Michael Barr has a lot to do and little time to do it.
His term as vice chair for supervision at the Federal Reserve ends in 19 months. Before then, he hopes to change liquidity standards, require more banks to issue long-term debt and rewrite the capital framework for the nation's largest banks.
With President-elect Donald Trump poised to usher in a new era of deregulation next month, Barr will have a hard time dictating the terms of any of these initiatives.
Instead, Barr could finish his term with few meaningful policy reforms to his name — consumer advocates and banking allies are displeased with the time and resources committed during the past two years just to maintain the regulatory status quo.
This animus was on display last month during a routine oversight hearing by the House Financial Services Committee. Rep. Zach Nunn, R-Iowa, chastised Barr for his "leadership — or lack thereof" on regulatory pursuits, while Rep. Stephen Lynch, D-Mass., accused him of "buckling … to what the banks wanted."
Barr understands that fielding such criticism is part of his job description. As vice chair for supervision, he is responsible for the Fed's supervisory and regulatory activities. And when it comes to rulemaking processes — even the messy ones that have defined his vice chairmanship — he is focused on picking up signals about needed policy tweaks, not the noise around them.
"I have a tough job," Barr told American Banker in a recent interview. "I took it on with my eyes open, and I spend my time thinking about how to make the world a little better, and I don't think about [the noise]. It's just not worth it."
Barr is a two-time veteran of the Treasury Department, having served under Presidents Bill Clinton and Barack Obama. He taught financial regulation and ran the public policy school at the University of Michigan. He literally
"I've been in this field for 30 years, and my record is very clear and well known to everybody. My job is to help make the banking system safer and fairer, to help make it work better for everyday Americans," Barr said. "That's what people expected of me, and that's what I'm trying to deliver."
But, in light of this expertise and acumen, Barr's lack of success at the Fed has come as a shock to regulatory analysts and academics.
"Michael Barr is a brilliant scholar of banking. He's a determined and seasoned public servant. He really did look, in many ways, like the Democrats' version of [former Vice Chair for Supervision] Randy Quarles," said Peter Conti-Brown, a leading Fed scholar and legal studies professor at the University of Pennsylvania's Wharton School for Business. "He has not succeeded in redefining the regulatory landscape during his time in office, and I don't have a good explanation for why that is."
Indeed, Barr's struggles defy tidy explanation. Rather, a confluence of factors have made for a challenging policymaking environment. These include legal and political developments, stark ideological differences among agency officials and a banking scare early in his tenure. Such obstacles could have been difficult for anyone in Barr's position to negotiate, but his own strategic moves did him no favors.
Unpacking each of these components might not yield a clear verdict as to why the regulatory landscape looks the way it does. But it can provide insights into the limitations of the vice chair for supervision role itself, and what Barr might be able to do with his remaining time in that role. Though he will be left to pursue his agenda as one of the last remaining Biden regulators in Washington, he's not ready to throw in the towel.
"I'm used to needing to work with people who disagree with me. That's sort of what I've done my whole life," Barr said. "I'm not saying that they're going to agree to what I want, I'm saying that I think that I can work with them on a package that is mutually acceptable, that moves us forward."
Capital miscalculations
The reforms Barr championed — alongside Federal Deposit Insurance Corp. Chair Martin Gruenberg and acting Comptroller of the Currency Michael Hsu — proved to be overly ambitious, insufficiently explained, poorly crafted and politically unpopular.
This was most evident in the agencies' attempt to implement the international regulatory accord known as the Basel III endgame, the initial proposal of which would have dramatically altered the way risk-based capital standards are set for banks with at least $100 billion of assets and increased capital requirements for the nation's largest lenders to an estimated 19%.
The proposal stems from an agreement struck by the Basel Committee on Banking Supervision in 2017, which
But Karen Petrou, managing partner of Federal Financial Analytics and a leading expert in regulatory policy, said the U.S. proposal put forth last year was simply too flawed to be codified.
"The fundamental reason why the endgame capital rules and other priorities never advanced is that they were a combination of intensely technocratic detail combined with overarching, often inexplicable purposes, such as simply significantly raising capital requirements," Petrou said. "Proposals like that, with so many technical flaws and inconsistencies combined with controversial objectives, almost always fail. It is a very poor approach to federal rulemaking."
The Basel endgame drew opposition from the banking industry, including a high-priced lobbying campaign and threats of litigation. Barr's effort to salvage the proposal has dominated much of his time and stymied the rest of his regulatory agenda.
Barr's supporters say the irregularity that derailed not only the Basel endgame but the totality of his reform push was the banking industry's response to the proposal rather than the policy of raising bank capital it embodied.
