Bank Stress Tests Are Getting Easier. This Fed Governor Warns That Puts the System at Risk.

Fed Governor Michael Barr spoke out against changes to bank stress tests, warning that softening them could put the banking system at risk. (Graeme Sloan/Bloomberg)

Federal Reserve Governor and former Vice Chair for Supervision Michael Barr issued a stark warning Wednesday about efforts to soften financial regulation, and he asked policymakers to “resist the pressure” to ease restrictions.

In an unusually direct critique of current policy during a planned question and answer session at the Brookings Institution, Barr said proposed changes to stress testing could make it easier for banks to game the system and reduce the effectiveness of one of the Fed’s most important oversight tools. Stress tests were first introduced after the 2008-09 financial crisis to gauge whether large banks could withstand severe economic shocks.

Changes to these tests, he said, will make it easier for banks to “ossify” and “game” stress tests. “People are doing this for good, well-meaning reasons, but I’m really worried that, over time, stress testing will become less effective,” he said.

His comments come just months after stepping down from his post under mounting political pressure and as President Donald Trump’s pick to fill his role, Michelle Bowman, gains traction with a deregulatory agenda of her own.

Barr also expressed concern about proposed changes to how the Fed grades banks’ management, calling them “grade inflation” that could mask serious deficiencies. “If you call a bank well managed and it has a serious deficiency in governance and controls or capital liquidity, that’s not a well-managed firm,” Barr said. “That’s a firm with a problem.”

The comments appear to push back against Bowman, who was nominated to the Fed by Trump and had previously criticized Barr’s supervisory approach. The dispute underscores growing divisions over how aggressively the central bank should regulate the financial system. Barr’s own resignation followed public criticism from Trump and other Republicans who viewed his policies as too restrictive.

Barr stood by the post-financial crisis guardrails he helped implement, citing the collapse of Silicon Valley Bank as evidence that easing regulations had gone too far. He argued that recent proposals could put the system at risk once again. “People have already forgotten about that episode, even though it was just two years ago,” he said.

Despite his departure from the vice chair role, Barr remains a Fed governor and retains a voice in shaping policy. Asked whether he plans to stay through the end of his term in 2032, he said he has no plans to leave.

Nicole Goodkind at nicole.goodkind@barrons.com.