Executive summary

Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve (Fed) System, announced a series of proposals to strengthen capital norms for US banks from the podium of Washington DC’s Bipartisan Policy Center on July 10. 

Emphasising the importance of capital for a sound banking system, Barr plumped for standardised measurement of credit and operational risks, in place of internal models in vogue. But he felt market risk was better modelled internally. 

He indicated a tighter stress testing framework was in the works and proposed bringing smaller banks into the ambit of the new rules.

The Fed had already undertaken a holistic capital review in 2022. Barr’s proposals step up on these efforts by drawing on lessons from the unforeseen failure of three regional banks this spring. 

CRISIL’s Point of View Raising the Barr is a quick take on the highlights of these proposals. It weighs their pros and cons and points to where the next course action might lie.