Fed’s Barr: Concerned about blowback to financial system from crypto

Nov 15 (Reuters) – Michael Barr, the Federal Reserve’s top financial regulator, said on Tuesday he was concerned about risks to the non-banking sector, including cryptocurrencies, for which the U.S. central bank and other regulators have low visibility.

“We are concerned about risks that we ignore in the non-banking sector,” Barr said in response to a question during an appearance before the Senate Banking Committee. “That obviously includes crypto activity, but more broadly the risks in parts of the financial system where we don’t have good visibility, we don’t have good transparency, we don’t have good data. create risks that accrue to the financial system we regulate.”

Barr’s remarks came in his first congressional testimony since becoming the Fed’s top cop on Wall Street over the summer and augmented his prepared comments to the committee that he was closely monitoring tensions in the financial system in a weakening economy.

He had also signaled that tighter oversight of the cryptocurrency arena is in sight, an issue that took on added urgency with the collapse last week of crypto exchange FTX, which filed for bankruptcy. Friday. Panicked traders had ripped some $6 billion from the platform in 72 hours and a rival exchange scrapped a bailout deal.

Recent events in the crypto markets, Barr said in his written testimony, “although occurring primarily outside of banking, have highlighted the risks to investors and consumers associated with new and emerging classes of assets and activities when they are not accompanied by strong safeguards”.

“We don’t want to stifle innovation, but when regulation is lax or lags behind, it can facilitate risk-taking and a race to the bottom that endangers consumers, businesses and the economy and discredits new products and services to consumers and investors.”

That said, Barr said market regulators are in a better position to provide an initial regulatory framework for the crypto sector.

“Market regulators are … the first place to start in this space,” Barr said in response to a senator’s question. “They have existing authorities. We want to make sure they are fully utilized. Some of the activities that were going on in this space claimed to be continuing in a way that was designed to escape oversight and regulation. I think we have given the enormous human costs of this kind of activity.”

CRYPTO GUARD QUESTIONS

Barr and other high-level regulators from the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency appearing before the committee were pressed by Senator Patrick Toomey, the ranking Republican on the panel, to explain why they did not advise banks on forming relationships, such as as custodial services, with crypto companies that could foster greater oversight of the industry.

Toomey expressed concern that the Fed would signal that it might issue guidelines to banks wishing to provide custodial services for crypto assets to place those assets on their own balance sheets, which would increase their capital requirements. Banks are not required to place other types of assets in custody on their own balance sheets.

“Wouldn’t it impose a significant cost on banks if they were in fact forced to put all … crypto custodial assets on their balance sheets?” Toomey asked Barr.

“We’ve seen banks operate in a fairly conservative fashion so far. There are very few institutions that are currently looking to engage in custodial activity,” Barr said. He said his understanding of the Securities and Exchange Commission’s recent accounting interpretations for publicly traded banks was that banks should hold capital against crypto assets held in custody in a manner that is not required for assets. traditional custody.

“So that differential would impact the banks’ decision-making,” he said.

NOT IN RECESSION BUT IN SLOWDOWN ECONOMY

Barr, who is also a monetary policymaker with a standing vote on Fed interest rate decisions, said a weakening outlook for the economy was another key risk to the financial system as the central bank raises interest rates to fight inflation which, in his view, is “way too high.”

“I think that’s the case, we’re going to see a significant downturn in the economy,” Barr told lawmakers, though he declined to offer an accurate forecast of the potential rise in the jobless rate to US workers. United States. Later, he added, “there is no recession right now. We are in a period of slower economic growth.”

Since March, the Fed has raised its benchmark interest rate from near zero to a range of 3.75% to 4.00%, including four consecutive increases of three-quarters of a percentage point. Rate hikes are expected to continue through early 2023, although the pace is expected to slow from here amid promising signs that inflationary pressures have started to ease.

Still, the tighter financial conditions designed by the Fed pose risks for banks, Barr said.

“A weaker economy could put pressure on households and businesses and, therefore, on the banking system as a whole.”

Additional reporting by Lindsay Dunsmuir; Editing by Lisa Shumaker and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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