Jesse Van Tol, head of the National Community Reinvestment Coalition, said Barr and his fellow regulators would have likely seen intense pushback from banks on any attempt to implement the Basel endgame. He pointed to court rulings that have made it easier for companies and industries to successfully sue their regulators as the impetus for the changing tenor of bank opposition.
"We have seen the banking lobby, empowered by
Bankers and industry representatives have cast their litigiousness in a different light. JPMorgan Chase CEO Jamie Dimon, speaking at the American Bankers Association's annual
"Banks are under such pressure, and a lot of banks — the truth is — are unwilling to fight with regulators because they'll come after you. It's gross. Time to fight back," Dimon said. "We don't want to get involved in litigation just to make a point, but I think if you're in a knife fight, you better damn well bring a knife, and that's where we are."
Bankers were not the only ones crying foul over the rules. Members of the Fed Board of Governors and directors at the FDIC were also vocal about their concerns. But the existence of that internal dissent appears to have been more meaningful for Barr than his counterparts.
David Zaring, a legal studies professor at Wharton, said Barr's tenure has demonstrated the practical shortcomings that come with his role.
"It looks like the vice chair for supervision has the power to set the agenda — and that's important — but not the right to expect deference from the other members of the board of governors," Zaring said.
The Basel endgame proposal passed by a vote of 4-2 in an open Fed board meeting in July 2023, but two of those yes votes came with significant caveats from the board's presidentially appointed leaders: Chair Jerome Powell and Vice Chair Philip Jefferson.
These dissents did not come as a surprise to Barr. He knew where his fellow board members stood before the meeting. At the time, he acknowledged that more information was needed to understand the implications of the proposal, which he described as an opportunity to "get more data and feedback and identify areas for refinement."
While not perfect, Barr said the proposal issued in July was the closest he could get to reaching full consensus among his board, the FDIC board and Hsu at the OCC.
"I did my best to find compromise between the Fed, OCC and FDIC on a path that could keep the process moving," Barr said. "The three agencies were able to support moving forward with public engagement through the comment process. Ultimately, the effort benefited greatly from that public engagement and analysis."
Issuing the proposal and getting public feedback provided a necessary — albeit humbling — moment of discovery for policymakers, Barr said. It also achieved his goal of bringing the long-anticipated policy change a step closer to fruition.
"I took my job as being moving the ball down the field, getting the job done," Barr said. "And to get the job done, to move the ball down the field, you've got to make a play. You have to get started. That's what we did with the proposal."
Despite the industry opposition to the proposal, some bankers are sympathetic to Barr's position. Fifth Third Bank CEO Tim Spence said he appreciates the way the vice chair has handled the issue.
"When it was created 15 years ago, Basel III was designed to cover more than two dozen countries with very different market structures. Implementation was bound to be complex and nuanced for anyone tasked with it," Spence told American Banker. "From the time he took it on, Michael Barr committed that the rulemaking process would be transparent, deliberative and subject to public comment. From my perspective, the Fed's handling of the process has been very consistent with that and demonstrates a willingness to consider industry feedback along with other affected stakeholders."
While Barr underestimated the level of pushback the proposal would receive and the time it would take to address it, he nearly succeeded in reproposing a scaled-down version of the capital plans.
In September, he gave a speech
Ultimately, the reproposal bid lost the support of Consumer Financial Protection Bureau Director Rohit Chopra, the third Democrat on the FDIC board alongside Gruenberg and Hsu. Chopra insisted on finalizing the revised framework to avoid the possibility of further rollbacks, something the Fed board would not support. With both sides unwilling to budge, the initiative collapsed.
Petrou said a fatal error among Biden-era regulators has been attempting to advance rule changes without incorporating opposing viewpoints. She said the agencies would have produced better policies if the comments of FDIC Vice Chair Travis Hill, FDIC board member Jonathan McKernan and Fed Gov. Michelle Bowman were incorporated into the proposal, rather than relegated to dissenting statements.
"They're often raising really sound points that don't undermine the overarching purpose of the proposal, but, in fact, would improve it," Petrou said. "The unwillingness to listen to reasoned voices is the most profound vulnerability of all in the last round of regulatory rulemakings."
Crisis management
Amid the recent political turmoil that has clouded Barr's regulatory pursuits, it is easy to forget the financial distress that defined his first months with the Fed.
Turmoil in the crypto sector began in May 2022 — before Barr was even nominated for his current role — with the collapse of the supposedly dollar-pegged token TerraUSD. That event dragged down its corresponding cryptocurrency, Luna, kicking off a chain of events that culminated in the demise of FTX — the second-largest crypto exchange in the world at the time — that November.
