Governor Barr warns that recent Fed deregulation threatens bank safety

Governor Barr told a gathering that recent Federal Reserve proposals and other agency actions are weakening bank regulation and supervision, raising the risk of financial instability. He emphasized that a strong banking system is essential for credit to households and businesses and warned that the current deregulatory trajectory could undermine that foundation.

Barr highlighted that, in aggregate, the proposals reduce capital requirements for the largest banks by 6 percent, which he said translates to $60 billion less in capital to protect against bank failure. The eight globally systemically important banks hold around 60 percent of banking-sector assets, so the reduction affects a substantial share of the system.

Supervisory standards are also being softened. The Board lowered the rating system for the 36 largest financial institutions, a change Barr described as "grade inflation." He noted that the number of "matters requiring attention" issued to large banks fell to roughly half of the 2024 level by the end of 2025, while the share of banks deemed well managed under the new rules doubled from the end of 2024 to the most recent observation.

Barr warned of a likely push to lower liquidity requirements, which he said would make bank runs more likely or severe. He also cited recent Consumer Financial Protection Bureau actions that have scaled back protections against fraud, excessive fees, predatory lending and discriminatory practices, arguing that lax consumer safeguards contributed to past crises.

Concluding, Barr argued that short-term gains from deregulation are outweighed by long-term costs, citing historical episodes where weakened regulation led to crises that caused unemployment to reach 10 percent during the Global Financial Crisis and 8 percent in earlier downturns. He urged policymakers to retain robust capital, liquidity and supervisory standards to avoid repeating those harms.