The early departure of the Federal Reserve’s top financial regulator paves the way for a more industry-friendly official to assume the position, benefiting U.S. banks amidst a surge of post-election optimism. Federal Reserve Vice Chair for Supervision Michael Barr announced on Monday his intention to step down from his role next month to avoid a prolonged legal battle with the Trump administration, which had contemplated seeking his removal.
This decision, contrary to Barr’s previous statements, accelerates his exit from the supervisory role by approximately 18 months and eliminates a potential obstacle to Donald Trump’s deregulatory agenda. Following Trump’s election in November, banks and other financial stocks experienced gains amid expectations of relaxed regulations and increased deal-making activities, such as mergers. Shortly after his victory, Trump nominated hedge fund manager Scott Bessent as his pick for Treasury secretary.
Trump has yet to announce selections for the three major bank regulatory agencies — the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau. With Barr’s resignation, a clearer picture of forthcoming bank regulation is emerging.
Trump’s options for the vice chair of supervision are limited to two Republican Fed governors: Michelle Bowman or Christopher Waller. Waller chose not to comment, while Bowman did not immediately respond to requests for comment. Bowman, who had been previously considered for roles in the Trump administration, is viewed as the leading candidate. She has criticized Barr’s efforts to increase capital requirements for American banks under the Basel III Endgame proposal.
Bowman, a former community banker and Kansas bank commissioner, is expected to introduce “industry-friendly reforms” addressing various concerns raised by banks. These include issues such as the opaque Fed stress test process, lengthy merger approval processes, and perceived unfair confidential bank examinations. The revised Basel Endgame proposal is anticipated to be less stringent on the industry compared to earlier versions that would have required large banks to retain significant amounts of capital.
Barr spearheaded the collaborative drafting of the comprehensive Basel Endgame, which initially proposed a 19% increase in capital requirements for the world’s largest banks. The final version is predicted to be less burdensome, according to experts like Barrage. If efforts to enforce higher capital holdings by lenders are thwarted, they could potentially utilize the freed-up capital for activities like share buybacks.
Following Barr’s announcement, bank stocks saw an uptick in trading, with the KBW Bank Index climbing up to 2.4% during the session. Citigroup and Morgan Stanley, both embroiled in regulatory issues last year, were among the top gainers of the day, each experiencing over a 2% increase.
It is noteworthy that Barr will retain his position as one of the seven Fed governors, maintaining the current 4-3 advantage of Democrat appointees on the Fed board. According to Klaros Group co-founder Brian Graham, Barr’s decision to resign as vice chair while remaining a governor is strategic, as it upholds the board’s voting balance for a period and limits the options for his successor to current board members.
