Fed member warns of financial collapse on weakened bank regulations

Michael Barr, member of the board of governors of the Federal Reserve, emphasized the need for regulatory frameworks to evolve alongside the financial system.

He further warned from US President Donald Trump's administration that pushes for looser oversight of major banks and a shift toward a more flexible regulatory approach.

“It is striking to see the pattern of regulatory weakening during a boom, including the failure of the regulatory environment to keep pace with the evolving financial sector, and how this weakening lays the foundation for a subsequent bust,” Barr said in a Brookings Institution event on July 16.

Barr added that weakened rules often drive risk-taking and increases bank fragility during the boom, making the ensuing bust more painful.

Trump’s pick for vice chair for supervision, Michelle Bowman, took her seat, replacing Barr, in June after being lauded by Wall Street for her drive to ease banking regulations.

Barr said booms have traditionally brought several positive outcomes, including fast economic growth, the reintegration of previously marginalized workers into the labor force and financial innovations, which often make credit or investments more readily available.

He cautioned that these very features of a booming economy can also contribute to future downturns as economic activity slows, lending tightens, and asset prices drop, triggering swift deleveraging and widespread disruption across the financial system.