Online Event Archive Recorded April 3, 2024
Vice Chair of the Federal Reserve Board of Governors Michael Barr answers questions from Politico reporter Victoria Guida on April 3, 2024, at NCRC’s Just Economy Conference.
Speakers:
Michael Barr, Vice Chair for Supervision, Board of Governors of the Federal Reserve System
Victoria Guida, Economics Reporter, Politico
Transcript:
NCRC video transcripts are produced by a third-party transcription service and may contain errors. They are lightly edited for style and clarity.
Barr 00:00
Oh wow, what a great audience.
Guida 00:10
Yeah, hello, thank you all so much for being here. Welcome to the Vice Chairman, I’m excited to be here, it’s gonna be a great conversation. I’ll jump right in with, you know, the latest news is that on Friday, the Community Reinvestment Act rules were blocked, temporarily blocked by a judge, which I’m sure all of you know. And I, I know, you’re not going to want to comment on the lawsuit directly. But I was just kind of wondering, from your perspective, if you could lay the groundwork of why, you know, from, from the purpose of the law, why these rules are necessary, why they’re there, they’re better.
Barr 00:48
Well, as you suggested, I’m not going to comment on the lawsuit. But I do think it’s really important to understand how important the Community Reinvestment Act is, and can be, for communities all over the country. All the organizations in this room, I know that you’ve been working on it firsthand for many, many decades. I see John Taylor over here, you know, you all have been working in this space for so many, many decades. You know how important it is to have good bank partners in the work you have in your communities. And one of the reasons that you can have good bank partners in your communities is with a strong Community Reinvestment Act. And so what we’ve done under the Community Reinvestment Act rules, is really update CRA for the communities that you live in today. What does that mean? It means providing greater clarity and transparency so both communities and banks can know what the expectations are. It means updating the rules so that you know what community development activities count for CRA consideration. It means making sure that banks are serving their entire communities, whether their communities are near their bank branches, or in other parts of the country where they’re doing lending and investing. So that kind of approach, I think, really has the opportunity to make the CRA vibrant for the next 25-30 years.
Guida 02:28
Well, and I should also ask, I mean, you know, there’s obviously an underlying statute here, do you think it would be helpful for Congress to to modernize the law?
Barr 02:36
Well, I think we have, one of the things that I think that is really positive about the way Congress wrote this law. They wrote it in 1977, in a in a broad way. And they left it to the banking agencies to make sure that CRA kept working over time. And so CRA was put in place in 1977, as part of a series of laws, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Fair Housing Act, and CRA, they were really designed together to make our financial system work better for communities, to serve communities, to serve their entire communities, in a better way. And it was written in such a way that it permits the bank agencies to get together periodically as we did in 1995. And now, almost three decades later, in the 2023 rule, to make sure that it keeps pace with the modern world we live in.
Guida 03:46
So sounds like no, not necessarily. Since we have a lot of CRA enthusiasts, I want to dig in a little bit on the details. You know, there’s been a lot of talk about the new metrics in the rule, but I know there’s also some qualitative factors. So I’m just wondering, you know, particularly relevant to this audience, what is the difference in terms of what the community group input means in the CRA process from the old process and to the new?
Barr 04:08
Well, I think the community group input is one of the constants over time. So the new rule improves our metrics. Our quantitative metrics, our comparability, transparency across the system, I think in a positive way. It raises the bar so that we see more bank lending. I think there’s lots of room to see better bank lending in this space – I’ll get to it in just a second. But one of the constants is that it’s really critical for examiners and for banks to know how they’re doing from the community groups and civil rights organizations, and affordable housing providers and small business lenders on the ground and communities that set the performance context for the evaluation that bank examiners need to do because community organizations know better than anybody, what the needs of the community are. What the gaps in lending or investing in the community are. How good is the local bank or the National Bank that the bank serving these communities. How well are they doing? That community group input is absolutely essential for making good qualitative judgments about the performance of a bank under CRA.
Guida 05:29
And in trying to answer those questions, what kind of feedback specifically is most useful?
Barr 05:34
Well, I think, you know, as much detail as possible, and the kinds of things I just said, so, you know, what are the gaps in lending? What are the gaps in investing? What are the gaps in services? How well are low- and moderate-income people currently being served? What are the innovative products that are needed in the local community that could make a difference? What are the deals that are harder to structure in that community, and therefore, should get more credit, should be seen as having, you know, a greater impact in that community? And then, you know, from a forward-looking perspective, and then from a backward-looking perspective, what’s your experience been in working with banks serving this community? Are they responsive to community needs? Are they being creative in the products and services they offer? Are they, you know, at the basic level meeting the financial services needs of the communities.
