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Federal Reserve Speeches·

Barr, Deregulating in a Financial Boom: What Could Go Wrong?

  • The speaker argues that recent deregulatory steps by the Federal Reserve & other banking regulators are weakening bank safety, soundness, & financial stability.
  • Capital requirements for the largest banks have been reduced by 6 percent, equating to $60 billion less capital available to protect against failure.
  • Specific capital changes include reducing stress test severity, eroding the leverage ratio, lowering the GSIB surcharge, & implementing Basel III standards below international norms.
  • Supervision has weakened through "grade inflation" in bank ratings, reduced focus on risk management, & a sharp decline in "matters requiring attention" notices.
  • Staffing levels at the Board have dropped significantly, limiting visibility into potential weaknesses across financial firms.
  • Proposals to lower liquidity requirements are expected, which could increase the likelihood or severity of bank runs.
  • Consumer protection regulations have been scaled back by the CFPB, raising risks of fraud, predatory lending, & economic destabilization.
  • Historical research indicates that deregulation provides short-term economic boosts but leads to long-term costs from financial crises, including GDP declines of 20 to 60 percent.
  • Fiscal costs of past crises were massive, with the Savings & Loan crisis costing $1.6 trillion in today's dollars & the Global Financial Crisis costing $650 billion.
  • Research suggests optimal bank capital ratios should range between 15 to 23 percent of risk-weighted assets to prevent crises.
  • The speaker warns that current U.S. capital requirements are already near the low end of the optimal range & proposed changes will lower them further.
  • Banks are increasingly exposed to nonbank financial institutions, with credit commitments exceeding $2.6 trillion as of late 2025.
  • The speaker contends that strong bank regulation is necessary to absorb shocks from the nonbank sector rather than deregulating banks to compete with them.
  • The speaker views the cumulative relaxation of capital, liquidity, & supervisory standards as unwise & likely to harm the U.S. financial system in the long run.