Home System list Explainer: Michael Barr faces a long to-do list as the US Fed’s next Wall Street cop

Explainer: Michael Barr faces a long to-do list as the US Fed’s next Wall Street cop

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The Federal Reserve Building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

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WASHINGTON, April 15 (Reuters) – U.S. President Joe Biden announced on Friday he would appoint former Treasury official Michael Barr as the Federal Reserve’s Wall Street cop, replacing Sarah Bloom Raskin, who has was withdrawn in March after failing to win support from moderate Democrats. Read more

Currently a professor at the University of Michigan Law School, Barr was a central Treasury figure under President Barack Obama when Congress passed sweeping reforms in the wake of the 2007-09 financial crisis.

Here’s the regulatory agenda Barr will have to tackle if he wins Senate approval:

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REDUX DEREGULATION?

Randal Quarles, the former Fed vice chairman for oversight, led a review of the post-crisis regulations, arguing they were too blunt and onerous. Democrats have accused Quarles of saving Wall Street billions of dollars while increasing systemic risk, and they want the Fed to revisit some of those changes.

Among the most controversial were revisions to the “Volcker rule” limiting speculative banking investments; removal of the requirement for large banks to hold capital against certain swap transactions; and stripping the Fed of its power to fail banks in their annual “stress tests” based on subjective concerns.

Barr will have to carefully decide which of these changes he thinks he can undo, given that such changes are likely to be contentious and time-consuming.

CLIMATE CHANGE RISKS

Climate change, a top policy priority for Democrats, is expected to move quickly onto the Fed’s agenda.

The Fed has so far asked lenders to explain how they are mitigating climate change risks to their balance sheets, with the industry planning to move to formal analysis of climate change scenarios in 2023, Reuters reported.

These projects should be accelerated. The big question will be whether the Fed is pushing for restrictions or tougher capital requirements for banks with high exposures to polluting industries or other climate-specific risks.

Fed officials may end up being more cautious than progressives had hoped, as Raskin’s appointment was ultimately sunk by fears she would push climate risk too aggressively.

BANK MERGERS

The Fed’s stance on bank mergers and acquisitions is expected to toughen under the leadership of a new overseer. Progressive Democrats generally oppose bank reconciliations, arguing they reduce competition and hurt consumers, and many deals were delayed after Quarles left the supervisory role in October. Read more

Some pending deals have been approved following the renomination of Fed Chairman Jerome Powell, but the industry is still waiting for the Fed and the Justice Department to decide on potential new policy for banking deals. If confirmed, Barr is expected to lead the committee reviewing potential tie-ups.

FINTECH FRAMEWORK

The Fed is also expected to tackle proposed regulations for “fintech” companies that are rapidly eating away at the traditional financial sector.

It explores how banks intersect with fintechs, especially with smaller lenders who can outsource more services and infrastructure. Fintechs are also lobbying the Fed for access to its payment system.

While other banking regulators have worked for years to bring fintechs under their regulatory umbrella, the Fed has resisted, fearing it could create systemic risks. But as the sector continues to inflate, the Fed should act.

ADDITIONAL LEVERAGE RATIO

Another issue on the table is the supplemental leverage ratio, a rule created after the crisis a decade ago requiring banks to hold capital against assets regardless of their risk.

The Fed had to temporarily relax that rule amid the pandemic, as a glut of bank deposits and Treasuries drove up banks’ capital requirements on what are considered safe assets.

Despite intense bank lobbying, the Fed let this relief expire but promised to review the general rule. The Fed has not yet released a proposal.

COMMUNITY REINVESTMENT ACT

The central bank will also play a key role in a long-awaited overhaul of the Community Reinvestment Act (CRA) rules, which encourage lending in low-income communities.

The Fed, which shares responsibility for writing the rules with other banking regulators, hopes the ARC can be updated to reflect the growth of online banking, while ensuring lenders make meaningful contributions to regions. the poorest they serve.

Barr would likely need to be in place before the Fed could approve the changes.

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Editing by Michelle Price and Hugh Lawson

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