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Unveiling the Force Behind Big Banks’ Fear

Yelling at Michael Barr, the Federal Reserve’s top banking regulator, has never been particularly effective, according to his friends and co-workers. Regardless, America’s biggest banks, their lobbying groups, and even some of his own colleagues have reacted with incredulity and outrage to his proposal to tighten and expand oversight of the nation’s large lenders.

Kevin Fromer, the president of the Financial Services Forum, stated that there is no justification for significant increases in capital at the largest U.S. banks in response to the proposal. The draft rules released by regulators, led by Mr. Barr, would require banks to have more easily accessible money, potentially impacting their profits.

Even before the release of the proposal, rumors about its contents sparked a lobbying blitz. Lobbyists from Bank of America and banks including BNP Paribas, HSBC, and TD Bank descended on Capitol Hill. Lawmakers sent letters expressing concern to the Fed and questioned its officials about the proposal.

Trade group Bank Policy Institute launched a national ad campaign demanding answers on the Fed’s new capital rules, and multiple trade groups, including BPI, prepared to sue over the proposal, alleging that the Fed violated the law by relying on undisclosed analysis.

Even some of Mr. Barr’s colleagues at the Fed have opposed the proposed changes. Two of the Fed’s seven governors, appointed by former President Trump, voted against the changes, indicating discord within the consensus-oriented institution.

“The costs of this proposal, if implemented in its current form, would be substantial,” said Fed governor Michelle Bowman, a frequent critic of Mr. Barr.

The proposal aims to tighten regulations for both large banks and their slightly smaller counterparts, marking the completion of a process started after the 2008 financial crisis and a response to recent bank failures.

If adopted, the proposal would raise capital requirements for the eight largest banks to around 14 percent on average, up from about 12 percent. It would also increase oversight for banks with over $100 billion in assets, prompted by the collapse of Silicon Valley Bank earlier this year.

Mr. Barr, known for his mild-mannered demeanor, was expected to be tougher on banks than his predecessor, given his nomination by the Biden administration and the Democratic party’s support for tighter financial rules.

As a former top Treasury official, Mr. Barr helped design the Obama administration’s regulatory response to the 2008 financial crisis and negotiated the Dodd-Frank law. However, some progressive groups opposed his appointment to various positions in the past, citing concerns about his centrist approach.

The proposal has surprised Wall Street, as banks expected the U.S. version of global banking rules to be similar, if not more lenient. However, rumors of a tougher approach emerged earlier this year, reinforced by the collapse of Silicon Valley Bank and other regional lenders whose rules had been relaxed under the Trump administration.

In response to the collapse, Mr. Barr conducted an internal review and concluded that the regulatory standards for Silicon Valley Bank were too low. Despite some pushback, the momentum for tighter regulation continued.

When the proposal was finally released, banks and their allies’ concerns became evident. The plan includes measures to prevent banks from manipulating their own assessments of operational risks and pushes them to hold more capital. Additionally, large banks would need to treat certain residential mortgages as riskier assets, drawing concerns from progressive Democrats and fair housing groups.

Representative Andy Barr, a Republican, criticized aspects of the proposal for going beyond international standards and lacking a clear cost-benefit analysis.

While Mr. Barr has supporters who view him as collaborative and willing to listen, others feel that he is being obstinate. Banks believe that he is the decision-maker without many alternatives.

Bank CEO Andrew Cecere describes Mr. Barr as collaborative and attentive. However, the Fed declined to comment on the matter.

There is speculation about potential changes to the proposal before it becomes final. Banks have until November 30 to offer suggestions. Colleagues who worked with Mr. Barr during the 2008 financial crisis reshaping expect him to be open to negotiation but firm on essential aspects.

Despite his previous reputation for mildness, Mr. Barr has exhibited a tougher stance. Economists who previously questioned his willingness to go after the industry now have a more positive view of him.

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