Why the Good Times Can Be Dangerous for Risk Professionals

Key Takeaways

• When Booms Invite Complacency: Financial booms often bring deregulation or inaction, setting the stage for painful busts.
• History as a Warning Sign: Fed Vice Chair Michael Barr traces a pattern from the Great Depression to the Global Financial Crisis, showing how regulatory erosion deepens downturns.
• Modern Implications for Risk Teams: Barr urges today’s regulators and compliance professionals to resist deregulatory pressure and keep pace with financial innovation.
• Through-the-Cycle Thinking: Effective supervision demands consistency, not loosening the reins just because the economy is thriving.
• Memory Is a Risk Factor: As crises fade, so does the perceived need for guardrails. The cost of forgetting? Another crash.

Deep Dive

When things are going well—when markets are humming, innovation is booming, and everyone feels flush—it’s tempting to believe the system is safer than it actually is. That’s exactly the moment risk professionals should be most concerned.

In a speech at the Brookings Institution this week, Federal Reserve Vice Chair for Supervision Michael S. Barr delivered a very timely reminder that good times often mask growing vulnerabilities. The message was simply that history has a habit of repeating itself, especially when we forget what caused the last crisis.

Barr’s talk, titled “Booms and Busts and the Regulatory Cycle,” didn’t just revisit the past, it dissected it. He walked listeners through three major financial breakdowns in U.S. history, inlcuding the Great Depression, the S&L crisis of the 1980s, and the 2007–2009 Global Financial Crisis. Each of them, he argued, was made worse by a common thread, regulatory weakening.

Sometimes that weakening was explicit, like in the deregulatory push that helped fuel the S&L collapse. Other times, it was more subtle, like when outdated frameworks failed to keep pace with innovation in the run-up to 2008. But either way, the result was the same: a boom that looked bulletproof until it wasn’t, followed by a bust that inflicted lasting damage.

A Familiar Story, Told Three Times

Barr pointed to the Roaring Twenties as a case study in how progress can outpace oversight. As banks and nonbanks grew more complex and speculative, regulators failed to adjust. When the crash came in 1929, nearly 9,000 banks failed. In response, Congress created the FDIC and reimagined financial regulation.

Decades later, in the 1980s, the S&L sector grew rapidly under loosened rules. But rather than reining in excess, policymakers doubled down on deregulation—allowing “zombie” institutions to pile up losses until the system finally collapsed. The bill to clean it up? Around $160 billion.

Then came the 2000s, when confidence in financial innovation and market discipline ran high. New mortgage products, OTC derivatives, and short-term funding mechanisms surged with minimal oversight. Meanwhile, regulators wielded actual chainsaws to symbolize their commitment to cutting red tape. The crash that followed brought the deepest recession since WWII.

For each of these crises, Barr said, “regulatory weakening—whether active or passive—contributed to the fragility that made things worse.”

These aren’t just history lessons, they’re warnings for today’s compliance and risk leaders. In fact, Barr explicitly cautioned against assuming “this time is different,” even as new technologies and financial tools emerge.

Innovation isn’t the problem, he emphasized. The issue is how quickly innovation can outstrip oversight, especially when policymakers feel political or market pressure to back off. Whether it’s crypto, AI in lending, or new fintech structures, the risks of regulatory lag are as real as ever.

“It is well within our ability, and is our duty as regulators, to learn from these episodes,” he said, “to avoid making the same mistakes.”

The Role of Risk Professionals

For those in risk management and regulatory affairs, Barr’s message is a call to stay alert, especially when the economy is strong and the temptation to relax rules runs high.

He outlined three key lessons for maintaining a resilient system:

• Keep a long memory: Don’t assume that just because a regulation seems burdensome during boom times, it won’t be missed when the cycle turns.
• Resist premature deregulation: Regulatory guardrails might feel unnecessary during expansions—but that’s often when they matter most.
• Evolve the rulebook: Regulation must keep pace with the financial system. Failing to adapt can be just as dangerous as dismantling rules outright.

To be clear, Barr didn’t argue for overregulation or stagnation. He acknowledged that rules should evolve and that removing outdated requirements can be appropriate. But evolution should be thoughtful, not reactive. And it must prioritize systemic resilience, even when pressure builds to take shortcuts.

“Humility would have helped,” he said of previous missteps, “and it will help us now.”

For risk professionals navigating today’s fast-moving financial environment, that humility, and a little historical perspective, may be the most important tools in the toolkit.

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