WASHINGTON—Federal Reserve Governor Michael Barr is warning that current efforts to roll back bank-supervision standards could heighten risks across the financial system, cautioning that weakening core oversight tools may leave institutions more vulnerable in the next period of stress.
Barr delivered the message at the Alan Meltzer Speaker Series at American University’s Kogod School of Business, where he argued that pressures to reduce examiner coverage and dilute long-standing ratings frameworks amount to a retreat from lessons learned during past crises.
In his remarks, Barr said the supervisory system is facing an inflection point as policymakers consider scaling back enforcement tools, easing ratings tied to governance and controls, and narrowing the definition of “unsafe or unsound” practices. He pointed specifically to recent changes in the Large Financial Institution rating system and proposals to alter CAMELS that would reduce emphasis on management quality—developments he believes could allow emerging weaknesses to go undetected.
Barr also criticized a proposed FDIC–OCC rule that would limit examiners’ ability to issue enforcement actions or matters requiring attention unless material financial harm can be demonstrated. He said such an approach would force supervisors to wait until problems cause damage rather than preventing them earlier in the process.
Compounding those concerns, Barr warned that steep staffing reductions at the Fed, FDIC, OCC, and CFPB will impair agencies’ ability to conduct forward-looking oversight, reduce the frequency of supervisory findings, and erode institutional knowledge. He argued that the cumulative effect of weaker ratings systems, diminished enforcement tools, and shrinking examiner ranks could ultimately undermine stability across the banking sector.