Recent moves by Federal Reserve The Federal Reserve Governor said that weakening regulation and oversight of banks threatens to undermine the safety and soundness of financial institutions and increase risks to financial stability. Michael S. bar He said recently letter.
Speaking on Saturday (June 6) at American University in Washington, D.C., Barr pointed to what he described as cuts in capital requirements, loosening of bank supervision, a potential push to lower liquidity requirements and a rollback in consumer protections.
“Taken together, the recently enacted or proposed regulatory and supervisory changes represent the most significant liberalization of the banking system since the global financial crisis,” Barr said. “It upends the inevitable balance that must be maintained between openness and innovation on the one hand, and safety and soundness on the other, in a way that will increase the risks of financial instability.”
“I voted against these changes, and I feel it is also my duty to continue to talk about them and make clear that the costs they impose, in the form of risks, far outweigh the promised benefits of reducing the regulatory burden,” Barr said.
Barr also highlighted what he described as growing risks in the non-banking sector, and said these risks require a strong banking sector.
Some have argued that the banking sector should be liberalized so it can better compete with private credit and other nonbanks, but the sector needs to improve regulation to protect banks from their exposure to nonbanks, Barr said.
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He said banks are exposed to non-banking institutions through credit lines and commonalities in holding assets.
“All of this means we need strong banks at the heart of the financial system to handle shocks, including shocks from non-banks,” Barr said. “Dealing with these shocks requires strong capital and liquidity, and easing regulatory standards for banks moves in the opposite direction.”
“Deregulating banks could also lead to a race to the bottom,” Barr said. “If the goal is to achieve greater overall safety, it is incorrect to ease regulation. Liberalizing banks so they can better compete with nonbanks may lead to more risk-taking by nonbanks. So the solution is not to reduce regulation of banks, but to increase regulation of unsafe practices in nonbanks.”
