Four Questions for Michael Barr
Questions on Ripple, China, supervisory ratings and Federal Reserve Board discretion
Now that his nomination has been officially sent to the Senate, the Senate Banking Committee will soon consider the nomination of Michael Barr, President’s Biden’s pick to serve as the Federal Reserve Board’s Vice Chair for Supervision. Here are four questions for Professor Barr.1
Question One: From 2015-2017 you served on the Advisory Board of Ripple Labs, Inc. The SEC alleges that during the time you were on the Advisory Board Ripple Labs was engaged in an illegal offering of a digital asset known as XRP, which the SEC believes is a security under the federal securities laws. Do you agree with the SEC that XRP is a security? If not, why not? More generally, do you agree with SEC Chair Gensler that the test for whether a digital asset is a security is “well-settled” and “clear”?
Context for this question: Just before Christmas in December 2020, the SEC sued Ripple and two Ripple executives, alleging that “[f]rom at least 2013 through the present” Ripple was engaged in an illegal unregistered offering of XRP. Ripple is vigorously contesting the charges in court (things are going “exceedingly well,” they say) and there has yet to be a ruling on the merits.
If confirmed, Professor Barr would have an important role to play in determining (parts of) the regulatory framework applicable to digital assets,2 but would not directly play a role in determining whether a given digital asset is a security, at least for purposes of the federal securities laws.
As for whether Professor Barr’s previous affiliation with Ripple can be used to make predictions one way or the other as to his views on crypto regulation more generally, that seems like a risky endeavor.3
Question Two: Russia’s illegal invasion of Ukraine has had devastating effects for the people of Ukraine. The invasion has also done damage to the global economy and, less importantly but still noteworthy, may lead to hundreds of millions or even billions of dollars of losses for banking organizations with operations or other investments in Russia. Although the invasion has been widely condemned, Russia has drawn support from some countries, including from the government of China. If China were to be cut off from the global economy in the way that Russia is now, banking organizations with investments or operations in China could face enormous losses. Moreover, it is the position of the United States government that the government of China has committed “genocide and crimes against humanity” in Xinjiang. Why, then, are U.S. banking organizations permitted to continue to invest in China? At a minimum, shouldn’t such investments be subject to additional scrutiny, rather than, as is sometimes the case, requiring only an after-the-fact notice?
Context for this question: U.S. banking organizations have continued to signal their deep desire to expand in China regardless of circumstance, including by acquiring majority or even full ownership of certain joint ventures in which they previously held only a minority stake.
A U.S. banking organization investing overseas may have multiple authorities available to it, including among others Section 4(k) of the Bank Holding Company Act and, separately, the Federal Reserve Board’s Regulation K. Whether such investments require prior Federal Reserve Board approval can depend on a number of factors, including the size of the acquisition, the activities of the target and the supervisory status of the acquirer. Even when prior approval or non-objection is required, public disclosure of this usually comes in the form of a line in the Board’s weekly H.2 report, rather than in the form of a public Board order setting out a detailed analysis of the proposal.
The Federal Reserve Board is required by law, “at least once every five years,” to review and revise its rules governing certain overseas investments by U.S. banking organizations. The last time the Board completed a comprehensive review of Regulation K was twenty-one years ago, but a long overdue update is understood to be in the works.4
Question Three: In a 2005 law review article you defended the Community Reinvestment Act against various criticisms. For example, responding to claims that CRA decisions can be arbitrary or lack accountability, you pointed out that banks’ CRA ratings are public, and thus “can be subjected to analysis and compared to other CRA reviews by the same and other bank agencies, both as to individual institutions and across the country.” This, you wrote, increases accountability and minimizes the opportunities for abuse. To what extent does that reasoning apply outside the context of the CRA? Should a bank’s other supervisory ratings be public, too?
Context for this question: Other than its CRA rating, a bank’s supervisory ratings are generally confidential supervisory information, with criminal penalties for disclosure. The same holds true for ratings assigned at the holding company level. The degree of secrecy involved in bank supervision has many critics but also many defenders, and whatever his personal views might be I would not expect Professor Barr to meaningfully seek to change the status quo. It is mildly interesting, though, that over in the House Representative Waters and her committee have drafted a bill that would require the public disclosure of G-SIB supervisory ratings.5
Question Four: In an appearance before this committee in 2015, you described the Dodd-Frank Act as reflecting a decision by Congress that the Federal Reserve Board in many instances “had too much discretion,” and you praised Dodd-Frank’s “wise choice” to "rein[] in” the Board’s discretion in various respects. Are there any areas in which you believe the Board still has too much discretion? What about areas where you think more discretion would be appropriate?
Context for this question: This quote from Professor Barr comes from an exchange with Senator Warren, in which she asked whether, if Congress were to raise the threshold for applying enhanced prudential standards from $50 billion “to $250 billion or $500 billion…but gives the Fed discretion to impose tougher standards on banks below the threshold” the Fed would be likely to exercise that discretion. Professor Barr replied that he “worr[ied] about whether they would, in fact, do that.”
Were Professor Barr’s worries warranted? It’s debatable. The threshold for applying enhanced prudential standards was ultimately raised by Congress to $250 billion, with it left to the discretion of the Federal Reserve Board whether to apply enhanced prudential standards in the $100 billion to $250 billion range. The Board did in fact do so, but not to the extent that some would have liked. In addition, using discretion granted (mandated?6) by Congress, the Board also tailored the stringency of certain enhanced prudential standards as applied to firms in the >$250 billion range.
Tomorrow: Four more questions
Up-front disclosure: I believe Professor Barr is a fine choice for the role, and don’t find the criticisms from either the left or the right to be overly compelling. These questions are not intended to be either gotchas or softballs, but instead are just things I find interesting without necessarily believing that they are either the most important topics to cover or the most likely topics to be covered.
In particular, compared to what Professor Barr is likely to hear from the Democratic side, these questions are probably light on questions related to climate, the agencies’ proposed revisions to their Community Reinvestment Act regulations (which will have been released by the time the hearing comes around), and other consumer protection issues (e.g., overdraft fees). From the Republican side, I would expect to hear questions from Senator Toomey on the Orderly Liquidation Authority, from Sen. Lummis on master account access, and potentially a few more general questions relating to Professor Barr’s support for policies that, according to Republicans, have contributed to elevated inflation.
For example, the federal banking regulators announced late last year that during the course of 2022 they intend to “provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible.”
To be clear, though, I have no information to indicate that the rules regarding investments in China (or any other specific country) are a subject of the review.
Consumer compliance ratings would be disclosed to the public following each examination, while other supervisory ratings would generally be disclosed with a 2-year lag, unless the banking agency determines that earlier disclosure would be in the public interest and would not negatively affect the safety and soundness of the institution concerned. A different provision of the bill also would require the disclosure of historic G-SIB supervisory ratings dating back to 2000.
Prior to 2018, the Dodd-Frank Act said that the Federal Reserve Board when prescribing enhanced prudential standards “may” differentiate between companies, either individually or by category, by taking into consideration their riskiness, complexity, activities and other factors. The EGRRCPA revised “may” to “shall,” sparking much debate on the import of the change. Professor Barr for his part accused Congress of “handing large banks a litigation tool” against stricter standards.