Barr warns deregulation risks financial instability
Federal Reserve Governor Michael S. Barr warned that recent deregulation by the Fed and other agencies is undermining bank safety and soundness, increasing financial stability risks. Speaking at American University, Barr cited reductions in capital and weaker supervision.
Capital erosion, supervisory 'grade inflation'
Federal Reserve Governor Michael S. Barr expressed deep concern over recent regulatory changes, arguing they significantly weaken bank safety.
He highlighted a 6 percent aggregate reduction in capital requirements for the largest banks, translating to $60 billion less capital to absorb potential losses.
This erosion stems from changes to stress tests, a weakened leverage ratio, and a reduced GSIB surcharge for systemically important institutions.
Barr also criticized a 'grade inflation' in the rating system for the 36 largest financial institutions, which he believes allows poorly managed banks to appear well-managed.
He noted a sharp decline in 'matters requiring attention' – supervisory inputs addressing bank risks – falling by half for large banks in 2025 compared to 2024, indicating reduced oversight visibility.
Echoes of past crises, new liquidity concerns
Barr underscored that reducing financial regulation is akin to 'reducing insurance against risk,' drawing parallels to the Great Depression, the savings and loan crisis, and the Global Financial Crisis.
He warned that vulnerabilities from deregulation may not be immediately apparent but will build over time, threatening severe economic harm.
Barr anticipates further weakening through lower liquidity requirements, which he fears could make bank runs more likely or severe, burdening deposit insurance funds.
He also pointed to declines in consumer protection regulations and supervision, risking conditions harmful to consumers and potentially destabilizing the economy.
Underinsured in a boom
Barr's speech is a stark warning against complacency, forcefully arguing that short-term gains from deregulation are outweighed by long-term systemic risks.
His detailed critique of specific policy changes provides a rare, dissenting view from within the Federal Reserve.
The message is clear: history's lessons on financial crises are being ignored at the economy's peril.