Federal Reserve Governor Michael Barr warned that the US banking system is entering its biggest deregulatory cycle since the Global Financial Crisis, arguing that weakening capital rules, softer supervision, and lighter liquidity requirements could leave the financial system dangerously exposed during the next downturn.
Speaking at American University in Washington, Barr said regulators are repeating historical mistakes that previously preceded the Great Depression, the savings and loan crisis, and the 2008 financial collapse.
The speech represents one of the strongest public criticisms yet from a senior Federal Reserve official against the current direction of US banking regulation.
Barr Says Banking Rules Are Entering A “Race To The Bottom”
Barr argued that a series of regulatory changes implemented over the past year collectively weaken the resilience of the banking system.
According to Barr, regulators reduced the stressfulness of stress tests, weakened leverage ratio requirements, softened Basel III implementation standards, reduced GSIB surcharges, and diluted supervisory oversight across large financial institutions.
The combined effect, he said, lowers required capital for the largest US banks by roughly 6 percent, equivalent to approximately $60 billion less in capital buffers protecting the financial system.
That matters because the eight largest globally systemic banks control roughly 60 percent of US banking-sector assets.
Barr warned that weaker standards could trigger an international “race to the bottom” if other jurisdictions also begin relaxing capital requirements to remain competitive.
“Deregulation can provide a short-term sugar high in the economy, but it can also lead to long-term costs for society,” Barr said.
He repeatedly framed financial regulation as a form of systemic insurance.
“Reducing financial regulation is effectively reducing insurance against risk, and I fear that we are becoming underinsured,” Barr said.
The comments come during a broader political and industry push for lighter banking rules amid strong bank profitability, booming equity markets, rapid AI-driven market growth, and rising competition from private credit and nonbank financial firms.
Large banks have argued that existing capital standards constrain lending, reduce competitiveness, and make it harder for banks to compete against lightly regulated private credit firms.
Barr directly rejected that argument.
Instead, he said stronger bank regulation is even more important precisely because nonbank financial risks are growing rapidly.
The Fed Is Increasingly Worried About Nonbank Contagion
One of the most important parts of Barr’s speech focused on growing interconnectedness between banks and nonbank financial institutions.
According to Barr, bank credit commitments to nonbank financial firms surpassed $2.6 trillion during the second half of 2025.
That reflects the explosive growth of private credit, hedge funds, fintech lenders, structured finance firms, and shadow banking infrastructure over the past decade.
Banks increasingly act as liquidity providers and financing sources for nonbanks while simultaneously sharing exposure to similar assets and funding markets.
Barr warned that stress inside nonbank sectors could rapidly spread into the banking system through liquidity shocks, asset fire sales, and interconnected balance-sheet exposure.
The concern reflects a growing debate among regulators globally.
Following the collapses of Silicon Valley Bank, Credit Suisse, Archegos, and multiple liability-driven investment crises over recent years, regulators increasingly worry that systemic risk is shifting away from traditional banks and into less-regulated financial sectors.
Private credit alone has grown into a market exceeding $2 trillion globally, according to IMF and McKinsey estimates, while hedge funds and leveraged nonbank strategies increasingly dominate Treasury, repo, derivatives, and credit markets.
Barr said weakening bank safeguards while nonbank leverage grows could amplify systemic fragility rather than improve competitiveness.
“The answer is thus not to regulate banks less, but to regulate unsafe practices at nonbanks more,” Barr said.
The comments also indirectly challenge the increasingly popular argument that market-based finance can safely replace bank intermediation.
Barr instead argued banks remain the “bedrock” of the financial system because of their central role in extending credit to households and businesses.
Barr Uses Economic Research To Warn About Long-Term Costs
The speech relied heavily on academic and historical research to support the argument that deregulation produces short-term economic gains while increasing long-term crisis risk.
Barr cited studies showing financial crises often lead to persistent GDP declines, long-term unemployment, reduced lending capacity, and severe fiscal costs.
He referenced research estimating that banking crises can produce cumulative output losses equal to 20 percent to 60 percent of GDP.
Barr also highlighted historical bailout costs.
According to the speech, resolving the savings and loan crisis cost approximately $160 billion at the time, equivalent to roughly $1.6 trillion in today’s economy. Government interventions during the Global Financial Crisis reached approximately 4.5 percent of annual GDP.
He also warned that current capital standards already sit near the low end of what academic research considers optimal for balancing economic growth and financial stability.
The broader message was unusually direct for a sitting Federal Reserve governor.
Barr argued that regulators are underestimating the probability and consequences of future crises because the memory of past financial collapses fades during periods of market optimism.
“We’re now in a risk-on environment with a booming stock market, robust bank profits, and a deregulatory mindset,” Barr said. “The bank deregulation undertaken so far, and the plans for more to come, is ultimately going to make our financial system less robust. And when the bill comes due, we will all pay the price.”
The speech therefore represents more than a policy disagreement.
It signals a widening divide inside financial regulation itself between officials who prioritize competitiveness and growth and those who increasingly worry that rapid deregulation during a market boom could create the foundations for the next systemic crisis.
Sources And Further Reading:
Takeaway
Michael Barr’s speech highlights growing concern inside the Federal Reserve that aggressive banking deregulation during a strong market cycle could weaken financial resilience just as risks inside private credit and nonbank finance continue expanding. The debate increasingly centers on whether lighter regulation boosts competitiveness or quietly increases the probability of the next systemic crisis.
