Michael Barr will step down from his role as deputy supervisory chairman of the Federal Reserve by Feb. 28, or sooner if President-elect Donald J. Trump appoints a successor, the Fed said Monday.
Mr. Barr will continue to serve on the Central Bank's Board of Governors. But in an interview, Mr. Barr said the decision to leave his role as deputy supervisory chairman was aimed at avoiding a protracted legal battle with Mr. Trump that he said could harm the central bank.
Some people connected to the Trump administration wanted to fire Mr. Barr before his term as acting chairman expired, according to people familiar with the matter who spoke on background because of the sensitivity of the issue.
That could have led to a lengthy — and costly — legal battle over whether a new president has the authority to remove someone from a Senate-confirmed position at an independent agency.
Some financial regulation experts questioned why Mr. Barr — and the Fed itself — would allow policy shifts to influence who held powerful roles. Jerome H. Powell, the Fed chairman, has stressed that the Fed is independent of the White House and that its decisions are not influenced by politics. Mr. Powell has also insisted that Mr. Trump lacks the legal authority to remove him from his role as Fed chairman, which is also confirmed by the Senate.
“I am surprised by Barr's announcement because I expected him to resist Republican calls for his ouster and defend the Fed's independence,” Ian Katz, managing director of Capital Alpha, said in an email.
Mr. Barr said he and his lawyers believed he would prevail in court if Mr. Trump tried to remove him. But he concluded the fight wasn't worth fighting because it could harm the Fed.
“If the matter were litigated, I would win,” Mr. Barr said. The bigger question, he said, was, “Do I want to spend the next few years arguing about this, and is this good for the Fed?” And I came to the conclusion: No, this is not good for the Fed, it would be a serious distraction from our ability to serve our mission.”
Mr Barr said the decision had not been easy. “The question I have been wrestling with is a difficult question, and in many ways it has been a painful decision.”
By resigning voluntarily, Mr. Barr also avoids scrutiny over whether Mr. Trump — or any other president — has the authority to fire a Senate-confirmed official. Both Mr. Barr and Mr. Powell have said the law prevents Mr. Trump from removing them from their posts. However, this view still needs to be tested in court. A decision allowing Mr. Trump to fire Mr. Barr could have opened the door to firing Mr. Powell, an idea the president-elect flirted with during his first term.
His departure will effectively freeze all banking regulatory action until Mr. Trump names someone for the acting chairman role. Announcing its move, the central bank said: “The board has no intention of embarking on major rulemaking until a deputy chairman is confirmed as a supervisory successor.”
The combination of Mr. Barr's decision to resign and the moratorium struck some financial regulatory experts as particularly problematic.
“The Fed has historically zealously maintained its independence,” said Aaron Klein, Miriam K. Carliner chairman and senior fellow in economic studies at the Brookings Institution. “I find it strange that the Fed seems to not only tacitly support this decision by Barr, but even go a step further and announce a moratorium on rulemaking.”
Mr. Klein noted that a decision by Mr. Trump not to select anyone for a year or more could result in banking rules being set indefinitely.
Dennis Kelleher, president, chief executive and co-founder of Better Markets, a nonprofit that advocates for stricter financial regulation, called Mr. Barr's decision “shocking” and said it would undermine the Fed's role in overseeing safety and soundness the financial markets affect the system.
“His unwarranted capitulation to deregulation enthusiasts will actually destroy this mission faster and more thoroughly than any dispute over this position,” he said.
Mr. Barr's move comes after a tumultuous tenure in which he oversaw the regulation and supervision of the country's largest banks. Mr. Barr oversaw an attempt to rewrite financial rules, which would have increased the amount of money banks must hold.
The reform would have required the largest banks to increase their capital buffers – cash and other easily accessible assets that could be used to absorb losses – which Barr said would ensure the banks could weather periods of severe turbulence.
The proposal — and Mr. Barr — were immediately attacked by a variety of groups, including the banking industry, lawmakers and even some of his colleagues at the Fed. Two of the Fed's seven governors, both appointed by Trump, voted against the rules.
Mr. Barr ultimately watered down the proposal in September after acknowledging the setback.
“Life gives one ample opportunity to learn and relearn the lesson of humility,” Mr. Barr said at an event this month.
While Mr. Trump has not announced any plans to replace Mr. Barr, the president-elect has made clear he wants to take a pro-industry stance toward banks, echoing his administration's approach during his first term. Randal K. Quarles, Mr. Trump's deputy supervisory chairman, pushed for easing banking regulations during his time in office.
Even before Mr. Barr announced his decision to leave, there was widespread speculation that the banking proposal, known as the Basel III endgame, would not receive final approval in a Trump administration.
The changes must be agreed upon jointly by the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. Mr. Trump has the opportunity to nominate the directors of the FDIC and OCC, but has not yet said who he plans to name.
Sen. Tim Scott, the South Carolina Republican who will lead the powerful Senate Banking Committee, welcomed Mr. Barr's decision to resign, citing the spring 2023 failure of Silicon Valley Bank and other regional companies as well as Basel III -Regulate.
“From his regulatory failures during the spring 2023 bank failures to the disastrous Basel III endgame proposal, Michael Barr has failed to live up to the responsibilities of his position,” Scott said in a statement. “I stand ready to work with President Trump to ensure we have responsible financial regulators at the helm.”