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Roula Khalaf, the Editor of the FT, curates her top stories in this weekly newsletter.
Two years ago, the United States faced its most significant banking crisis since the 2008 financial meltdown. Several regional banks, some comparable in size to Europe’s larger financial institutions, began to falter, including Silicon Valley Bank (SVB), whose failure nearly triggered a widespread crisis. SVB’s collapse was fueled by multiple factors. Its bond investments were deteriorating in value as US interest rates rose. With a few taps on their smartphones, anxious tech clients quickly withdrew deposits at an alarming rate, leaving wealthy individuals in desperate need of federal support.
Thanks to the crisis management skills that regulators honed during the 2008 financial crisis, a more extensive financial meltdown was averted. This troubling incident should resonate powerfully with US President Donald Trump’s regulation-happy financial overseers. The US Federal Reserve had identified the reduced oversight imposed on smaller banks like SVB during Trump’s initial term in 2018 as a contributing factor to its downfall.
The intricate network of overlapping federal and state financial regulators in the US is indeed in need of simplification and reform. However, the turnover at the highest levels of Trump’s new administration seems to favor deregulation for its own sake rather than a comprehensive efficiency effort. Investors in bank stocks are eager. Dealmakers, driven by the potential for bonuses, anticipate lucrative opportunities from an imminent reduction in regulatory burdens. Yet, seasoned bankers recognize that indiscriminate deregulation could sow seeds of trouble for the future.
As a significant opponent of the deregulation push, Gary Gensler stepped down from the Securities and Exchange Commission, which oversees financial markets, just before the new president took office. Paul Atkins is expected to take his place, having a long-standing record of opposing substantial corporate penalties on the basis that they harm shareholders.
Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, is likely to be succeeded by Travis Hill, who favors a less stringent approach to capital requirements and fintech oversight. The Consumer Financial Protection Bureau has also halted regulatory activities under the leadership of Russell Vought, the hardline conservative and acting head who describes the agency as “woke”.
Trump’s favorable stance towards cryptocurrencies raises significant concerns. He has initiated discussions around a potential national strategic reserve of these volatile tokens, supported crypto ventures by his sons, and even launched his own memecoin. Recently proposed adjustments to accounting standards would facilitate banks and asset managers in holding cryptocurrency assets — bringing these inherently unstable assets closer to the core of the financial infrastructure.
As the US banking landscape evolves, other major financial hubs may be tempted to follow suit. The EU and the UK have already started to relax stringent capital requirements for banks under the “endgame” to Basel III, inspired by the US. Nevertheless, the prospect of extensive reductions in financial regulations in the US raises the alarming possibility of a broader decline in regulatory standards.
Ken Wilcox, former CEO of SVB for a decade until 2011, warned that the wave of deregulation is “a monumental error that could be perilous.” He told the FT’s sister publication, The Banker, that “Without effective banking regulators, financial institutions will operate recklessly.” Trump is likely to avoid repercussions from this regulatory upheaval in banking and finance, as issues within the financial system typically remain hidden for years before they manifest as crises. However, if the new administration implements hasty regulatory rollbacks, we could soon feel the repercussions.
