Growing pressures to weaken bank supervision – to scale back bank examiner coverage, dilute ratings systems, and redefine “unsafe and unsound” – present “real dangers” to the American people, Federal Reserve Board Gov. Michael Barr said Tuesday.
Speaking in Washington at American University’s Kogod School of Business, Barr, formerly the Fed’s vice chair for supervision, pointed, for example, to efforts underway now to change the CAMELS rating system. In his prepared remarks, he said some want to diminish the weight assigned to the “management” component, which he called “misguided and shortsighted.”
“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. “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.”
Barr noted several other components of “strong, effective supervision” are also at risk of being seriously weakened in the current environment. He noted, for example, 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.
Barr said such cuts “will impair supervisors’ ability to act with the speed, force, and agility appropriate to the risks facing individual banks and the financial system.” He said 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.”
“The Case for Strong, Effective Banking Supervision,” speech by Fed Gov. Michael S. Barr at the Alan Meltzer Speaker Series, Kogod School of Business, American University, Washington, D.C.
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