Barr offers some hints about leanings of Fed ‘holistic’ review of bank capital requirements

The Federal Reserve is continuing its “holistic” review of bank capital requirements, but some early indications offered in a speech Thursday by the agency’s top regulator are that no proposals for relaxed capital requirements are likely in the offing.

In remarks to the American Enterprise Institute in Washington, Federal Reserve Board Vice Chair for Supervision Michael S. Barr said the agency’s review of bank capital standards – which called a “holistic” approach – is not yet completed, and he had no firm conclusions to announce. He did indicate that he would have more to say about the review early next year.

However, he gave hints as to which way he sees the data leaning. “As I have argued today, capital plays a central role in how a bank manages its risks, and capital regulation is fundamental to bank oversight,” Barr said. “History shows the deep costs to society when bank capital is inadequate, and thus how urgent it is for the Federal Reserve to get capital regulation right. In doing so, we need to be humble about our ability, or that of bank managers or the market, to fully anticipate the risks that our financial system might face in the future.”

More specifically, Barr told the group that a body of empirical and theoretical research on optimal capital indicates that the current U.S. capital requirements are “toward the low end of the range described in most of the research literature.”

“International comparisons also suggest strong capital requirements support banks and the U.S. economy,” he said. ”We have strong capital levels today, and generally higher bank capital requirements in the United States after the Dodd-Frank Act have corresponded with healthy economic growth and have supported the competitiveness of U.S. firms in the global economy.17

He also brushed aside arguments by some bankers that bank capital is already high enough. That approach points to bank performance during the coronavirus pandemic, and are indicators of bank resilience, he said about the arguments. “But we didn’t get a real test of resilience because Congress, the president, and the Federal Reserve rightly stepped in with massive assistance to avert an economic disaster,” Barr asserted. “Furthermore, I’d observe that the recent experience of the pandemic suggests that large, unexpected shocks can occur with little notice. Our inability to predict such events would argue for a higher overall capital level than one based solely on historical experience.”

Federal Reserve Board Vice Chair for Supervision Michael S. Barr, “Why Bank Capital Matters”