Barr likely to tackle capital requirements before M&A if confirmed to Fed

Michael Barr is unlikely to make M&A a top focus in the beginning of his term as vice chair for supervision if he is confirmed to the role, according to industry sources.

Any actions taken by the Federal Reserve on M&A are expected to make it tougher to get deals done, as President Joe Biden has made scrutinizing mergers and acquisitions a priority of his administration. Should Barr opt to focus elsewhere in his early days as vice chair for supervision, it could be a welcomed reprieve for banks, which are already experiencing extended wait times for deal approvals. If Barr is approved by the Senate following the July 4 recess, his presence, filling the last vacancy on the board, could help expedite the process, according to Clifford Stanford, partner at Alston & Bird LLP.

The recent delays in approvals are likely related to Fed board vacancies, forcing Fed governors to pull "double and triple duty," Stanford said. If Barr is confirmed, all board seats will be filled. Senate Majority Leader Chuck Schumer's office said the full Senate vote on Barr's nomination could come as early as the week of July 11.

The Fed has gone without a vice chair for supervision since October 2021 when Randal Quarles' term expired. President Biden nominated Barr in April after Sarah Bloom Raskin withdrew her nomination. Raskin faced criticism from senators over her views on climate-related financial risks.

There will be quite a bit on the Fed's plate after Barr arrives that will likely be more urgent than M&A, including addressing the supplementary leverage ratio and the international capital rules referred to as the Basel III Endgame, said Derek Tang, economist at Monetary Policy Analytics. The supplementary leverage ratio applies to banks with over $250 billion in assets and requires them to hold a minimum of 3% common equity capital against their total leverage exposure. The largest and most complex bank holding companies must hold an additional 2% buffer.

"He really wants to come in and kind of get a holistic view on the systemic risk in the system," Tang said. "I think he really does have a focus on that, making sure that the different pieces of the Fed's regulatory apparatus actually work together well."

Still waiting

There are several M&A deals under review by the Fed, such as U.S. Bancorp's proposed acquisition of MUFG Union Bank NA, The Toronto-Dominion Bank's proposed purchase of First Horizon Corp. and BMO Harris Bank NA's proposed acquisition of Bank of the West.

Previously, Barr helped craft the 2010 Dodd-Frank Act as assistant Treasury secretary for financial institutions during the Obama administration. Despite his background, Tang does not expect Barr to be hostile toward M&A.

"Even though he's the nominee for vice chair for supervision, [and] he was nominated by Democrats, it seems like his view on bank mergers is perhaps even more permissive or balanced than some of the existing governors,'" Tang said in an interview.

Alston & Bird's Stanford is less certain on Barr's M&A stance, though he said Barr is likely to "inject a balanced voice at the table in terms of temperature from a regulatory perspective."

Meanwhile, Chip MacDonald, counsel at Jones Day who focuses on M&A among other financial services topics, said he does not believe Barr's confirmation will do much to alleviate M&A wait times at the Fed.

The longer processing time for merger applications is likely to continue under Barr, though the extra time taken recently might have gone beyond statutory requirements, MacDonald said. How the Fed handles pending deals will show whether Barr will take a different perspective and whether the agency might change its approach.

Meanwhile, the Biden administration's broader examination of M&A guidance is still ongoing. The FDIC is considering a proposal, and the U.S. Justice Department is also conducting a review.