Fed Governor Warns Against Weakening Bank Supervision
Commentary by Steven Lofchie
Federal Reserve Governor Michael S. Barr warned that efforts to weaken bank supervision threaten the stability of the U.S. financial system and the broader economy.
In remarks at the Kogod School of Business at American University, Mr. Barr said a resilient banking system depends on strong, independent oversight. He said market discipline alone cannot prevent the buildup of systemic risk, noting that lessons from the global financial crisis show how quickly vulnerabilities can spread when oversight is relaxed.
Mr. Barr cautioned that several current proposals would significantly erode prudential safeguards. These include efforts to dilute supervisory ratings, narrow the definition of "unsafe and unsound practices," and restrict examiners’ ability to act early through "matters requiring attention." He also warned that weakening stress tests would reduce the system’s ability to anticipate and withstand severe shocks. Mr. Barr said allowing banks to self-validate remediation efforts undermines supervisory independence and risks masking deficiencies until it is too late.
Mr. Barr also expressed concern about widespread staffing cuts across federal regulatory agencies. He said that reductions in experienced supervisory personnel will slow the detection of emerging risks, erode institutional knowledge, and leave the system less prepared for future crises. He emphasized that supervision relies not just on rules but on expert examiner judgment—particularly in evaluating governance, controls, and risk-management culture. Mr. Barr asserted that maintaining robust internal controls and a strong compliance culture is essential for safeguarding financial stability.
Commentary
To a good extent, Mr. Barr's remarks reflect the significant difference in regulatory approaches under the Biden Administration and the Trump Administration. Mr. Barr’s approach would have one believe that, unless there is significant ongoing and additional investment in more regulation, supervision and enforcement, very bad things will happen that the regulators would otherwise have prevented. Mr. Barr's approach may be reasonably compared to that of former SEC Chair Gensler, while the views of his replacement in the role of Fed Vice Chair for Supervision, Michelle Bowman, are more akin to current SEC Chair Atkins—an approach more strategic and targeted, less likely to be an impediment to economic growth, and perhaps less rooted in any certainty of the efficacy of regulation.