Financial Sector Sees New Dawn with Departure of Top Regulator
The sudden exit of Michael Barr, the Federal Reserve’s top financial regulator, has paved the way for a more industry-friendly official to take the reins. This development is a significant boon for US banks, which have been riding a wave of post-election optimism.
A Shift in Regulatory Landscape
Barr’s decision to step down by next month avoids a protracted legal battle with the Trump administration, which had considered seeking his removal. This move ends his supervisory role 18 months earlier than planned, removing a potential obstacle to Trump’s deregulatory agenda.
Banks and Financial Stocks Soar
The news has sent bank stocks surging, with the KBW Bank Index rising as much as 2.4% on Monday. Citigroup and Morgan Stanley, which have faced regulatory issues in the past, were among the biggest gainers, each rising over 2%. The sector has been buoyed by speculation of softer regulation and increased deal activity, including mergers, since Trump’s election victory in November.
A New Era of Bank Regulation
With Barr’s resignation, the path is clear for a more precise image of incoming bank regulation to emerge. Trump is likely to choose between two Republican Fed governors, Michelle Bowman or Christopher Waller, to fill the vice chair of supervision role. Bowman, a former community banker and Kansas bank commissioner, is seen as the frontrunner and has been critical of Barr’s attempts to force American banks to hold more capital.
Industry-Friendly Reforms on the Horizon
Bowman’s appointment could lead to industry-friendly reforms around several sore spots for banks, including the opaque Fed stress test process, long turnaround times for merger approvals, and unfair confidential bank exams. The Basel Endgame, a proposal that would have boosted capital requirements for large banks, is now likely to be significantly watered down.
Capital Requirements and Share Buybacks
If lenders ultimately avoid being forced to hold more capital, they will be able to boost share buybacks and other uses for the money. This could lead to a significant increase in bank profitability and shareholder returns.
Preserving the Balance of Power
Notably, Barr is not resigning from his role as one of seven Fed governors, preserving the current 4-3 advantage of Democrat appointees on the Fed board. This move ensures that the balance of power remains intact for the time being.
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