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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Two years ago, the US was on the brink of its most serious set of bank failures since the financial storm of 2008. A clutch of regional banks, some the size of Europe’s larger lenders, hit the skids, including Silicon Valley Bank, whose demise came close to sparking a full-blown crisis. SVB’s crash had several immediate causes. Its bond holdings were crumbling in value as US interest rates pushed higher. With just a few taps on an app, the bank’s spooked and interconnected tech customer base yanked out deposits at an unsustainable pace, leaving multimillionaires crying out for federal assistance.
The swift crisis-cauterising skills regulators forged in the fire of 2008 helped avert a broader financial contagion. The grim episode should loom large in the minds of US President Donald Trump’s trigger-happy, anti-regulation financial sheriffs. After all, the US Federal Reserve identified the lighter supervisory burden placed on smaller banks like SVB in his first term in 2018 as a key ingredient in its failure.
The US’s byzantine maze of overlapping federal- and state-level financial regulators is indeed ripe for simplification and reform. The personnel shift at the most senior levels in Trump’s new administration, however, points to deregulation for its own sake, not an incisive efficiency drive. Holders of bank stocks are licking their lips. Bonus-hungry dealmakers reckon an impending bonfire of red tape will open up lucrative opportunities for lenders. But every serious banker knows that a haphazard cull of regulation risks storing up trouble for a later date.
Bogeyman to the deregulation agenda, Gary Gensler, departed the Securities and Exchange Commission, the key financial markets watchdog, shortly before the new president was sworn in. Paul Atkins is lined up to replace him, and has a long history of opposing big corporate fines on the grounds that they hurt shareholders.
Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, is likely to be replaced by Travis Hill, who wants a lighter touch approach to capital requirements and fintech regulation. Next is the Consumer Financial Protection Bureau, which has paused regulatory work under Russell Vought. The hardline conservative, who has been the body’s acting head, describes it as “woke”.
Trump’s embrace of cryptocurrencies is particularly concerning. He has laid the groundwork for a possible national strategic reserve of the speculative tokens, backed crypto projects launched by his sons, and started his own memecoin. Newly proposed changes to accounting guidance would also make it much easier for banks and asset managers to hold crypto tokens — a move that pulls the highly volatile asset closer to the heart of the financial system.
Where the US banking system goes, other major financial centres will be tempted to follow. The EU and the UK have already cooled on onerous capital requirements for banks under the “endgame” to Basel III, following the US’s lead. But given the breadth of America’s plans to slash financial red-tape, the risk of a broader race to the bottom in regulatory standards remains.
The wave of deregulation is “a huge mistake and will be dangerous”, said Ken Wilcox, who was chief executive of SVB for a decade up to 2011. “Without good banking regulators, banks will run amok,” he told the FT’s sister publication The Banker. Trump himself will probably dodge any fallout from this regulatory free-for-all in banking and finance: problems deep inside the financial system often take years to develop into visible crises. But if the new administration engages in thoughtless regulatory cuts, we could all feel the effects soon enough.
