, the value of which some critics say has eroded over time, becoming less stressful for banks. “The stress tests need to continue to evolve,” Mr. Barr said. “They’re supposed to be stressful. They’re supposed to be tough. And I want to make sure that they are that way.”

He said he would have more to say about certain bank-capital requirements in the fall. Mr. Barr has previously said he wants to get a broad view of requirements before pushing for adjustments to rules piece by piece.

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

Mr. Barr’s supervision role is the government’s most influential bank overseer, responsible for developing a vision for the regulation of big banks and other financial firms. That includes developing policy recommendations for the Fed board and for overseeing its regulatory staff, which supervises some of the largest U.S. financial firms, including JPMorgan, Bank of America and Citigroup Inc.

Mr. Quarles, who previously held the Fed supervision post, focused on simplifying financial regulations enacted after the 2008-09 financial crisis. Supporters say those moves clarified or better calibrated the central bank’s rules. Some Democrats say they significantly softened the impact of the Wall Street rulebook. Mr. Quarles left the Fed in December.

At the event, Mr. Barr also addressed monetary policy. He said inflation was too high and that the Fed was committed to bringing it down. Acknowledging that the Fed’s rate increases risk a further slowdown to the economy—and even some pain—he said it is far worse to let “inflation continue to be too high.”

He didn’t specify how high the Fed’s benchmark interest rate should rise.

Mr. Barr was the last of President Biden’s slate of five appointees to the central bank. Fed Chairman Jerome Powell and three other appointments were confirmed in recent months.

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

Courtesy Andrew Ackerman, Wall Street Journal