Fed, FDIC Stand Their Ground Under Withering GOP Assault

In their first appearance following the reports on recent failures, FRB Vice Chairman Barr and FDIC Chairman Gruenberg were harshly criticized by Republicans for both the bank failures and recommended remedies. HFSC Chairman McHenry (R-NC) blamed the Fed for faulty monetary policy that led to inflation and unduly quick rate hikes that endangered financial stability as well as lax supervision that missed glaring failures at SVB, SBNY, and First Republic. Mr. McHenry was unconvinced by Vice Chair Barr’s defense of the reports finding that Fed supervision had undergone a “cultural” shift under Vice Chair Quarles; Mr. Barr defended the finding based on interviews with the San Francisco Fed’s staff. Democrats fired back, with Ranking Member Waters (R-CA) arguing that Republicans were politicizing consideration of essential supervisory and regulatory reforms. Acting Comptroller Hsu was at pains to emphasize that none of the failed banks were OCC-regulated, reiterating as we noted yesterday that supervision must be forceful and numerous rules require urgent revision. Although Mr. Hsu indicated an “open mind” to bank M&A – an issue of particular concern to Republicans – he also reiterated the need to ensure large-bank resolvability via TLAC and severability standards (see FSM Report RESOLVE48). Mr. Barr announced that the interagency proposal finalizing Basel III and his thinking on the holistic capital review will be released this summer. He also said that new, multiple stress-test scenarios will be released for public comment before adoption. Mr. Gruenberg indicated that revised incentive-compensation standards are likely to require a new proposal he expects sometime before year-end.