Fed's Barr working with Powell to find consensus on Basel III

Al Drago/Bloomberg

The Federal Reserve's top regulator said he's collaborating with other board members to come up with fixes for their proposed capital reform package. 

During a Friday afternoon speaking engagement at the University of Michigan, Fed Vice Chair for Supervision Michael Barr discussed the so-called Basel III endgame, which he said had sparked "lots of controversy" in the banking sector. 

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Barr said the Board of Governors has seen the 400-plus comments — most of which are critical of the framework's calibration — and is in the process of making corresponding changes.

"We're working very hard to see what that will look like," Barr said. "I'm working very closely with Chair [Jerome] Powell and other members of the board of governors to reach a consensus."

Earlier this month, during testimony in front of the House Financial Services Committee, Powell told lawmakers that "broad and material" changes were coming to the proposed rule, noting that he was open to issuing an entirely new proposal, should significant modifications be needed. Powell has also emphasized the importance of building consensus through the rulemaking process. 

Barr said the board has "some ideas" about how it will amend the proposal, but said it would need more time to settle on a course of action.

During the Michigan event, Barr discussed a wide range of topics, including bank liquidity, distress in the commercial real estate sector and the Fed's independence. 

Liquidity

Officials from the Fed and other regulatory agencies have promised to introduce changes to liquidity requirements at some point this year. On Friday, Barr said one area of focus is how to treat assets on a bank's balance sheet that have not been designated as available for sale.

"We're looking at what are the right kinds of assumptions banks should have about taking held-to-maturity securities and converting them into cash," Barr said.

He also noted that the Fed is continuing to encourage banks to make sure they are ready to borrow from the central bank's emergency lending facility, the discount window.

"The message we want to convey is that it is okay to use the discount window," Barr said. "We want to get rid of that stigma because if banks feel that stigma they might be less likely to use the discount window when they need it."

Since last year's bank failures, Barr said the Fed has seen nearly $1 trillion of new assets pledged to the discount window, bringing the total amount of ready collateral at the facility to roughly $3 trillion. 

Commercial real estate risks

Barr called the distress in the commercial real estate sector an "old school risk," one that is significant but manageable. 

Barr warned observers not to view the commercial real estate lending space as a monolith, noting that while offices in some major cities are under stress — due to plummeting post-pandemic occupancy levels and rising interest rates — other types of commercial property are continuing to perform well. He cited hotels, apartments and senior living facilities as subsectors of strength. 

"When people talk about commercial real estate risk, it's really important to think about the heterogeneity of those risks and their distribution throughout the banking system," he said.

Central bank independence

Barr defended the Fed's position as an independent agency, one that is overseen by Congress but able to set its own agenda and craft its own policies, which he said has served the institution and the nation well.

"We don't talk about politics, we don't make decisions based on politics, that's really important for our credibility," he said. "That's true of monetary policy, it's true of supervision of regulation, and it's true of our oversight of the payments system."