Federal Reserve Board Governor Barr warns that rating changes, constrained enforcement and a 30 percent staffing cut risk weakening bank supervision

In a speech, Federal Reserve Board Governor Michael S. Barr argued for strong, effective banking supervision and cautioned that current moves to dilute supervisory guardrails could make it harder for examiners to act early enough to prevent excessive risk from building in the banking system. Barr pointed to several pressure points. He criticised the Federal Reserve Board’s recent final rule changing the Large Financial Institution rating system, arguing it deemphasises poor performance, weakens incentives to remediate serious management and governance problems, reduces supervisory attention to compliance matters for the largest banks, and removes the presumption that significant deficiencies should trigger an enforcement action. He also said efforts are underway to modify the CAMELS rating system in ways that could reduce the weight of the management component, and highlighted an October proposal by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency that would narrow the standards for “unsafe or unsound practices” and limit the use of enforcement actions and matters requiring attention (MRAs) to a tight “material financial risk” concept that would generally exclude material nonfinancial risks. Barr further raised concerns about an initiative that would allow a bank’s internal audit function to determine whether supervisory findings or enforcement requirements should be lifted, while noting this would not be implemented in the consumer compliance function. On forward-looking supervision, he objected to the Federal Reserve’s October proposals to change stress testing, warning they could produce overly optimistic results and weaken capital requirements, and he defended the use of horizontal reviews as a tool to identify emerging risks and promote consistency. He also warned that plans to cut staffing in the Board’s Supervision and Regulation division by 30 percent by end-2026 would impair supervisory capacity, against a backdrop of reductions at other US supervisory agencies.