Economic Risks in the U.S.: Trump and the Deregulation of the Banking System

The professor highlighted that such approaches could lead to serious problems in the future, which may arise even before Trump leaves office. He noted that if asked about the likelihood of a new large-scale financial crisis in the U.S. six months ago, he would have responded that while such a possibility always exists, the likelihood of it occurring in other countries, such as Japan, is higher. Japan, according to him, is facing a constant rise in interest rates, even though its economy has been accustomed to nearly zero rates for decades.

However, the professor admitted that he underestimated the Trump administration's appetite for deregulation. It is not only revisiting strict measures enacted after the 2008 financial crisis but is also ruthlessly cutting staff in key regulatory agencies. This leads to a loss of experienced experts, posing a threat to institutional memory.

He reminded that aggressive deregulation approaches have previously led to serious financial crises. For instance, the savings and loan crisis of the late 1980s resulted from a deregulation campaign led by President Ronald Reagan. The global financial crisis of 2008-2009 was also a result of deregulation policies initiated under President Bill Clinton and continued under George W. Bush.

The crisis associated with Silicon Valley Bank in 2023 occurred partly because the first Trump administration weakened capital requirements. While this does not guarantee a new crisis, the economist pointed out that there are numerous reasons for concern.

Specifically, the new deregulation campaign initiated by Trump targets capital requirements, which determine how much resources banks can raise through borrowing in bond markets and from depositors, and how much through increasing their own capital. Capital requirements are crucial for ensuring that banks have reserves to cover losses and maintain liquidity in their assets, so that in the event of unexpected withdrawals by clients, banks are not forced to sell valuable assets at fire-sale prices.

The economist noted that according to Moody's, if the latest regulatory changes lead to a reduction in liquid capital resources, it will negatively impact the level of banking risks. As economists Anat Admati and Martin Hellwig pointed out in their 2013 book, "The Bankers' New Clothes," a reduced threat to bankers losing their money creates stronger incentives to increase risks at the expense of taxpayers.

Thomas Friedman, commenting on the situation, stated that Trump is "playing with matches in a room filled with gas." This underscores the seriousness of the situation facing the American economy.

It is also necessary to consider arguments in favor of easing or clarifying the regulations imposed after 2008. Michelle Bowman, who was nominated by Trump to the Board of Governors of the Federal Reserve and currently serves as the Vice Chair for Supervision, believes that this will enhance regulatory effectiveness, allowing banks to be better positioned to support economic growth while maintaining safety and soundness.

However, the most significant concerns arise from changes occurring with the least transparency, particularly related to stress test rules that assess capital adequacy in banks during a crisis, as well as guidelines for regulators regarding inspections and reporting issues.

Bowman's predecessor as Vice Chair for Bank Supervision, Michael Barr, has also expressed concerns in this regard. As a member of the Federal Reserve Board, he has repeatedly voted against regulatory changes proposed by the Trump administration. In an agency where consensus is valued, frequent displays of dissent attract attention.

Proponents of easing bank regulation point to stiff competition from deregulated cryptocurrencies, particularly dollar stablecoins. They argue that banks need opportunities for innovation and successful competition. However, it is crucial to avoid a situation where deregulation of both cryptocurrencies and the traditional financial system leads to an inevitable crash.

When might such a crash occur? In their 2009 book, "This Time Is Different," Carmen Reinhart and co-author noted that predicting the timing of a crisis is very difficult, as authorities and banks have many motives to conceal problems. However, it is hard to disagree with Senator Elizabeth Warren's warning made back in February 2025: the level of risk has significantly increased.

One line of defense against risks has historically been the comparative independence of regulators, such as the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve itself. While the question of the appropriate degree of independence for regulators is complex, given the expanded understanding of presidential powers under the Trump administration, the independence of regulators is undeniably diminishing. The White House has taken on a more significant role in evaluating regulatory processes, holding regular meetings with top financial regulators and the Treasury Secretary.

Will a full-blown systemic banking crisis occur soon? Most likely not, as even if restrictions in current regulation are sharply eased, the financial system will need two to three years to reach new heights.