Donald Trump’s deregulatory drive will cause another financial crisis

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.

The savings-and-loan crisis of the 1980s was the result of thrifts doing high-risk commercial-property deals with weak capital requirements, while supervisors turned a blind eye. The global financial crisis of 2007-09 was prompted by a failure to supervise and to require adequate capital to limit the risks associated with subprime mortgage lending and the securitised products concocted to stoke that lending. The regional bank failures of 2023 were preceded by a weakening of the capital and liquidity requirements and supervisory standards for the very institutions that were at the heart of the crisis. In each case the lessons of the past were ignored following a period of relative stability.

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.

Under Donald Trump, the Treasury Department has argued that regulation itself can threaten financial stability. That is a dangerous claim to make amid booming equity markets and weakening credit conditions, when financial safeguards matter most.

The administration’s campaign to weaken financial regulation has three main components. First, it is subjecting independent regulators to political direction. Executive Order 14215 places all federal financial regulatory agencies, including the Federal Reserve in its regulatory capacity, under White House control. This covers all regulatory actions, policies, strategic plans and interpretations of agency law. It is given even greater force by the recent Supreme Court decision empowering the president to remove the heads of previously “independent” financial regulators. It has already affected various agencies’ budget and staffing decisions.

Second, agencies that police financial risk have been hollowed out. 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.

Other federal financial regulators, including the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency and the Securities and Exchange Commission, have implemented or plan staffing reductions of 20-30%. The Consumer Financial Protection Bureau faces a staggering proposed reduction of nearly 90%. This loss of experienced leadership, institutional memory and proven judgment would be particularly damaging should the financial system come under stress.

The reviews by the Fed of Silicon Valley Bank, and by the FDIC of Signature Bank, the failures of which precipitated the regional bank crisis of 2023, concluded that a shortage of bank examiners affected supervision of both institutions. One can only guess at the potential impact of the subsequent loss of hundreds of additional examiners at both agencies.

On Mr Trump’s watch the scope of bank supervision has narrowed. Last October the Fed circulated a “Statement of Supervisory Operating Principles”. 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.”

This is thick-headed. Supervision is not about reacting to material financial risks after they have emerged. It is about preventing them. This includes assessing the effectiveness of an institution’s own identification and management of risk and its internal controls. These were central issues in the regional bank failures of 2023. An update to the Fed’s principles in April 2026 added hortatory language but kept them substantively unchanged.

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. The agencies have already finalised a rule that would lower the leverage capital requirement for these banks by nearly 30%.

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.

Taken together, these policies greatly endanger financial stability. We must be clear about what is at stake. If this deregulatory agenda and the undermining of supervisory institutions are not reversed, another financial crisis will erupt sooner rather than later. And this time will not be different—except that the institutions we rely on to respond to such crises will lack the people, experience and resources to limit the costs. ■

Martin J. Gruenberg was chairman of the Federal Deposit Insurance Corporation in 2012-18 and again in 2023-25. He is a lecturer in the Yale Programme on Financial Stability.