In early 2023, the reverberations of the nascent
Silvergate's wind-down coincided with an attempted capital raise by Silicon Valley Bank, another California institution that catered to the crypto, tech and venture capital industry and that was also dealing with an outflow of deposits. The capital raise failed, sparking a historic run on deposits, in which $40 billion was withdrawn in a single day.
On March 10, 2023, Silicon Valley Bank became the third-largest bank failure ever. Its demise sparked panic among depositors at similarly sized banks, including Signature Bank, which failed that same weekend.
Barr coordinated the Fed's response with the FDIC and Treasury Department. Together the agencies declared a systemic risk exemption, enabling them to backstop uninsured deposits at the failed banks. They also set up an emergency lending facility to bolster other institutions. As a result, the acute stress of the episode was limited and quickly faded from the public consciousness.
Whether the episode was handled in the optimal manner is a
"We could have faced broader contagion from Silicon Valley's failure, but in the end, it was a relatively orderly resolution … not without problems, but Michael navigated those and dealt with them," Van Tol said.
Christopher Brummer, a Georgetown University law professor, said crisis management is a seminal focus for Barr and other regulators of his generation whose early career experiences with the global financial crisis shaped their worldview.
"They're all very well aware of what happens when things go wrong, because they lived through it," Brummer said.
Within six weeks of the failure, Barr produced a report about what led to the collapse. It pointed to "textbook mismanagement" in forms of unhedged interest rate risks, liquidity issues, a lack of urgency from the banks' executives and weaknesses in the Fed's supervisory practices that predated his tenure.
The report also pointed to another shortcoming: capital.
Because Silicon Valley's issues were triggered, in part, by realized losses on its securities holdings, Barr argued that the event demonstrated that paper gains and losses on such assets should be factored into the capital requirement for more banks. Currently, most are exempted from this calculation. Banks have for the most part
The same cannot be said for Barr's other assertions, including that Silicon Valley Bank's failure demonstrated the need to finalize the Basel endgame implementation rules, and by extension a rollback of regulatory tailoring practices enacted during the first Trump administration that spared large but not systemically important banks from the most stringent regulatory treatment.
Banks and their allies have disputed this conclusion, arguing that Silicon Valley's downfall had little to do with capital and everything to do with the management and oversight of the bank.
Barr has since clarified that, other than the treatment of unrealized gains and losses — known as accumulated other comprehensive income, or AOCI — the Basel endgame was not meant
But he has not backed down from his stance that capital played a role in the failure. He also points to the ensuing stress as evidence that nonglobal banks can present stability risks to the financial system — a risk that he says is poorly addressed in the current regulatory framework.
"It's important to finalize the Basel process, to raise capital standards to a level playing field across the international system, and to take into account the risks that we saw from the global financial crisis that were not yet fully incorporated into our minimum requirements, as well as to reflect the lessons learned from March 2023," Barr
Politics matter
That hearing was likely the last time Barr, Gruenberg, Hsu and National Credit Union Administration Chair Todd Harper will appear together as regulators. Committee Chair Patrick McHenry, R-N.C., heralded the moment as the end of the "era of post-financial crisis regulation."
"It's clear our banking regulators under Democratic leadership have been busy fighting the last war," McHenry said. "It's clear our banking regulators, under Democratic leadership, are working in a different way than Hill Democrats are about these subject matters. Your backward-looking approach to regulations harmed our financial system innovation and consumers."
Though scarcely articulated so bluntly, the sentiment that Congress — and, by extension, the American electorate — has lost the appetite for getting tough on large banks, has emerged at various points during the past two years.
Moderate Democrats on the Senate Banking Committee such as Sens. Mark Warner of Virginia and John Tester of Montana joined Republicans in worrying openly about the unintended consequences of the Basel endgame. A few stalwart Democrats
Whether the memories of 2008 have faded or the solutions put forth by the agencies were simply deemed to be ill-suited for the current landscape is debatable, but in any event it seemed clear that the Basel endgame and other proposals lacked a strong constituency in Washington.
At the same time, Barr and his counterparts have received little direct policy guidance from Congress during the past two years. Key committees have taken up legislation about
This was not the case for the past two regulatory chiefs at the Fed, both of whom had success implementing substantial reforms at the central bank thanks, in part, to supportive laws.
Former Gov. Dan Tarullo is largely considered the prototype for the vice chair for supervision, given the role he played in reimagining the Fed's oversight mechanisms in the wake of the global financial crisis. Though never nominated for the role, as head of the Fed's supervision committee he was empowered by Dodd-Frank with a bipartisan mandate to fix the financial regulatory system. Similarly, Quarles — the first official vice chair for supervision — was supported by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, also known as S.2155, in his efforts to tailor Dodd-Frank regulatory standards to better account for smaller banks' smaller risks to the financial system as a whole.
