With days left in his role, Fed Vice Chair for Supervision Michael Barr reflected on his tenure and the terms of his departure as a bank regulator, while also urging the Trump administration to continue to work on reforms started under the previous administration.
Barr — delivering a speech to a crowd at the Georgetown University Law Center in Washington, D.C. — also discussed his decision to leave the bank supervisory role, saying it was important to avoid politicizing the office.
"The risk of a dispute over my position would be a distraction from our important mission," he said. "I feel strongly — as Chair Powell has said publicly many times — that the independence of the Federal Reserve is critical to our ability to meet our statutory mandates and serve the American public."
Barr — who
Barr emphasized the urgency of completing bank reforms, many of which trace back to the 2008 financial crisis. He stressed that finalizing the Basel III endgame capital reforms is critical and called on regulators to reach an agreement on the rules that would raise capital on the largest banks. Barr's comments come as Federal Reserve Chair Jerome Powell said in his testimony in the Senate Banking Committee last week that he believed banks were well capitalized and any new Basel rules should be capital neutral.
Barr
"When we don't follow through on our commitments, for whatever reason, concerns about a level playing field rise in other jurisdictions, in an international 'race to the bottom' on standards," he said. "This harms us all and makes U.S. banks less competitive. And unless the U.S. implements these standards, other jurisdictions will force U.S. banks operating abroad to meet their standards instead."
Barr also discussed reforms to bank liquidity — a concern that was heightened by the 2023 bank failures and for which he advocated during his tenure. He emphasized that liquidity rules are now more crucial than ever, given the unprecedented speed of runs, such as
"Banks, even the largest banks, are not currently required to establish a minimum level of readiness at the window, and, as a result, there are outlier firms that are not prepared for stress," he said. "This needs to change. Without a requirement, there is also a significant risk of backtracking on the substantial progress in readiness we have made since March 2023."
The official said that large and regional banks, along with G-SIBs, must also ensure they can effectively convert their securities into cash to cover outflows when uninsured depositors or short-term creditors withdraw funds. He argued that regulations may need to reassess assumptions about how easily banks can monetize their assets in times of stress, given businesses' increasing awareness of — and sensitivity to — bank balance sheet stress.
"During the stress in 2023, we saw uninsured deposits from high-net worth individuals and certain entities, such as venture capital firms, behave more like highly sophisticated financial counterparties than nonfinancial companies or ordinary retail depositors, which is how they are generally treated in regulations. This mis-measured risk of deposit outflows means banks may not have sufficient liquidity to manage a stress period."
The concept of requiring large banks to issue certain kinds of long-term debt to reassure depositors in times of stress was also highlighted. Barr called on regulators to continue the work initiated by the Biden administration, which proposed the rule. During the Biden Administration, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Fed issued a proposed rule for comment, but the measure
The outgoing Vice Chair highlighted the importance of maintaining the credibility of the Federal Reserve's annual stress tests. He warned that changes to the process could allow banks to hold insufficient safeguards against losses, cautioning that too much transparency about the testing could enable banks to game the system.
Greater disclosure could deter banks from investing in risk management and lead to asset concentration in favorable stress test scenarios. Additionally, the stress tests' effectiveness could diminish if models aren't updated to reflect evolving risks. Barr advocated for individual capital requirements, aligned with global practices, to ensure banks remain resilient in times of financial uncertainty. Barr also called for discretionary capital requirements.
"As an additional backstop to help ensure banks have sufficient capital to withstand losses, the Fed should preserve its discretion to set individually binding capital requirements on firms based on supervisory judgment under the International Lending Supervision Act," he said. "Jurisdictions around the world undertake a similar process under a so-called Basel 'Pillar 2' approach, and the United States would benefit from using such a framework as well," Barr continued. "That is all the more important given the changes the Fed is undertaking for the binding stress tests."
Barr also warned against reforms that could weaken oversight in the name of reducing regulatory burden. While he supports sharpening supervision's focus to be more focused on urgent risks as
Barr said while technologies like blockchain could improve efficiency and accessibility in banking, he warned that without proper safeguards, blockchain technology could also introduce new vulnerabilities. Crypto-assets, for example, lack the structural protections of traditional financial markets, exposing investors to risks such as fraud, misuse of funds, and financial crime. While industry-led solutions are emerging to address these challenges, Barr stressed that regulation and supervision remain essential. He called for upholding the
Barr also highlighted key risks facing the financial sector, including cybersecurity threats, third-party vulnerabilities, and risks from nonbanks. He stressed that cyber risks — particularly from foreign actors and artificial intelligence — require stronger defenses, as shown by recent security breaches. He also warned that the growing reliance on third-party IT providers could create systemic vulnerabilities.
Regarding nonbanks, Barr noted increasing risks from hedge funds, private credit, and insurance firms. He pointed to high leverage in hedge fund trading, the opacity of private credit markets, and growing entanglements between private equity and insurance firms as potential concerns.
"The rapid growth and opacity of the sector raise the risk that recent private credit arrangements may be assuming new risks," he said. "Retail investors can now gain exposure to the asset class through mutual or exchange traded funds, which could present the age-old consumer and financial stability risks we see when opaque, illiquid assets are converted to liquid ones."
Barr also emphasized the critical need for continued vigilance, warning against swift deregulation that could not only reverse the progress made under the prior administration but lead to broader instability.
"A strong and resilient banking system benefits the American people. We need to be humble about our ability to predict shocks to the financial system, and how they will propagate through vulnerabilities in the system," he said. "That is why it is so important to have strong regulation and supervision as shock absorbers to protect households and businesses from risks emanating from the financial system."
