(Yahoo! Finance) - The Federal Reserve’s top banking regulator Michael Barr will step down from his position in February, saying that "the risk of a dispute over the position could be a distraction from our mission."
Fed watchers expected President-elect Donald Trump to demote Barr, who was a Joe Biden appointee and a Treasury official during the Barack Obama era, although it was not clear that Trump would have had the legal power to make such a move once he took office.
Barr himself said in November he wouldn’t leave as the Fed's vice chair of supervision before his term was up even if Trump tried to fire him, saying "I intend to serve my fixed term of office." Barr's term as vice chair for supervision was scheduled to end in July 2026.
Barr backed off from that potential fight Monday, in a surprise move. However, he said that he would remain on the Fed board of governors, a separate term that doesn't end until 2032.
"I’ve determined that I would be more effective in serving the American people from my role as governor," he said.
Barr’s decision to resign by Feb. 28 doesn't mean his boss, Fed chair Jerome Powell, will necessarily do the same.
Since Trump's election win, Powell has repeatedly reinforced his intention to serve out his term as chair through May 2026, telling reporters he didn’t intend to go anywhere even if Trump tried to fire or demote him.
"Not permitted under the law," the central bank chair said in November when reporters asked about it.
Barr's departure comes as the people in Trump’s orbit are floating some dramatic ideas that would remake the way US banks are regulated, from deleting the CFPB to abolishing the FDIC.
There are lots of questions about whether any of the ideas, some of which would require acts of Congress, will come to pass.
Barr has clashed with the US banking industry over a new set of controversial capital rules proposed by top bank regulators that would require lenders to set aside greater buffers for future losses.
The requirements are based on an international set of capital requirements known as Basel III imposed in the decade following the 2008 financial crisis.
Banks have been fighting this US proposal for the last year in an aggressive public campaign and even dropped hints about suing regulators if they don’t get their way.
They won a big victory in September when Barr and other regulators said they would water down those requirements. Some in the industry expect regulators to scrap the proposal once Trump is in office.
"If there was any doubt," the Basel proposal "is dead," Stifel chief Washington policy strategist Brian Gardner said in a note.
Fed governor Michelle Bowman, who in 2023 opposed the Basel proposal, "seems like the likely choice" to become the new vice chair for supervision, Garner added.
Bowman is a former state bank commissioner of Kansas and vice president of Farmers & Drovers Bank in Council Council Grove, Kan. She was the lone Fed official to dissent against a 50-basis point interest rate cut from the central bank in September.
"I stand ready to work with President Trump to ensure we have responsible financial regulators at the helm," Senate Banking Committee chair Tim Scott said in a statement Monday, arguing that "Michael Barr has failed to meet the responsibilities of his position."
A longtime adviser to Trump, Stephen Moore, told Yahoo Finance Friday that replacing Barr was "something in the mix" as part of a second Trump term.
Moore said that since Barr is in favor of raising capital requirements that’s not something the incoming administration wants "because we'd like to see more bank lending and that would restrict bank lending or hurt the economy."
It is not clear that Trump would have had the legal power to remove Barr — or Powell, for that matter — even if he wanted to do so.
That question would hinge on interpretations of Section 10 of the Federal Reserve Act.
The law states that each board member shall hold office for 14 years "unless sooner removed for cause by the President."
The question that has been debated for years is what exactly constitutes "for cause."
The language in the law is plainly more restrictive for Fed officials when compared with the arrangements for cabinet officials and other members of a presidential administration, who are often described as working "at the pleasure" of the president.
Legal experts have tended to say that a simple policy disagreement wouldn't rise to the level of cause, but it's a standard that hasn't been tested with a judge.
By Jennifer Schonberger - Senior Reporter
