Federal Reserve Governor Michael Barr has expressed concerns that recent regulatory changes and proposals disproportionately benefit the largest banks, stating that these changes increase big bank profits but not lending. Speaking at a Community Development Bankers Association event, Barr highlighted that global systemically important banks have received an estimated $65 billion in capital relief. This increased balance sheet capacity, however, has not translated into increased lending.
Barr noted that the share of executive compensation as a percentage of revenue increased by 18% over the past year, while share buybacks are up by 66%. He argued that these trends do not benefit communities or community development banks. The regulatory changes include modifications to capital standards and liquidity requirements, as well as a reduction in supervisory discretion, such as removing reputational risk from considerations and limiting examiners' ability to cite banks for management issues.
Barr cautioned that these reforms could increase the risk of financial stress in the long term, even though the financial system is currently sound. He believes that lower capital levels and reduced supervision could lead to future problems in the financial sector, which would negatively impact community development efforts. This deregulation follows a "sustained campaign to roll back the post-crisis capital framework," with proposals to significantly weaken regulatory capital, including reducing common equity tier 1 capital by nearly $88 billion for the largest institutions. Goldman Sachs, in particular, has emerged as a significant beneficiary of these deregulatory moves, reportedly freeing up more capital than its rivals amid these changes.
Regulators have also cut the supplementary leverage ratio, diluted stress tests, and reduced the Federal Reserve's supervisory capacity by over 30%. While individual changes might seem minor, their cumulative effect, according to Barr and other analysts, makes the financial system significantly less resilient. The proposals would lower common equity tier 1 capital by almost 5% for the largest banks, while for global systemically important banks, this drop amounts to an astounding $60 billion. This prioritization of short-term capital efficiency for large banks over long-term economic security for American families is seen as setting a dangerous precedent, potentially creating a "perfect storm" for future financial crises.
