"Federal Attorney General Barr advises opposition to regulatory rollback effort"
Federal Reserve Governor Michael Barr has issued a stern warning against the weakening of bank regulations during periods of economic growth, citing historical evidence that such moves can encourage excessive risk-taking by financial institutions and increase their vulnerability to shocks.
Speaking recently, Barr emphasized that regulatory weakening fails to keep pace with the evolving financial sector, allowing vulnerabilities to accumulate unnoticed. Specifically, easing supervisory tools like bank stress tests undermines effective defenses against systemic risk, potentially leading to more damaging economic downturns.
Barr's concerns draw directly from historical experience, showing that deregulation in boom times can sow the seeds for painful busts later on. He highlighted the role that ill-advised weakening of the bank regulatory framework played in past financial crises such as the Great Depression, the savings and loan crisis of the 1980s and 1990s, and the global financial crisis.
The Fed governor pointed out that the consequences of relaxing bank regulations during economic upswings include encouraged excessive risk-taking by financial institutions, increased fragility and vulnerability of banks to shocks, and a higher likelihood and severity of subsequent financial crises.
Barr also expressed his concerns about the potential for stress testing to become less effective, citing his dissenting opinions on Fed proposals related to stress testing and the supervisory rating framework for big banks. He called on policymakers to resist pressure to loosen banking industry regulations during robust economic times.
Bank regulation, according to Barr, involves trade-offs, with decisions about risk in the financial system versus efficiency gains. He believes it's important to rethink regulation periodically, not for more or less regulation, but for the right mix of regulation.
Barr's term as Fed governor ends in 2032, and he has no plans to leave prior to that. His successor, Michelle Bowman, appointed by the Trump administration, has since filled Barr's position on the board and has pursued changes to supervisory ratings.
In the past, regulatory agencies have reduced supervision of and requirements for regional banks during periods of deregulation. Barr recalled the March 2023 banking sector stress caused in part by a prior period of deregulation. However, Barr stated that the intervention worked so well that nobody remembers the stress in the banking system just two years ago.
Despite the political pendulum swing in the industry not being unique, Barr emphasized the importance of being humble about the ability to predict shocks and focusing on making the system less vulnerable when those shocks hit. He added that a bit of humility would have helped in preventing past financial crises.
The temporary Bank Term Funding Program was used by bank regulatory agencies to prevent stress in the banking system from becoming a financial panic. Barr's caution draws directly from historical experience, showing that deregulation in boom times sows the seeds for painful busts later on.
- The weakening of bank regulations during economic growth, as Michael Barr has warned, could encourage excessive risk-taking by financial institutions and increase their vulnerability to shocks, similar to the roles played in past financial crises such as the Great Depression and the global financial crisis.
- In periods of economic upswings, the potential for stress testing to become less effective, as expressed by Barr, could increase the fragility and vulnerability of banks, potentially leading to more damaging economic downturns and financial crises, as seen in the past with deregulation contributing to the savings and loan crisis of the 1980s and 1990s.