Absent authorizing legislation and lacking a potent political constituency, it is unclear how much effort Barr dedicated to drumming up support for his policies beyond the confines of the Fed, the FDIC and the OCC.
"I can't tell how much political capital there was for someone who was not Michael Barr to pursue," Conti-Brown said. "I will say, however, that the vice chair for supervision in the future, both in the Trump administration and the future Democratic administration, must be a politician."
Conti-Brown said Powell is a model example of a politically savvy central banker, pointing to his practices of "wearing out the carpets on Capitol Hill" early in his tenure to build relationships. The Fed chair continues to meet regularly with lawmakers and has recently — in the face of threats to the central bank's monetary policy independence — referred regularly to the strong support the Fed enjoys "where it matters most" — Congress.
"To accomplish the task of reorienting regulation and supervision toward Democratic priorities requires the collaboration of Democrats, and it will be thwarted if what a vice chair of supervision does is negotiate with himself about what is appropriate before pushing forward," Conti-Brown said. "Randy Quarles spent very little time, so far as I can tell, trying to define a bipartisan policy space. He mostly focused on trying to make sure the Republican coalition had clarity about what he could do as Republican vice chair for supervision. And then he just moved forward deliberately and moved forward on multiple fronts."
Supervisory priorities
While external forces have constrained Barr's regulatory pursuits, the same cannot be said for his work to reimagine supervision.
In the wake of Silicon Valley Bank's failure, he pledged to improve the "
Derek Tang, co-founder of the Washington-based research firm Monetary Policy Analytics, said one of his biggest takeaways from the Silicon Valley Bank post-failure reports was that Fed supervisory practices have been consistent over time, despite changes in politically appointed leadership.
"It looks like it hasn't changed for decades, not just years. It points to a very strong internal culture at the Fed, which is going to continue its work even when the leadership at the top changes," Tang said. "The other side of that, of course, is that the vice chairs — whether it's Quarles or Barr — have not really gone in and changed things wholesale."
It is clear that supervisors have been more active on Barr's watch.
Between the end of 2022 and the middle of this year, the number of outstanding findings against Fed-supervised community banks, regional banks and large banks that are not systemically important roughly doubled, according to the Fed's most recent
Anecdotal accounts and public enforcement actions show an increased scrutiny on third-party risk management and Bank Secrecy Act/anti-money-laundering compliance, particularly against smaller banks that partner with financial technology firms. This lines up with
Barr also set up a
"We still don't totally understand how the Fed has shifted and changed as the result of something like Silicon Valley Bank — and yet, I think they have done the work, and that's going to show up over time," Van Tol said.
Ongoing work
If the politics of Barr's first two-plus years with the Fed were hard to navigate, the waning months could be nearly impossible.
On top of having to build consensus between his board and the heads of the FDIC and the OCC — individuals who are as yet unknown but certain to approach these questions differently — Barr must also operate under the threat of attack from the White House.
Trump's advisors
"Vice Chair Barr is in one of the most untenable positions in Washington," Conti-Brown said, noting that Barr will be both too powerless to advance his own policies but also too important to simply walk away. "There are no good options for him."
Barr is not spoiling for a fight, but if push comes to shove, he is willing to take one on in defense of the Fed's political autonomy.
"It's not about me. It's about what is right for serving the American public," Barr said. "And I feel very strongly — as does Chair Powell, as does the institution — that the independence of the Federal Reserve is critical for that."
Yet, narrow though it may be, there is still a path for him to continue to move the ball down the field. Barr has crafted proposals around his three top objectives — capital, liquidity and long-term debt — and secured broad support for them from his fellow governors. It's possible he finds more success bridging the ideological divide between Democrats at the Fed and Republicans at the FDIC and the OCC than the reverse.
There are even signs of bipartisan support in Congress for more moderate versions of his policy proposals. Last month, Rep. Andy Barr, R-Ky., a prominent critic of the original Basel III endgame proposal, said he would welcome a U.S. implementation of the international standards, so long as its capital impact is roughly neutral.
In this sense, the coming months will be the greatest test yet of Michael Barr's ability to build consensus and strike a compromise.
Whichever way the chips fall, Barr knows that the end result will not be perfect. But for him, perfection was never the measure of success. Instead, the pursuit of a more perfect banking system is always a work in progress.
"There's always work that needs to get done to keep making sure that the banking system, that the financial sector, is better serving the American public. And that's what the job is. That work is ongoing work, whether it's being done by me or by somebody else. The job is to help make sure that the banking system is better serving the American public," Barr said. "That's why I'm grateful for the opportunity I've had over the last couple of years, and looking forward to the opportunity for the next year and a half — because that work is ongoing, and I feel responsibility to do the best I can at that."
