Fed's Barr: Expects further bank deregulation, with liquidity requirements likely next
- Expects further bank deregulation, with liquidity requirements likely next; warns cumulative easing of capital, liquidity and supervision is “unwise” and could make bank failures more likely or more severe over coming years.
- Largest-bank capital requirements reduced ~6% in aggregate across recent/proposed actions, equal to ~$60B less loss-absorbing capital for GSIBs that hold ~60% of U.S. banking-sector assets.
- Supervisory intensity is already falling: Matters Requiring Attention for the largest banks were roughly half 2024 levels by end-2025, while the number of large banks deemed “well-managed” under weaker rules doubled from end-2024 to the latest observation.
- Near-term deregulation “sugar high” is showing up in market activity and shareholder returns: bank buybacks rose 66% from end-2024 to end-2025, with ~$65-66B in buybacks in the first two quarters of this year; executive compensation rose 18% over the period.
- argues lower capital is not necessarily translating into more lending; banks are using expected capital relief to return capital to shareholders, while reduced leverage constraints may encourage more RWA compression similar to Europe.
- Bank/non-bank linkages are a growing systemic risk: bank credit commitments to other financial entities reached >$2.6T in 2H25, raising concern that stress or fire sales in non-banks could hit bank portfolios and broader credit conditions.
- Private credit risks are “meaningful but manageable”: rapid growth, more retail/high-net-worth exposure, rising redemptions over the last 18 months, opacity and software-credit stress are concerns; larger spillover risk is psychological contagion causing a broader credit pullback.
- AI/data-center financing has shifted dramatically over the last 18 months from hyperscaler self-funding toward bank loans, SPVs, private credit and REIT structures; Barr says total leverage is hard to measure and flags chip depreciation assumptions shifting from ~3 years to ~5 years as a sign investors may be worried demand will not meet optimism.
- Stablecoin regulation via the GENIUS Act is better than no framework but has gaps; Barr flags reserve-asset repo language that could allow Bitcoin or foreign currency instead of dollars, plus affiliation risks with less-regulated entities as issues regulators must “button down.”