Update 609 — Raising the Barr:
Vision Behind Fed’s Supervision
For the first time since its creation 12 years ago, the Federal Reserve’s Vice Chair for Supervision position will be filled by a Democratic nominee. Yesterday, Senate Banking held a confirmation hearing for Michigan Law Professor Michael Barr, an architect of Dodd-Frank, the law that established the post.
The prospect of his confirmation brings some of the original vision behind Dodd-Frank full circle. The hearing made it clear that President Biden’s second nominee for the position has bipartisan support. Barr made a commendable pledge to avoid any revolving doors for four years after his Fed service and held his own in a discussion of bank lending rules, among many issues. Below, we review the hearing and the agenda ahead for the position.
Good weekends all,
Alongside two nominees for the Securities and Exchange Commission, Professor Michael Barr testified before the Senate Banking Committee following his nomination to the Vice Chair for Supervision role. Barr is President Biden’s second nominee for the position after the previous nominee, Sarah Bloom Raskin, was blocked from the role. Barr held his own during the hearing and broadly contoured what his agenda will be for the position.
The Vice Chair for Supervision serves as one of the nation’s leading bank regulators. Created through the Dodd-Frank Act – which Barr helped author – the position oversees the financial sector and helps mitigate risk from causing another financial crisis. The Vice Chair for Supervision must maintain a dutiful eye on metrics such as capital liquidity, concentration, as well as a range of risks from bank runs to cryptocurrencies. Barr would be the first Democrat to hold the position, as it was held open until President Trump nominated Randal Quarles to the role in 2017, seven years after the role was established.
Confirming Barr is a top priority for Democrats and progressive financial regulatory policy advocates. Despite some historical disagreements with Barr, progressives acknowledge this may be Democrats’ last shot to confirm someone to the Vice Chair for Supervision role before the midterms. And Democrats don’t want to leave an important vacancy just in case Republicans take control of the Senate or all of Congress.
Final Fed Board Hearing for Now
Despite Republican efforts, Barr remained composed during the hearing. His opening remarks laid out what his priorities would be if confirmed. Barr highlighted the necessity of sound financial regulatory policy and a strong response to inflation. Barr further noted his commitment to allowing innovation to flourish with strong rules of the road.
Republicans tried to pin Barr down by bringing up his criticism of the Trump-era Senate Bill 2155 that deregulated portions of the financial industry and previous comments about climate change posing a threat to the financial system. Democrats rallied around Barr and noted the critical role he will play in ensuring our financial system remains safe and fair. Democrats brought up Barr’s experience with financial regulatory policy including his role in the Obama White House and involvement in developing the Dodd-Frank Act.
Some key highlights from the hearing:
- Barr reasserted his commitment to the Federal Reserve’s independence and acknowledged the limits of the central bank’s power when it comes to the allocation of capital as it relates to climate change.
- Barr confirmed he is in favor of a multi-tiered approach to tailoring bank regulations dependent on the size and risk of institutions.
- Upon being asked about his financial investments in cryptocurrency companies, Barr pledged to not seek employment or compensation at a company that has a matter before the Fed or any financial services company for four years after service at the Fed.
- Barr acknowledged the need to regulate cryptocurrencies and provide rules of the road, especially as the Fed considers developing a central bank digital currency.
The bipartisan pair of SEC nominees, Jaime Lizárraga and Mark Uyeda, did not receive nearly the same attention as Barr, but neither was expected to be controversial. Lizárraga comes from Speaker Nancy Pelosi’s office and Uyeda is a career attorney with the SEC currently on detail with the Senate Banking Committee Republican staff. All three nominees are expected to receive bipartisan support in their committee and floor votes, a marked change from the vitriolic hearing Raskin faced only a couple of months ago. While the GOP would have other druthers, Barr remains uncontroversial and experienced to dissuade another blockade by the Committee minority.
Progressive Agenda, Barr None?
Professor Barr is expected to join the rest of the Fed Board within a few weeks. Senator Manchin’s endorsement of Barr reinforces the likelihood that Barr already has 50 votes to proceed. When Barr joins the Board, the immediate challenge is inflation. The Fed has already been acting aggressively to tackle inflation with a series of interest rate hikes and balance sheet reductions throughout the spring and summer. Barr’s addition to the Board will reinforce the current trajectory of monetary policy. In addition, financial regulation can be added as a priority once more when Barr is confirmed.
Barr’s extensive experience with financial regulation will help not only bring financial regulatory policy to the top of the agenda but also inform sound policy development and implementation. On traditional systemic risks, he will be a stalwart ally of progressive banking regulators. He will help rein in industry and bring back much-needed prudential oversight and supervision. Given the recent turmoil in financial markets, Barr will have a large role to play in ensuring our financial system is safe and mitigating risk. Among the first steps Barr will likely take will be to roll back the Trump-era deregulatory policy implemented under former Vice Chair for Supervision Randal Quarles.
After rolling back Trump-era policy is handled, Barr will be able to move onto a more proactive agenda. Beyond providing oversight to the financial system and ensuring large institutions are not generating excessive risk, Barr will have the ability to address a litany of issues, particularly emerging risks. Cryptocurrencies, climate change, and cybersecurity are all topics that have emerged as important areas in financial regulatory policy debates. While other agencies have started addressing these risks, a Federal Reserve with a focused Vice Chair for Supervision will be crucial in limiting risks in these areas. A fully-confirmed Fed Board will be an integral part of addressing financial regulatory gaps while keeping the recovery on track.
Elsewhere, Vacancies Loom
- The Office of Financial Research (OFR) is without a confirmed director. Currently, James Martin is Acting Director after Dino Falaschetti left earlier this year. Falaschetti’s time at OFR has eroded what was originally intended for the office in the Dodd-Frank Act. OFR’s research is critical to providing data and background to regulatory agencies to combat systemic risk. Under Trump, the office endured staffing and budget cuts, limiting its efficacy. President Biden should reverse these degradations of OFR, by restoring its budget and staff and nominating a savvy director to lead the office.
- The Comptroller of the Currency post remains open after Professor Saule Omarova’s nomination fell through last year. Omarova’s progressive views and academic writings on financial policy led her to be the subject of an unusually intense, xenophobic opposition campaign led by the banking industry, dooming her nomination. This office has been without a confirmed leader since May 2020, currently being led by Michael Hsu as the current Acting Comptroller of the Currency. This critical bank regulator position needs permanent leadership to ensure proper oversight of banks.
- Federal Deposit Insurance Corporation is without a Vice Chairman. After Chair Jelena McWilliams resigned in February, Vice Chairman Martin Gruenberg became acting chair. As a Trump appointee, McWilliams’s resignation gave Democrats more control in the FDIC. However, the Vice Chairman position would have to be fulfilled by a Republican to maintain balance on the board. If Biden decides to fill this position, he should look for a moderate Republican.
Democrats are close to rounding out the Federal Reserve Board of Governors and SEC, providing two critical financial regulatory agencies with leadership. The White House and Senate have little time to move quickly on the remaining vacancies before… need we say? But it starts and ends with midterms.