Michael Barr, the Biden administration’s pick to serve as the Federal Reserve’s top regulator, said during his Senate confirmation hearing that he wants to rethink the Fed’s various capital requirements “as a whole, rather than piece by piece.”
Barr, who is expected to clear a Senate floor vote this summer to become the Fed’s next vice chair for supervision, struck a chord with that sentiment, particularly with Karen Petrou, managing partner at Federal Financial Analytics.
“After Michael said that, I thought this was just too important an idea at a moment that really could be pivotal,” Petrou said. “We need to bring attention to it and then try to help move it along, because if the U.S. just goes back to a rule-by-rule, piece-by-piece, bits-and-pieces capital regulation, we’ll never get a coherent system without counterproductive impact.”
In a white paper published this week, Petrou urges the Fed to take that holistic approach beyond being a mere starting position and instead make it a guiding principle for rewriting the Fed’s capital framework.
The paper, released Wednesday, describes the current regulatory framework as too vast, complex and restrictive for large banks while simultaneously being focused on the overall capital requirements at the expense of safeguarding against specific risks.
“The rules for larger U.S. banks are even more of a morass than the global standards on which they are modeled, affording opportunities for regulatory arbitrage, creating pockets of unanticipated risk and contributing to the redesign of American finance into a sector that does far more for financiers than the real economy,” she wrote. “A holistic-capital construct is thus urgently needed.”
After garnering the support of five Republicans on the Senate Banking Committee along with the panel’s 12 Democrats in a vote last month, Barr is poised to usher in a new regulatory regime at the Fed.
He will be tasked with balancing the Biden administration’s objectives for a more inclusive banking sector with needed changes that have been left unaddressed since the previous vice chair for supervision, Randal Quarles, left office last October. This to-do list includes amending the SLR for the current capital landscape and recalibrating its regulatory framework to ensure the final implementation of the Basel III endgame, also known as Basel IV, is capital neutral.
Federal Financial Analytics is not the only organization hoping to capitalize on this looming sea change to influence the Fed’s thinking on regulatory and supervision. Advocates for both banks and consumers alike argued for changes to bank capital…