Guida 06:29
Banks are also waited on, you know, different geographic locations, and then also at the overall institution level? So how does that how does that work? How does the geographic location specifically relate to the overall grade?
Barr 06:43
Well, so one of the things that this rule does is it updates the Community Reinvestment Act in important ways, by including for assessment for certain banks that do activity outside of their branch network, making sure that those communities also are brought into the evaluation. So if you have a bank that’s doing lots of lending outside of its branch network, or if it’s an online bank, and it doesn’t have any branch network, you want to know how well it’s serving low- and moderate-income people in all the communities where it is doing business. And so the rule takes that into account. The rule also includes clarity to let banks know and communities know that community development financing activity can be measured in communities all across the country. So one of the things that that does is, let’s say, you have some parts of the country where there’s lots of bank community development activity. And there’s almost sort of too much competing for those deals. And then you have other parts of the country where there’s no community development activity at all, or very little, you know, for example, a lot of Native American communities, Native Lands, don’t have enough banks with branches on them, and they historically have gotten very little community development financing. This rule would now give credit for a bank, let’s say you have a bank that wants to serve a native community, doesn’t happen to have a branch there, they can get credit for providing community development finance to that Native American community, as an example. So that’s an important update to the rule. And then to your question, how do these things add up? Well, they get weighted. So if you have a bank, that is mostly based in, say, the western part of Michigan, but does some lending in the eastern part of Michigan, those two things get weighted by the extent of their activity. So sometimes banks wonder like, if I do a little bit over here, am I going to have to totally change my business in order to comply with CRA? The answer is no. If you do a lot of activity in one place, make sure that your low- and moderate-income lending and investing in that is commensurate with your engagement. And if you do a little bit of activity in another community, make sure that your low- and moderate-income activity is commensurate with your engagement there. And those get weighted so that the activities that you’re doing more of count more than the areas where you’re doing less. And that kind of waiting means that CRA is really flexible and open to the business practices and models of the banks that are being assessed.
Guida 09:32
Yeah, that’s really interesting. Another thing that I think banks are particularly focused on is bank mergers and CRA is, you know, a component of that. So I did want to ask, you know, to what extent do you when you’re looking at mergers generally, to what extent do you want to see an affirmative benefit to the community as part of why the merger should go through?
Barr 09:56
Yeah, you know, we have under the Bank Merger Act we have full four categories of things in a big picture way that we look at, we look at the effects on competition. We look at financial and managerial capacity to effectuate the merger. We look at financial stability. And we look at convenience and needs and convenience needs is a broad category. That includes how well has the bank served its community, an important way to measure that is by their rating under the Community Reinvestment Act. So we want to see strong past performance. And then banks also submit information about their plans going forward. Are they going to close a bunch of branches in low-income communities or open more? Are they planning to serve low-income communities better in the future? Or not? What kinds of products and services do they intend to keep where to grow in the merged institution? So we take all of that into account in thinking about the convenience and needs of the community.
Guida 11:01
Are you going to be putting something out along the lines of what the FDIC and the OCC have done on this?
Barr 11:06
We’re not currently planning to do that. We have, I think, a pretty robust process that follows our existing guidelines in this area. We are working with the other bank agencies in the Justice Department to see whether those should be updated. But that’s work that we’re thinking about on an interagency basis, rather than just us doing something.
Guida 11:30
Got it. And, you know, another thing that I have to ask you about is Basel Three End game, you know, raise capital requirements on the big banks. You’ve talked about, and Chair Powell has talked about that you expect to see broad material changes. You know, it seems like it’s an open question whether or not you’re going to issue a reproposal. So it’s, I guess my first question is, is there a timeline by which you would like to make that decision as to whether there’s going to be a reproposal?
