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July 13, 2022

With the Economy on a Knife’s Edge, Here’s the Agenda for the New Federal Reserve Vice Chair for Supervision Michael Barr

Dennis Kelleher, President and CEO of Better Markets, issued the following statement and released a detailed agenda for the incoming Vice Chair for Supervision for the Federal Reserve, Michael Barr, upon his confirmation by the Senate today:

“The newly confirmed Vice Chair for Supervision for the Federal Reserve Board, Michael Barr, would have a difficult job and packed agenda in the ordinary course.  He is, however, taking office at an historically challenging time.  The economy and the financial system are on a knife’s edge as inflation skyrockets, supply chain constraints continue, commodities disruptions multiply, pandemic-caused labor market dislocations persist, and financial conditions remain under extreme stress.  Unfortunately, those conditions follow years of neglect and backsliding on the most basic financial protection and systemic stability rules.

“As a result, there is a substantial agenda for Vice Chair Barr to undertake as soon as possible as we have detailed in a memo sent to him, the Chair and other Governors today.  He must act quickly to strengthen the resiliency of the banking and financial systems so that they can withstand the stresses of today, weather the emerging threats of tomorrow, and, throughout, continue to support the productive economy, jobs, growth, and Americans’ living standards.

“That agenda starts with immediately putting the stress back into the stress tests so that they ensure that the banking system can both withstand the unprecedented conditions battering our financial system while still supporting the needs of a growing economy.  That requires the following actions: first, restore the qualitative objection that accompanied the tests; second, reinstate the two key assumptions recently removed (capital distributions over nine quarters and the growth of bank balance sheets under stress); third, once again include a post-stress leverage requirement; and fourth, making the scenarios more stressful and dynamic.

“At the same time, the Vice Chair must initiate and lead a comprehensive, 360-degree, data-driven review of the actions taken in response to the 2020 pandemic and the consequences of those actions.  The pandemic-caused shut down of the economy was a live stress test of the post-Dodd Frank financial architecture, and it highlighted and exposed strengths and weaknesses in both the banking and the nonbank “shadow banking” sectors.  That review must include the reforms put in place after the 2008 financial crash, the effects of the deregulatory actions over the last several years, and the emerging and un- or under-addressed risks to the financial system. Done right, the insights from such a review should enable the next phase of financial regulation to be the informed and calibrated.

“Inevitably that will include strengthening capital, liquidity, and living will requirements as well as the supervisory process that complements them to reduce the likelihood of failures of Wall Street’s biggest banks and yet more taxpayer bailouts. Appropriate regulations and supervisory programs must be put in place for previously un- or under-addressed risks, including related to risks from climate, financial technology companies, cryptocurrencies, and cyber threats.  The Fed must also use its supervision and regulation to promote a broadening of the provision of bank products and services to low-income individuals and economically marginalized communities of color.

“Unquestionably, the banking sector has become more complex and concentrated and is facing new sources of risks that have yet to be fully understood and addressed, despite being less regulated and under-supervised. The too-big-to-fail problem is not only alive and well, but is growing larger, more dangerous, and harder to address. At the same time wealth gaps continue to increase as more and more Americans are under-served by the banking system. The set of actions detailed in our memo are needed now to address these challenges while enabling more hard-working Americans to achieve the American Dream.”

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Better Markets is a non-profit, non-partisan, and independent organization founded to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

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