Michael Barr's Fireside Chat
Opportunity for comment on QIS results, a signal about the BTFP, and the Fed's supervisory approach
Today Federal Reserve Board Vice Chair for Supervision Michael Barr attended an event held by Women in Housing and Finance. The event was promoted as featuring “a wide-ranging fireside chat that may address issues including consumer credit, bank supervision, DEI issues, capital issues, bank regulation, and women in the marketplace/financial services area.”
The discussion was indeed wide-ranging,1 but this post highlights three brief exchanges I thought were particularly interesting.
Public Comment on Summary of Quantitative Impact Study
Around three months after the Basel Endgame proposal was released in July, the Federal Reserve Board “launched a data collection to gather more information from the banks affected by the large bank capital proposal.” The submission deadline for the data collection is January 16 - the same date as the deadline for comments on the proposal.
A natural question, then, is what exactly the Board intends to do with the data it receives. Vice Chair for Supervision Barr today indicated that the public will have a chance to comment, in some form, on the results of the data collection before the Basel Endgame rule is finalized.
Vice Chair for Supervision Barr: So we’re going to collect that information. That information is coming in to us at the same time as the end of the comment period. And then we’ll analyze that information and, on an aggregated basis, we’ll publish that information, give people a chance to comment, in effect, on the impact itself. And that is an important part of the input that we get as part of the proposed rulemaking process. … It will feed into how we develop the final proposal.
Moderator: So the public will have an opportunity to get a summary of the Quantitative Impact Study before the rule is finalized.
Vice Chair for Supervision Barr: That’s right. It’s not the Quantitative Impact Study itself, it’s our analysis.
Moderator: Your analysis of it.
Vice Chair for Supervision Barr: It would be public and people would be able to comment on it.
The conversation then moved on, and there was no indication in today’s discussion as to what date the Board is targeting for publishing this summary (or what date the agencies are targeting for a final rule).2
Future of the Bank Term Funding Program
Much later in the conversation, Vice Chair for Supervision Barr was asked about the Bank Term Funding Program, which was introduced by the Federal Reserve Board (with the approval of Treasury) last year and is currently set to expire March 11, 2024.
Vice Chair for Supervision Barr did not say this explicitly, but I do not think it is much of an overreading of these comments to say that, if banking sector conditions stay as they are, the BTFP is unlikely to be extended.
Moderator: I wanted to ask you about the future of the [BTFP]. We are rapidly approaching the one-year mark, is this something where the Fed is planning on extensions, or any information to be released to the public on usage?
Vice Chair for Supervision Barr: … So when the funding stress happened in March 2023, over the weekend the Federal Reserve, FDIC and Treasury agreed to a systemic risk exception to least cost resolution for the FDIC. And the Federal Reserve and the Treasury worked together to create an emergency lending program for banks and credit unions, the Bank Term Funding Program that you are referencing. And the Bank Term Funding Program enables banks to use collateral that was in place as of that time - as of March of 2023 - that is, essentially Treasuries and agency mortgage backed securities, to pledge those, and to be able to get borrowing against that up to a year at the par value of those securities.
That program was really designed in that emergency situation. It was designed to address what in the statute is called unusual and exigent circumstances - you can think of it as an emergency. It was designed for that emergency to say, we want to make sure that banks and creditors of banks and depositors of banks understand that banks have the liquidity they need. And that program worked as intended. It dramatically reduced stress in the banking system very, very quickly. And deposit outflows which had been very rapid in that short period of time normalized to what had been going on before and in fact maybe flattened out to some extent a little bit.
So that program was highly effective, banks and credit unions are borrowing under that program today, but it was really set up as an emergency program. It was set up with a one-year timeframe and so banks can continue to borrow now, and all the way through March 11 of this year. So a bank could continue to borrow or refinance under the program and in March of this year have a loan that then extends to March 2025.
So I expect continued usage until that end date of March 11, but it really was established as an emergency program for that moment in time.
The Board’s Supervisory Approach
During the audience Q&A portion of the event, an attendee asked Vice Chair for Supervision Barr if he could “speak to how the supervisory posture of the Fed has shifted since SVB” and “speak to the magnitude of downgrades to individual banks.”
While not really engaging, for understandable reasons, with the second half of that question, Vice Chair for Supervision Barr answered the first part in a way consistent with what public reporting has suggested.
Vice Chair for Supervision Barr: We’ve been paying a lot of attention over the last several years to issues of interest rate risk and liquidity risk, but those became very acute in March 2023. So it is the case that supervisors are wanting to make sure that banks are appropriately managing interest rate risk, appropriately managing liquidity risk, and are acting promptly when they are faced with those risks to make sure that those are addressed in a prompt fashion.
It is the case in general that whenever you have stress in the banking system, or you have stress in the economy, supervisors tend to want to make sure that banks are acting promptly on those sets of risks. So you see that reflected in the supervisory experience, you see that reflected in the data we publish in our supervision report, and I think that means that supervisors are doing what we want them to do. Which is making sure that they are paying careful attention to risks in the banking sector.
In addition to what is discussed in this post (and among several other topics covered), there were a couple of questions on the Basel Endgame proposal’s approach to operational risk and, unsurprisingly given the audience, questions about the proposal’s potential impact on housing, mortgages, MSRs and so on. Vice Chair for Supervision Barr’s responses to the questions produced a few flash headlines, but I did not understand him as saying much that is new on these points — stressing that the proposal remains open to comment, that the Board really values getting feedback, etc.
Vice Chair for Supervision Barr did say, much later in the event, that the agencies “look forward to finalizing this year” their separate long-term debt rule which is also out for public comment.