Barr welcomes regulatory rethink but Fed needs to supervise

Al Drago/Bloomberg

The Federal Reserve's former top regulator welcomes the Trump administration's efforts to reform bank oversight — as long as the central bank gets to keep its supervisory authorities. 

Fed Gov. Michael Barr — who until last month served as the vice chair for supervision at the central bank — said Friday afternoon that it is "good and healthy" to reexamine the structure of bank regulation, noting that he did so as part of the Obama administration and that George W. Bush's administration did its own explorations before that. 

"I don't think anybody would describe the U.S. regulatory system as a platonic ideal. There's certainly room for improvement in the regulatory architecture," Barr said, noting that his efforts in the Obama Treasury Department resulted in the elimination of the Office of Thrift Supervision and the creation of the Consumer Financial Protection Bureau. "There's always room for discussion about how to [regulate] in a better way."

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But, Barr added, past efforts to consolidate the three primary bank regulators — the Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — have proven to be politically unpopular.

"The financial sector and the public, I think, like the arrangement that we have pretty well," he said.

Barr also emphasized the importance of the Fed maintaining its ability to supervise banks. In addition to ensuring the safety and soundness of individual banks, he said the Fed's oversight helps it safeguard financial stability — a crucial part of its role as lender of last resort for banks — and understand the transmission of monetary policy.

"It's really important to me that the financial stability and financial safety and soundness roles of the Federal Reserve not be removed from the connection we have to monetary policy," Barr said. "These things are inextricably linked."

Barr's comments came during an onstage question-and-answer session at a bank policy conference hosted by the University of North Carolina School of Law. 

Barr was the Fed's vice chair for supervision from July 2022 until this February, when he quit the position out of fear of a potential legal fight with the administration over his removal. Before joining the Fed, he held key financial oversight roles under presidents Bill Clinton and Barack Obama. 

Barr said that efforts by other central banks to separate monetary policy and financial stability oversight have played out poorly. He pointed to the Bank of England's efforts to do so, which he said led to the institution being "blindsided" during the global financial crisis in 2008. 

He said the information the Fed gleans from its supervisory work has been critical to establishing emergency lending facilities during times of stress, such as the Bank Term Funding Program launched in March 2023, after the failure of Silicon Valley Bank — an outcome that was, itself, driven in part by the Fed's efforts to tighten monetary policy.

"These are functions that require us to have knowledge and insight into the banking sector," he said. "So, I would worry if there were proposals that somehow got to the Fed's authority. I think that would be quite damaging to our economy."

The idea of consolidating regulatory and supervisory functions of the Fed, FDIC and OCC — or even combining the agencies outright — have been bandied about within the Trump transition team for months. The idea fits neatly within the administration's push for regulatory downsizing and greater government efficiency. 

But Treasury Secretary Scott Bessent, who has emerged as the Trump administration's leading voice on financial policy, has dismissed the idea of formal consolidation. Instead, he has said he will play a more active role than past secretaries in coordinating activities between the three bank regulators, to ensure they are "singing in unison from the same song sheet."

Still, some actions by the president would appear to give the administration greater control over agency policymaking. Last month, Trump signed an executive order requiring independent agencies to run their regulatory policies through the White House. While this directive carved out the Fed's monetary policy functions, some scholars and legal experts question whether the Fed can actually firewall its various functions from one another. 

Reputation risk 'overblown'

During the event, Barr discussed another hot topic in the world of banking oversight: reputation risk. 

Barr said the concept has not been cited as a significant factor in any enforcement action or application decision since he joined the board of governors in 2022. 

"Reputational risk might be listed as one of the things that examiners note, but I haven't seen it in an application or a supervisory matter or enforcement matter where reputation risk is the thing driving a decision," he said. "I won't say that it never happens, but I haven't seen it in my personal experience at the board, and so in that sense, it's probably overblown."

Lawmakers, crypto proponents and venture capitalists have argued that regulators have used the blanket term of reputation risk to justify sweeping supervisory actions against allegedly unfavored industries. 

The discourse — which has arisen as part of a broader discussion of so-called crypto "debanking" — has led regulatory policymakers, including Fed Chair Jerome Powell, to de-emphasize reputation risk. Sen. Tim Scott, R-S.C., who chairs the Senate Banking Committee, has even introduced a bill that would prohibit examiners from considering reputational risks. 

Because of its limited use, Barr said he does not see the new policies emerging around reputation risk changing much in the bank regulatory landscape. 

"Getting rid of it wouldn't matter much in either direction," Barr said. "It wouldn't necessarily, for the Board, change our supervisory practice, open things up or close them down, or really matter that much one way or the other in terms of the work that our supervisors and regulators do on a regular basis."