Fed Vice Chair: Banks Need ‘Humility and Skepticism’ and Tougher Rules

Banks both big and small will face tougher rules following this year’s banking crisis.

That was the message from Michael Barr, the Federal Reserve’s vice chairman for supervision, in a speech Monday (July 10).

“Events over the past few months have only reinforced the need for humility and skepticism, and for an approach that makes banks resilient to both familiar and unanticipated risks,” Barr told an audience at the Bipartisan Policy Center in Washington.

Barr’s speech included an update on his “holistic” review of banks’ capital requirements, saying the recent collapse of Silicon Valley Bank (SVB) and two other regional lenders show the need for stronger rules.

“The holistic review began well before then, of course, and the steps proposed here address shortcomings in capital standards that did not begin in March of 2023,” he said. “But in an obvious way, the failures of SVB and other banks this spring were a warning that banks need to be more resilient.”

He said the banking crisis showed the crucial role smaller banks can play, meaning they too should face more oversight. Barr also said he wants to apply tougher capital rules to banks with $100 billion or more in assets.

Federal Reserve Chair Jerome Powell announced in a Senate Banking Committee hearing last month that new capital requirements will mainly impact the eight largest U.S. banks, applying the so-called Basel III international standards to banks within the $100 billion and $250 billion asset range.

“There may be some capital increases for other banks. None of this should affect banks under $100 billion,” Powell added.

In addition, banking “stress tests” would become more rigorous, Barr said.

“With respect to stress testing, I believe that the stress capital buffer framework is sound,” Barr told the group. “At the same time, I believe that the stress test should continue to evolve to better capture risk.”

Barr’s speech was criticized by the banking industry, according to a report Monday by Reuters.

“With the economy still processing historic shocks and a potential slowdown looming on the horizon, constraining the financial sector’s capacity to support growth and economic activity — especially at this moment — is puzzling and counterproductive,” said Tim Adams, president and CEO of the Institute of International Finance.

In an interview with PYMNTS soon after the banking crisis began, QED Partner Amias Gerety predicted a reassessment of laws that have made it more tougher to regulate smaller, regional banks.

“Increased capital requirements would, in some form, limit at least some of the funds channeled back into a bank’s customer base and in the economy at large but would conceivably be a buffer to shore up demands by depositors and, by extension, prevent bank runs,” PYMNTS wrote in March. “It’s no longer a case of ‘too big to fail,’ but a case of ‘no one’s too small to matter.’”