Michael S Barr: Why bank capital matters

Speech (virtual) by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the American Enterprise Institute, Washington DC, 1 December 2022. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
02 December 2022

In my first speech as Vice Chair for Supervision in September, I said that the Federal Reserve Board would soon engage in a holistic review of capital standards. My argument, then and now, is that our review of regulatory policy must be a periodic feature of bank oversight. Banking and the financial system continuously evolve, and regulation must adapt to address emerging risks. Bank capital is strong, but in doing our review, we should and are being humble about our ability - or that of bank managers - to predict how a future financial crisis might unfold, how losses might be incurred, and what the effect might be on the financial system and our broader economy. That humility, that skepticism, will serve us well in crafting a capital framework that is enduring and effective. It will help make sure that we do not lose the hard-fought gains in resilience over the past decade and that we prepare for the future.

That review is still underway, and I have no firm conclusions to announce today. Rather, I thought it would be helpful at this early stage to offer my views on capital regulation and the role that capital standards play in helping to advance the safety and soundness of banks and the stability of the financial system.

By "holistic," I mean not looking only at each of the individual parts of capital standards, but also at how those parts may interact with each other - as well as other regulatory requirements - and what their cumulative effect is on safety and soundness and risks to the financial system. This is not an easy task, because finance is a complex system. And to make the task even harder, we are looking not only at how capital standards are working today, but also how they may work in the future, when conditions are different.

As I mentioned, we are approaching the task with humility - not with the illusion that there is an immutable capital framework to be discovered, but rather, with the awareness that revisions we conceive of today will reflect our current understanding and will inevitably require updating as our understanding evolves.