Fed’s Barr says regulators more aggressive with banks, focused on interest rate risk

The Federal Reserve’s top supervisory official said Friday that bank regulators are flagging problems at banks at a higher rate over the past year and are conducting additional exams at firms facing large unrealized losses.

Federal Reserve Vice Chair for Supervision Michael Barr added that bank examiners are “closely focused” on how firms are managing commercial real estate risk as that sector faces post-pandemic pressure.

“The past year has been busy for Federal Reserve supervisors,” Barr said in prepared remarks nearly one year after the failure of Silicon Valley Bank due in part to large unrealized losses. 

In the wake of SVB’s failure and those of other large regional banks, including First Republic Bank and Signature Bank, the Fed has focused on quickly identifying bank issues.

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The Fed’s vice chair for supervision Michael Barr said that regulators are focused on monitoring potential issues facing U.S. banks. (Photographer: Graeme Sloan/Bloomberg via Getty Images / Getty Images)

Reuters reported in December that federal bank regulators had been stepping up their oversight of firms after last spring’s bank failures and issuing disciplinary actions to firms – including downgrading confidential bank health ratings.

Barr said the uptick in activity isn’t due to a policy change but is reflective of the changing economic and interest rate environment and the strain that can put on banks’ balance sheets.

“We want and expect supervisors to help banks focus adequate attention on the areas that matter most for the particular bank,” he said.

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The Federal Reserve is stepping up its monitoring of banks facing potential weaknesses in their balance sheets. (Photographer: Nathan Howard/Bloomberg / Getty Images)

Aside from requiring extra exams for firms dealing with unrealized losses, Barr said examiners are requiring firms to take steps to address weaknesses and bolster their capital. He added that a small number of firms “with a risk profile that could result in funding pressures” are being continuously monitored.

Barr explained that different supervisory teams are heightening their coordination, particularly for regional banks that are nearing the $100 billion threshold that triggers stricter oversight. Rapidly growing firms are facing more frequent assessments of their health and policies as part of an effort to ensure they’re ready to meet tougher requirements.

“The goal is that the transition to heightened supervision for fast-growing banks is more of a gradual slope and not a cliff,” Barr said.

New York Community Bank’s stock took a hit after disappointing quarterly results amid ongoing concerns about commercial real estate exposure. (Photographer: Bing Guan/Bloomberg via Getty Images / Getty Images)

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His comments come after New York Community Bank saw a steep decline in its stock price after it announced an unexpected quarterly loss in January. NYCB’s leaders said that part of the strain was caused by tougher regulatory requirements that kicked in after the bank recently surpassed the $100 billion threshold.

Barr said the Fed is still considering whether it should impose temporary higher capital and liquidity requirements on banks facing risk management issues.

Reuters contributed to this report.