Barr 11:56
We’re going to, we’re going to take a very thoughtful approach to the rule, as we’ve taken all along. You know, we gave the public extra time to comment on the rule, because it was a big complex rule. We’re analyzing those comments now. Many of the comments, there’s kind of external chatter about the rule, which I think is not very helpful. And then there’s the actual comment process itself, where we’re getting good substantive comments, I think we’ll be evaluating those. We want to make sure that we get the final rule, right. We take comments seriously, and all our work. You know, people say, Well, do you really look at comments? The answer’s Yeah, we really look at comments, we really take them seriously. We get comments a few years ago on the stress test, for example, that we were not properly looking at the risks associated with low-income housing tax credit properties, and were able to adjust the stress test to take that into account. We got comments more recently, from the SBA, that we were not appropriately thinking about the kinds of risk profile of SBIC- Small Business Investment Company projects. We were able to update for this year and the stress test, our approach to SBIC’s so that we are appropriately thinking about the risk profile of SBIC differently from other private equity investments. We had a similar issue with the new markets tax credit. People said, you need to think differently about the new markets tax credit, for purposes of the public welfare investment test, which has capital limitations in it. And we were able to adjust for that. So we take all the comments we get on these kinds of issues very seriously. We’re taking these very seriously. I expect will make adjustments to the final rule. I think it will be a good strong rule when it’s done. But we’re going to we’re going to make changes along the way.
Guida 13:53
Well, this process has been many years coming. It was years of negotiations before it was finished in 2017. And then, you know, it took a while for the agencies to come to a rule. So were you expecting this, I mean, because given the complexity of the rule, all the things that it deals with, were you expecting this to be, you know, maybe take some extra work after the proposal came out?
Barr 14:15
Yes, I would say, you know, we expected that the proposal would, as proposals do offer the opportunity for public comment. We expected to get a lot of comment on the rule. We expected to make adjustments to the rule and I do think that we will be doing that.
Guida 14:33
All right. And then also slightly different Basel question. There was reporting this morning that the Fed has been sort of resisting requirements for lenders at the Basel Committee to disclose their green commitments, how they’re trying to follow their green commitments. And I was just wondering, you know, if if you think that that’s the type of international standard that we should or shouldn’t have?
Barr 15:00
Well, we have at the Federal Reserve, you know, our job is financial stability. Our job is, is the safety and soundness of banks when we think about regulation. And so we do have a role to play on climate. We need to make sure that banks are looking at climate change, assessing their risk, measuring their risk and preparing for risks associated with climate change. So we’ve been doing that in a couple of ways. We did that by issuing guidance to the largest banks banks over 100 billion in size, to make sure that they are measuring and managing risk from climate change. And this last year, just for the large, very largest banks, the G sibs, for six of those banks, we engaged in a climate scenario analysis to assess whether they were thinking methodically through these risk measurement and management issues. So we are focused on it. But we’re doing that within our mandate. It’s an important mandate, but it’s a narrow mandate. We’re not making climate policy at the Federal Reserve, we’re just making sure that institutions we supervise, are looking at all their material risks, including the risks from climate change.
Guida 16:20
Is there more to come on that scenario analysis?
Barr 16:22
We do, we will have a report out of the analytics that we did from that. And then we’ll have further work that, you know, I expect will do over the coming years, again, kind of day-in and day-out work, not flashy work, and certainly not climate policy work, work that is really focused on the way in which climate change might pose financial risks to banks.
Guida 16:47
Great. Well, I’ll turn back to CRA back to your regularly scheduled programming. You know, one of the things that is sort of interesting about the new rules is there’s a focus on, you know, treating deposit products, positively not just credit products. He talked about, you know why you all decided to do that.
Barr 17:10
This, this is an important area. So under the rule, deposit products are treated positively for consideration under the rule, because deposit products are so essential for low- and moderate-income households and businesses to get access to credit. That’s always been the case. We’ve always looked over at the range of financial services that banks provide to low- and moderate-income households, because they’re all related to each other. I’ve been studying CRA and, and financial access issues for more than a quarter of a century. And I can tell you, deposit products are absolutely essential to be on the pathway to financial inclusion.
Guida 17:58
Yeah. And then there’s their you know, there’s the there’s the community development piece as well. And I know you all are sort of monitoring to see the extent to which those community development investments are increasing or decreasing. So if, you know, what is sort of the analysis that you’re doing across banks to look at community development investments, are you looking at, you know, are you looking at this at the state level? And is what sort of the sticker, the carrot, like if investments go down, the agencies take some sort of action?
