Federal Reserve Vice Chairman Barr issues final warning! Easing bank regulations may increase vulnerabilities in the financial system

According to the Zhitong Finance APP, Michael Barr, the Vice Chairman responsible for supervision at the Federal Reserve, warned on Thursday that relaxing banking regulatory rules and oversight could make financial institutions more vulnerable to unexpected shocks. He emphasized the need to maintain a strong regulatory framework to prevent the spread of financial risks.

Barr will step down from his position as Vice Chairman of Supervision at the end of February this year, but he will remain a member of the Federal Reserve Board. In what is expected to be his last public speech as the Federal Reserve's head of supervision, Barr stressed that banks need sufficient capital and strict regulatory requirements to cope with sudden risks. He pointed out, "We cannot fully foresee how a specific vulnerability interacts with other risk factors, thereby exacerbating and spreading risks when a shock occurs, nor can we accurately predict when a shock will come to avoid it in advance."

Barr specifically urged the Federal Reserve and other banking regulatory agencies to complete the implementation of the Basel III Endgame. He has been advocating for this reform during his tenure, which will fundamentally change the way banks measure risk and significantly increase capital requirements for large banks. However, due to strong opposition from the financial industry, the implementation of this reform plan has not yet been completed.

Barr warned that if these global regulatory agreements are not ultimately implemented, U.S. banks will be at a disadvantage and could trigger a "race to the bottom" among countries to lower regulatory standards, thereby undermining the robustness of the entire global banking system.

In addition to capital requirement reforms, Barr also warned against weakening another key regulatory tool of the Federal Reserve—the annual stress tests for large banks. The Federal Reserve announced at the end of last year that it plans to increase the transparency of stress tests in response to recent court restrictions on the powers of government regulatory agencies.

The banking industry has long complained that the standards for stress tests are opaque and highly subjective, while Barr emphasized that regulators should not lower bank capital requirements while increasing the transparency of the tests. Furthermore, he warned that if the public disclosure and granularity of stress tests are too high, it could reduce their flexibility, making them inefficient in responding to dynamic risks.

Although Barr will continue to serve as a board member of the Federal Reserve, it remains uncertain whether his warnings will be heeded. The Trump administration has made it clear that reducing regulatory burdens is part of its economic growth strategy, so the future direction of financial regulation remains uncertain. Currently, the Federal Reserve has not announced a successor for Barr