Banks, investors aspiration for lighter regulations after Fed’s Michael Barr steps down

lender stocks rose Monday on the prospect of more lenient oversight after the Federal safety net’s top supervisory official stepped down to avoid a potentially thorny legal battle with President-elect Donald Trump.

But buyer advocates said the episode could undermine safeguards protecting Americans from reckless banking practices.

Michael Barr, the Fed’s vice president of supervision, said Monday he’ll step down from that role on Feb. 28 after serving in the position since July 2022 but will remain on the Fed’s board.

Citigroup shares closed up 2.5%, lender of America rose 1.4%, and Wells Fargo edged up 1.1% as the banking giants’ stocks gave back some of their earlier gains.

“The hazard of a dispute over the position could be a distraction from our mission,” Barr said in a statement. “In the current surroundings, I’ve determined that I would be more effective in serving the American people from my role as governor.”

Why do banks require regulations?

Barr, a Democrat, has led the Fed’s efforts to require banks to hold more capital apportionment as a cushion against feasible monetary crises – a mandate that would channel money from capital apportionment and lending and could affect lender profits.

Barr’s resignation as board vice president paves the way for Trump to replace him with a Republican board member more to the liking of the banking industry. Fed Governor Michelle Bowman “seems the likely selection,” Brian Gardner, Stifel’s chief Washington policy strategist, said in a research note.

Why are banks against Basel III?

Gardner said a recent vice chair will likely speed up union reviews, especially for tiny and midsize banks. He also said a proposed recent global regime to toughen lender capital apportionment requirements − known as Basel III Endgame − “is dead.” While there could be a recent rule, Gardner said he thinks it would be “capital apportionment-neutral.”

But since Barr isn’t stepping down from the seven-member board, Democrats will retain their majority until early 2026, when Trump can appoint Republicans to fill open seats.

“It is challenging for us to view much getting done on a deregulatory side this year given the require to confirm recent regulators,” Jaret Seiberg, managing director of TD Cowen, said in a note to clients.

Barr’s term as the Fed’s top banking official was set to expire in July 2026 while his term as governor ends in January 2032.

For weeks, Trump has sought to remove Barr from his banking role, according to Reuters and other reports. A president can only fire a Fed governor for factor, but it’s ambiguous if he could demote Barr from his supervisory position.

At a information conference after the election, Fed Chair Jerome Powell said Trump would not have the authority to remove him from his role or Barr from his banking position.

Girding for a feasible battle in the courts, Barr recently sought advice from law firm Arnold & Porter, a Fed spokesperson said.

Bartlett Naylor, economic strategy advocate for community Citizen, a buyer throng, criticized the events leading to Barr’s resignation.

“Wall Street’s attack on honorable community servants attempting to protect hardworking Americans and our economy from reckless banking sends ice water into the veins of monetary industry oversight,” Naylor said in a statement. “Barr led the attempt to establish better capital apportionment safety standards against the vigorous opposition of Wall Street banks.”

In a statement, Tim Scott, R-S.C., incoming chair of the Senate Banking Committee, assailed Barr both for his push for tougher regulations and inadequate oversight that helped navigator to a lender run and the collapse of Silicon Valley lender and related failures at other regional banks in early 2023.

“From his supervisory failures during the Spring 2023 lender failures to the disastrous Basel III Endgame proposal − Michael Barr has failed to meet the responsibilities of his position,” Scott said in a statement. “I stand ready to work with President Trump to ensure we have responsible monetary regulators at the helm.”

Contributing: Reuters