Barr 18:31
Well, you know, I think I anticipate that under the revised rule, under the final rule, that will see commutative investments go up around the country. We’re certainly going to be monitoring that. The rule takes special account of those investments, they’re given kind of a higher impact factor. If you’re doing say a new markets tax credit deal, or a low income housing tax credit deal, that has a higher impact, qualitatively, as we were talking about before. Examiners, we’re going to hear from community groups, is this the kind of investment or transaction that should be given higher weight because it’s a hard deal to do. Those kinds of impact factors for community development investment, I think we’ll see investment rising, we’re certainly going to be monitoring all aspects of the rule. After it’s implemented. We’ve got two years basically, from the announcement of the rule to implementation. We’re going to be taking those two years, the role starts January 1, 2026, to work with community organizations, civil rights groups, banks, examiners all together to make sure implementation is strong going forward.
Guida 19:45
There’s also been some criticism from the rule. Better Markets put out a report a while back about how, you know, the fact that you look at banks performance in relation to each other. And so if everybody’s performance goes down, that doesn’t necessarily ding them. Is there something in place to try and combat that?
Barr 20:00
We do look at all kinds of metrics, we look at metrics related to how banks perform in relation to each other. And we look at how banks perform in relation to the low- and moderate-income communities they serve. Right now, there’s a lot of room for improvement, I would say. So, you know, if you just look at, for example, large banks, banks over 100 billion in size, they account for about 9% by volume of mortgage lending to low- and moderate-income communities. They account for about 16% overall of mortgage lending to all communities. So why are the largest banks only doing 9% by volume of their lending to low- and moderate-income communities? That seems quite low. If you compare that smaller banks banks under 100 billion, they’re doing about proportional to their mortgage lending size. So they’re, they provide about 22 or 23% of originations overall for mortgage lending. And they provide about 22% of lending to low- and moderate-income communities. So there’s, for the big banks, there’s a lot of room for improvement, and we’re going to be looking for that under the new CRA rules.
Guida 21:28
Yeah, that’s really interesting. Before we run out of time, I do want to ask you, since you were the vice chair for supervision, the banking sector generally, you know, we obviously had whatever you want to call it, banking crisis banking situation last year. How are the banks doing? What are the what are the big risks that you’re watching right now?
Barr 21:49
Well, I would say overall the banking system is sound and resilient. We’re not seeing the kind of liquidity pressures that we saw, you know, a year ago in March of 2023. There are pockets of risk in the system. We do have banks that are more under stress than other banks. We’re looking at things like what’s the level of unrealized losses on the balance sheet from securities. We’re looking at banks that have particular kinds of concentration in commercial real estate. So for example, commercial real estate covers lots and lots of different sectors. The office commercial real estate sector is under stress more than other parts of the sector, and there’s heterogeneity around the country. So we’re just looking very carefully at banks that have heavy concentrations in office commercial real estate, where there are significant expected price declines is another example, where we’re always worried about and think all the time about operational risk exposure. So, you know, banks exposure to cybersecurity risk is a big operational risk, and one that is a constant kind of threat to the system that we have to be careful and monitor. So those are examples of some of the kinds of things on our minds now.
Guida 23:14
On the commercial real estate piece of it, is there, like a time-period, when you know, once we’ve gotten through X year, we’ll know we’ve made it through like how are you thinking about that?
Barr 23:27
This is the kind of thing where it’s likely to be a very slow-moving train as the financial sector and commercial real estate market move forward. Why is that? Well, commercial real estate properties refinance at a periodic cycle. Those are not all done in one year or one month. Those are being refinanced slowly over time. And so over the next two to three years, we’re going to see how properties deal with that refinancing in a higher interest rate environment than the extremely low-interest rate environment they were operating in pre 2019. Some of those deals will keep penciling out just find others, then we’ll be worked out in ways that are not problematic for the banks that funded them because they have high levels of equity cushions. And other banks are going to see losses on those loans. So that will take some time to work through. And we’re obviously operating an environment in which for office commercial real estate, in general, this is a generalization, vacancy rates have increased or occupancy rates have lowered because of work from home. And so for some categories of Office care, that means they’re more exposed to risk.
Guida 24:52
Yeah, so you can’t say for certain when we’re through it.
Barr 24:55
It’ll take some time. As we say in Fed land.
Guida 25:00
Soon. All right. Well, thank you so much Vice Chairman, thank you so much to all of you. This has been a fascinating conversation. I really appreciate you taking the time.
Barr 25:10
Thanks, Victoria. And thanks to all of you.
Guida 25:13
And thanks to NCRC.
