WASHINGTON–One Federal Reserve governor is cautioning that the rollback in bank supervision presents “real dangers” to the country.
Federal Reserve Board Gov. Michael Barr shared the view in remarks at American University’s Kogod School of Business, where he said he sees risks in efforts to change the CAMELS rating system under the Trump administration.
Those who want to diminish the weight assigned to the “management” component are “misguided and shortsighted,” said Barr, who formerly served as the Fed’s vice chair for supervision.
‘Look Good on Paper, But…’
“The ‘Management’ rating is not simply one item among six; it is the element that ties the others together. It measures the quality of governance, risk identification, internal controls, and the institution’s ability to respond to emerging threats,” Barr said, according to his prepared remarks. “Strong management can compensate for unexpected stress, whereas weak management can magnify even modest vulnerabilities. Deemphasizing the rating system’s focus on management could lead to significant increases in risk, even in institutions that look good on paper.”
Additional Risks
Moreover, he said, plans to weaken bank supervision by scaling back bank examiner coverage, diluting ratings systems, and redefining what “unsafe and unsound” means present “real dangers” to the American people, he said.
Barr also pointed to other components of “strong, effective supervision” he said are at risk of being seriously weakened, such as the Fed’s recent changes to the large financial institution (LFI) rating system, efforts to weaken forward-looking supervisory tools such as stress tests, and plans to cut staffing in the Fed’s Supervision and Regulation division by 30% by the end of 2026.
According to Barr, the cuts “will impair supervisors’ ability to act with the speed, force, and agility appropriate to the risks facing individual banks and the financial system.”
‘Gutted Overnight’
He told the audience the financial crisis “showed that the Fed’s bank supervision had failed to keep up with the growth in the size and complexity of the banking system, and it took nearly a decade afterward to build up this capacity. Now it is being gutted, practically overnight.”
Barr’s full remarks can be found here.
