Fed’s Barr warns of booms and busts tied to weakened bank rules

Federal Reserve Governor Michael Barr emphasized that regulation must evolve with the financial system, issuing a warning as Trump-era officials look to ease rules for big banks and shift to a lighter touch.

“It is striking to see the pattern of regulatory weakening during a boom, including the failure of the regulatory environment to keep pace with the evolving financial sector, and how this weakening lays the foundation for a subsequent bust,” Barr said in prepared remarks for a Brookings Institution event on Wednesday.

Barr added that weakened rules often drive risk-taking and increases bank fragility during the boom, making the ensuing bust more painful.

The Fed official’s comments follow early wins for the banking industry as the new administration pursues the deregulation agenda President Donald Trump campaigned on last year. Trump’s pick for vice chair for supervision, Michelle Bowman, took her seat in June after being lauded by Wall Street for her drive to scale back rules and tailor supervision.

Bowman was nominated to be the Fed’s top bank cop after Barr resigned from that role in a bid to bypass a potential battle with Trump over his position.

Barr said booms have historically been characterized by a multitude of good things: fast economic growth, sidelined workers re-entering the workforce and financial innovations, which often make credit or investments more readily available.

He warned that at the same time, some of these same characteristics of a boom economy can sow the seeds of busts - economic activity and lending contract and asset prices decline, leading to rapid de-leveraging and dislocation throughout the financial system.

Barr said in the past insufficient thought was given to how the easing of regulation may create new weaknesses.

“A bit of humility would have helped,” Barr said.

A former senior Treasury Department official who played a key role in shaping the 2010 Dodd-Frank Act, Barr’s comments come 15 years after the sweeping regulatory reforms were enacted. Some advocates and lawmakers argue that recent attempts to relax key provisions of that law go far beyond Trump’s partial rollback during his first administration.

“It is well within our ability, and is our duty as regulators, to learn from these episodes to avoid making the same mistakes,” Barr said.