Why Michael Barr Says Weakening Bank Rules in Good Times Magnifies Financial Crises

In a July 16, 2025 address at the Brookings Institution titled “Booms and Busts and the Regulatory Cycle,” Michael S. Barr emphasized that throughout U.S. financial history—across crises like the Great Depression, the Savings & Loan crisis, and the Global Financial Crisis—periods of economic boom are often paired with a weakening in regulation that tends to exacerbate the severity of the ensuing bust [1][2]. The message was clear: regulatory inertia or deliberate deregulation during prosperity can store up systemic vulnerabilities that ultimately exact high costs.

Barr has been an advocate for strong prudential regulation, long pushing for rigorous requirements like those under the Basel III Endgame. He warned that watering down components of capital rules or reducing the stringency of stress tests threatens to weaken financial stability, particularly for large, interconnected institutions [2][3]. Though he resigned as Vice Chair for Supervision in February 2025, he remains on the Fed board through 2032, continuing to voice opposition to deregulatory trends [1][2].

In response to wide criticism—both from the banking sector and political actors—Barr announced planned material revisions to key proposals. These include: reducing the proposed increases in capital requirement burdens for large banks; exempting firms with assets between $100 billion and $250 billion from much of the Endgame rules; lowering risk weights for mortgages and retail loans; excluding certain operational risk adjustments; and easing restrictions in market risk modelling and trading-book rules [4][5]. The direction suggests a balancing act: committing to regulatory resilience while responding to concerns about credit availability, competitiveness, and cost burdens.

Strategically, banks must now assess how the evolving regulatory architecture will affect capital allocation, product mix, business models, and profitability. As rules shift—especially with differentials for asset classes and institution sizes—financial institutions will need to model scenarios under both more stringent and more lenient regimes. Regulators face open questions: how to avoid “regulation arbitrage,” ensure consistency with international standards, maintain FSOC oversight of nonbank risks, and preserve strong stress testing even as transparency increases. The political landscape under the Trump administration, with Michelle Bowman now Vice Chair for Supervision, moves toward deregulation, which adds further uncertainty [2][4][5].