Fed’s Michael Barr Paves the Path for Softer Banking Regulations—What It Means for Your Money!
The latest boost for U.S. banks riding a wave of post-election euphoria comes from the early departure of the Federal Reserve’s top financial regulator, who can be replaced by a more industry-friendly official.
In order to avoid a drawn-out legal struggle with the Trump administration, which had considered asking for his removal, Federal Reserve Vice Chair for Supervision Michael Barr announced Monday that he intends to leave his position by the end of next month.
Barr’s supervisory position will be terminated around 18 months ahead of schedule, reversing his former remarks on the subject. Additionally, it eliminates a potential barrier to Donald Trump’s deregulation plan.
Following Trump’s election in November, banks and other financial companies saw significant gains due to expectations of more deal activity, particularly mergers, and easier regulations. Trump appointed hedge fund manager Scott Bessent as his Treasury secretary a few weeks after he won the election.
The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau are the three main bank regulating organizations for which Trump has not yet appointed anyone.
Now that Barr has resigned, a clearer picture of future bank regulation is emerging.
Only one of the two Republican Fed governors—Michelle Bowman or Christopher Waller—can be chosen by Trump to serve as vice chair of supervision.
Bowman did not immediately reply to a request for comment, and Waller declined to comment.
Bowman, who is regarded as the front-runner and whose name has already been on short lists for potential Trump administration positions, has criticized Barr’s idea, known as the Basel III Endgame, to require American banks to retain more capital.
In a speech in November, Bowman stated, “The regulatory strategy we followed failed to evaluate or produce a reasonable solution, one that is compatible with the original Basel accord yet fit to the particulars of the U.S. banking system.”
Alexandra Steinberg Barrage, a former FDIC officer and partner at Troutman Pepper Locke, said Bowman, a former community banker and Kansas bank commissioner, could implement “industry-friendly reforms” around many trouble locations for banks.
This includes lengthy turnaround times for merger approvals, what bank executives have referred to as an opaque Fed stress test process, and what bankers have described as occasionally unfair confidential bank tests, according to Barrage.
Easier ‘Endgame’?
In contrast to versions that would have required big banks to withhold tens of billions of dollars in capital, the Basel Endgame, which was first proposed in July 2023 before a softer version was published last year, is now more likely to be much kinder to the industry in its final form.
Barr oversaw the interagency effort to create the comprehensive Basel Endgame, which in its original form would have increased capital requirements for the biggest banks in the world by around 19%. Barrage and others now see a much lighter final version.
In a note released Monday, Stifel analyst Brian Gardner stated, “Barr’s replacement may still collaborate with the other agencies to propose a new B3 Endgame rule, but we think such a proposal would be capital-neutral industry-wide.” “We anticipate that Bowman would steer any B3 rewrite in a different direction, as she voted against the 2023 proposal.”
Lenders could increase share buybacks and other potential uses of the funds if they eventually defeat attempts to have them hold more capital.
Following Barr’s comments, bank stocks increased on Monday, with the KBW Bank Index jumping as much as 2.4% during the day. Two of the day’s largest winners, Citigroup and Morgan Stanley, both of which made headlines for regulatory issues last year, saw increases of more than 2%.
Brian Graham, a co-founder of Klaros Group, noted that Barr is not leaving his position as one of seven Fed governors, maintaining the current 4-3 advantage of Democrat appointees on the Fed board.
Graham remarked, “Barr’s decision to leave as vice chair while still serving as governor is actually extremely brilliant.” “It limits the options for his replacement to those now on the board and maintains the balance of power for board votes for about a year.”
