Explainer-Michael Barr Faces Long To-do List As The U.S. Fed's Next Wall Street Cop

U.S. President Joe Biden on Friday said he would nominate former Treasury official Michael Barr to be the Federal Reserve's Wall Street cop, replacing Sarah Bloom Raskin, who withdrew in March after failing to win support from moderate Democrats.

Currently a professor at the University of Michigan Law School, Barr was a central figure at the Treasury under President Barack Obama when Congress passed sweeping reforms following the 2007-09 financial crisis.

Here is the regulatory agenda that Barr will have to tackle if he wins Senate approval:

DE-REGULATION REDUX?

Randal Quarles, the previous Fed Vice Chair for Supervision, led a review of post-crisis regulations, arguing they were too blunt and onerous. Democrats accused Quarles of saving Wall Street billions of dollars while increasing systemic risks, and they want the Fed to revisit some of those changes.

Among the most contentious were revisions to the "Volcker Rule" curbing speculative bank investments; scrapping a requirement for big banks to hold capital against certain swap trades; and stripping the Fed of its power to fail banks on their annual "stress tests" based on subjective concerns.

Barr will have to decide carefully which of these he believes he can reverse, given such changes are likely to be contentious and time-consuming.

CLIMATE CHANGE RISKS

Climate change, a top policy priority for Democrats, is expected to rapidly rise on the Fed agenda.

So far, the Fed has asked lenders to explain how they are mitigating climate change-related risks to their balance sheets, with the industry expecting to progress to a formal climate change scenario analysis in 2023, Reuters has reported.

Those projects are expected to accelerate. The big question will be whether the Fed pushes for restrictions or stiffer capital requirements on banks with significant exposures to polluting industries or other climate-specific risks.

Fed officials may end up treading more carefully than progressives had hoped, as Raskin's nomination was ultimately sunk by concerns she would push too aggressively on climate risk.

BANK M&A

The Fed's position on bank M&A is expected to become tougher under a new supervision chief. Progressive Democrats generally oppose bank tie-ups, arguing that they reduce competition and hurt consumers, and many deals were delayed after Quarles stepped down from the supervision role in October.

Some pending deals have been approved following Fed Chair Jerome Powell's renomination, but the industry is still waiting for the Fed and the Justice Department to decide on a potential new policy for bank deals. If confirmed, Barr is expected to lead the committee that scrutinizes potential tie-ups.

FINTECH FRAMEWORK

The Fed is also expected to tackle a regulatory blueprint for "fintech" companies that are quickly chipping away at the traditional financial sector.

It's exploring how banks intersect with fintechs, particularly with smaller lenders that may outsource more services and infrastructure. Fintechs are also lobbying the Fed for access to its payments system.

While other banking regulators have worked for years to bring fintechs under their regulatory umbrella, the Fed has resisted, fearing doing so could create systemic risks. But as the sector continues to balloon, the Fed is expected to act.

SUPPLEMENTARY LEVERAGE RATIO

Another issue on the table is the supplementary leverage ratio, a rule created after the decade-ago crisis requiring banks to hold capital against assets regardless of their risk.

The Fed had to temporarily ease that rule in the midst of the pandemic as a glut of bank deposits and Treasury bonds drove up bank capital requirements on what are viewed as safe assets.

Despite intense bank lobbying, the Fed let that relief expire but promised to review the overall rule. The Fed has yet to publish a proposal.

COMMUNITY REINVESTMENT ACT

The central bank will also play a key role in a long-awaited overhaul of the Community Reinvestment Act (CRA) rules, which promote lending in lower-income communities.

The Fed, which shares responsibility for writing the rules with other bank regulators, hopes the CRA can be updated to reflect the growth in online banking, while still ensuring lenders make meaningful contributions to the poorer areas they serve.

Barr would likely have to be in place before the Fed could sign off on the changes.

(Editing by Michelle Price and Hugh Lawson)