AMERICA HAS experienced three major threats to its financial system since the second world war. Each was precipitated by a period of deregulation and lax supervision. There could be a fourth by the end of Donald Trump’s term in office.
Second, agencies that police financial risk have been hollowed out. On Mr Trump’s watch the scope of bank supervision has narrowed. Its core directive was that “Examiners and other supervisory staff should prioritize their attention on a firm’s material financial risks. They should not become distracted from this priority by devoting excessive attention to processes, procedures and documentation that do not pose a material risk to a firm’s safety and soundness. The third part of the administration’s campaign is a lowering of capital standards. The federal banking agencies are weakening both leverage and risk-based capital requirements for the largest, most systemically important banks, thereby reducing their ability to withstand stress when the cycle turns.
In May 2025 the Fed announced a workforce reduction of 10%, some 2,400 employees, across the Federal Reserve system. Five months later it said it would reduce its Washington-based supervision and regulation division by 30% by the end of 2026. The agencies have already finalised a rule that would lower the leverage capital requirement for these banks by nearly 30%.
Last October the Fed circulated a “Statement of Supervisory Operating Principles”.
Capital is the foundation of financial stability. It is what makes banks credible and able to meet the economy’s financing needs through good times and bad. During the global financial crisis, banks had insufficient capital to cover losses and needed hundreds of billions of dollars in support from the government. A glaring lesson was to keep capital levels high during benign times. The argument that this unduly constrains banks is simply not supported by the evidence. Martin J. He is a lecturer in the Yale Programme on Financial Stability.
Gruenberg was chairman of the Federal Deposit Insurance Corporation in 2012-18 and again in 2023-25.
Executive Order 14215 places all federal financial regulatory agencies, including the Federal Reserve in its regulatory capacity, under White House control. The Trump administration is not only ignoring the lessons of the past. It has exacerbated this failing by explicitly politicising regulation through executive order and severe workforce reductions across all of the federal financial regulators. This is laying the groundwork for the next financial crisis. The administration’s campaign to weaken financial regulation has three main components. First, it is subjecting independent regulators to political direction. This covers all regulatory actions, policies, strategic plans and interpretations of agency law. It has already affected various agencies’ budget and staffing decisions.
It is given even greater force by the recent Supreme Court decision empowering the president to remove the heads of previously “independent” financial regulators.
