Barr Sees Big Bank Deregulation as Threat to Community Banks

(Bloomberg) -- Federal Reserve Governor Michael Barr views Trump-era moves to loosen rules and relax supervision over Wall Street lenders as a mistake, saying that recent capital proposals threaten protections for smaller banks. 

“As community bankers well know, it was not community banks that fueled the 2008 financial crisis — it was the largest, most complex firms whose excessive risk-taking nearly brought down the system. In the years since, strong reforms — higher capital, tougher liquidity requirements, and rigorous stress testing — have helped to safeguard our economy,” Barr said Wednesday in prepared remarks for a community banking research conference at the St. Louis Fed.

Barr emphasized that proposals to roll back capital standards threaten to erode crucial safeguards. Regulators have been looking to dial back some requirements, such as overhauling stress tests, which gauge how large banks would fare during a hypothetical recession. 

“These shifts would not make the system safer; they would leave community banks once again exposed to the fallout if the largest players stumble,” said Barr, the Fed’s former vice chair for supervision. 

Wall Street lending giants have long pushed for changes to regulations tied to capital requirements, arguing they are too burdensome and hinder their ability to function. But consumer advocates say tougher rules and strict supervision are intended to prevent future bank failures and another financial crisis.

Barr’s comments come ahead of a conference this week on community lenders that will be hosted by Michelle Bowman, now the Fed’s top bank watchdog. 

Bowman has said that she is also focused on relaxing regulations for the smallest lenders and emphasized that her approach to community bank supervision will help those put those firms on stronger footing. 

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