The Federal Reserve will launch a “pilot micro-prudential scenario analysis exercise” next year “to better assess the long-term, climate-related financial risks facing the largest institutions,” Michael Barr said today in his first speech as Fed vice chairman for supervision. Barr did not offer additional details beyond the timing but added that the Fed is also planning to work with the other banking agencies “to provide guidance to large banks on how we expect them to identify, measure, monitor and mange the financial risks of climate change.” During the Q&A after his remarks, Barr also noted that “with respect to community banks, we are quite a way from even being able to offer even good advice to community banks on the issue of climate change.”
Outlining his overall priorities, Barr noted his preference for a “risk-focused” regulatory capital framework, but said that non-risk-based approaches, including leverage ratios, “also serve an important role in this framework. He also advocated for tiered requirements for firms as they increase in complexity and systemic importance. Turning to resolvability, he signaled that the Fed would begin “looking at the resolvability of some of the other largest banks as they grow and as their significance in the financial system increases.”
Barr also touched on several other priorities, including reviewing the Fed’s existing guidelines for mergers and acquisitions and supporting responsible innovation while balancing risk. Regarding digital assets, he emphasized that “banks engaged in crypto-related activities need to have appropriate measures in place to manage novel risks associated with those activities and to ensure compliance with all relevant laws, including those related to money laundering,” and also expressed the view that “Congress should work expeditiously to pass much-needed legislation to bring stablecoins, particularly those designed to serve as a means of payment, inside the prudential regulatory perimeter.”