Barr: Fed to pursue debt requirements for large banks

The Federal Reserve will propose a long-term debt rule for large banks that are not globally systemic important banks, which will require the institutions to maintain a cushion of loss-absorbing resources to support stabilization and allow for resolution in a manner that does not pose a systemic risk to the overall financial system, Federal Reserve Vice Chairman for Supervision Michael Barr said today.

In prepared testimony released ahead of two congressional hearings this week on the recent bank failures, Barr called the bank’s closure “a textbook case of mismanagement.” But he noted that he is overseeing a review of how regulators handled the situation, which will be made public by May 1. “In our review, we are focusing on whether the Federal Reserve’s supervision was appropriate for the rapid growth and vulnerabilities of the bank,” he said. “While the Federal Reserve’s framework focuses on size thresholds, size is not always a good proxy for risk, particularly when a bank has a non-traditional business model.”

Barr said it is critical that regulations to implement the Basel III endgame reforms, “which will better reflect trading and operational risks in our measure of banks’ capital needs.” He also said that last year, the Fed issued an advanced notice of rulemaking on whether a long-term debt requirement was needed for large banks that were not globally systemic. It plans to pursue that proposal.

“We will need to enhance our stress testing with multiple scenarios so that it captures a wider range of risk and uncovers channels for contagion, like those we saw in the recent series of events,” Barr added. “We must also explore changes to our liquidity rules and other reforms to improve the resiliency of the financial system.”