Federal Reserve | Sep 7, 2022

Vice Chair for Supervision Michael S. Barr at the Brookings Institution, Washington, D.C.

Safer and Fairer

• When I say that one of my top goals is to make the financial system safer, it is because keeping it safe involves an active and never-ending effort to analyze risks and make necessary adjustments. There is no responsible alternative to this approach because the stakes are far too high to do otherwise.  I am also committed to making it fairer.
• Fairness is fundamental to financial oversight, and I am committed to using the tools of regulation, supervision, and enforcement so that businesses and households have access to the services they need, the information necessary to make their financial decisions, and protection from unfair treatment. Safety and fairness may seem like distinct goals, but they are intertwined. Financial instability unfairly harms those who are economically vulnerable, so making the financial system safer is making it fairer.

Select Highlights

Capital

• An important principle of the capital framework is that it must evolve through a continuous process of incorporating new risks that may emerge.
• A second principle is that the capital framework should be risk focused. Different activities pose different potential for loss, and the capital regime should calibrate requirements to account for the risks of specific activities.

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• A third principle is that requirements should be tiered. As firms increase in systemic importance, the social cost of their failure grows. Regulations should be designed to require firms to internalize the costs that their potential failure would impose on the broader financial system and thus on businesses and households. This means that firms face higher costs through more stringent regulations as they grow in complexity, size, and interconnectedness. And rightly, that community banks face simpler regulations.

Stablecoins as Private Money

• Stablecoins, like other unregulated private money, could pose financial stability risks.
• History shows that in the absence of appropriate regulation, private money is subject to destabilizing runs, financial instability, and the potential for widespread economic harm.
  • In the nineteenth and early twentieth centuries, before the advent of prudential bank regulation and deposit insurance and before action was taken to ensure private money creation by banks was appropriately regulated, repeated crises did substantial damage to the U.S. economy.

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• I believe Congress should work expeditiously to pass much-needed legislation to bring stablecoins, particularly those designed to serve as a means of payment, inside the prudential regulatory perimeter. I look forward to continued partnership with other regulatory agencies and Congress to address the risks of stablecoins.

Innovation, Access, and Consumer Protection

• In the past, I have described the three essential elements of fairness in the financial system as a three-legged stool because all three are necessary for any aspect of fairness to work. The three are (1) financial capability, (2) financial access, and (3) consumer protection.
• In terms of financial capability, an important component is transparency in the cost of services, which means making sure consumers have the information they need to make good decisions.

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