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It's going to be the largest regulatory reduction in the history of our country.
It's going to happen very fairs.
I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and this is trump Anomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy and what on earth is going to happen next. And this week we're talking about Donald Trump's way with money, all kinds of it. The old guard on Wall Street and the crypto punks are all delighted with the administration's plans for the financial sector so far,
especially the big push on deregulation. That's no mean feat. I mean, there's little else these folks could agree on. But when the financial sector gets everything it's asked for, that's not always good news for the rest of us.
In loosening the guardrails on the banks, or at least saying that's what it wants to do, and giving the presidential seal of approval to all kinds of crypto, is the administration laying the groundwork for the next big financial crisis, or just correcting the mountain of bureaucracy, regulation, and risk aversion that descended on America's financial system in the years after the financial crisis of two thousand and eight. That's what I'm wondering about this week, and I have two
expert colleagues to help me navigate it all. Joining from New York Christine Harper, a member of the Bloomberg editorial board and also the co author with the man himself, of Paul Volker's biography, And in Washington, D C. Katanga Johnson, who's our lead reporter covering banking regulation in that bureau. Thank you so much for coming, both of you.
Thank you thanks for having us in.
So Kittanga, we tend to come to reporters first because they're the ones who are trying to kind of keep track of everything that's going on. When the administration came in, what would you say were their big priorities in thinking about the state of financial regulation in the US and the administrative system that they were inheriting.
On day one, Trump's regulators really wanted to focus on streamlining all regulatory and supervisory efforts to make sure that small banks, community banks could compete and that bigger banks weren't necessarily complying with rules that were, as they say, goal plated or much more onerous than the framers had anticipated.
Part of that focus was really to address things that didn't really address a bank's balance sheet, things like climate rules restricting access and partnerships with FinTechs and non banks,
heavier hand on anything tied to crypto. Trump's regulators came in thinking, how can we level the playing field for banks to compete, whether those were smaller banks and bigger banks, And let's pause anything that the bui An administration proposed and then revisit some of the bigger ticket items addressed issues that actually affected their ability to end, like capital liquidity and all the rest.
Okay, so that's really useful.
We've tended to think that the administration has acted extremely quickly on an enormous range of fronts in its first few months. If you think about those goals that you just set out, how are they doing if they made some big moves in those directions.
On the one hand, initially privately you'd hear folks on Wall Street and even some in Washington would agree there are things of the administrations doing that's not quite the main priority that included a flurry of executive orders that seemed to get in the way of regulators getting to work.
But to some degree, the personnel moves that we've seen at the agencies have really made a big difference in terms of their ability to get the deregulation agenda started, and chiefly at the FAD the departure of Michael Barr, who, as the Vice Chair of Supervision under Biden, was supposed
to be in office until next year. His departure in a bid to sort of avoid a fight with Trump, open the way for Michelle Bowman, who's now the fed's top bank cop, to come in and really take a look at Okay, what are the main issues that banks have said they want to see paused and what are things that we could begin to do around capital and the major agenda items so far out of the FED and indeed all of the regulators has been a major
capital rule, this enhanced supplemental Leverage ratio, which is the beginning of easing capital rules for banks. There are others that we expect, but already having a proposal with a thirty day comment period on that item, in addition to pausing other rules that sort of got in the way, has been in some ways ahead of track for the administration, again because of Mar's departure.
It's good you've taken us to the effect because I want to get onto that a bit later. I think we tend to focus a lot on what's going to happen to the chairmanship of the FED, and thinking about Jay Pale and whether he's going to get FED and
how much power that might get the president. But as you've reminded us, there's lots of people behind slightly less high profile things that the FED is deeply involved in which the administration can have a lot of influence over partly because of that personnel change you just mentioned Michelle Bowman. So we'll get onto that in a bit. But Christine, after many years of very distinguished reporting in different areas, often in finance in Bloomberg, you're now on the editorial board,
and so you're associated with the editorials. And I was quite struck by one on financial deregulation that was published soon after President Trump was re elected, saying this campaign's disdained for the administrative state and the public's growing exasperation with red tape suggests the country is in for a period of bureaucratic humility. Here's hoping the financial system doesn't become vulnerable as a result. Well, I think you've got the bureaucratic humility right.
But do you think.
Overall that we're heading in a direction where the financial system will be less safe?
Well it's hard to say. I mean, but as Katanga was pointing out, personnel is really policy here. I mean, besides Michelle Bauman, who's been a very staunch opponent of many of the regulatory efforts under Biden, the Trump administration has named to all of the key regulatory posts people who are, you know, advocates for the industry in one way or another. I think even Michelle Bowman has named one of the top lobbyists for the banks as a
key deputy. So now there are people in position to rewrite or pause in many cases, rules or enforcement actions that the industry didn't like. That's not always a bad thing. Some of the things that were happening under the Biden
administration were just, you know, probably over aggressive. Gary Gensler had an incredible record at the SEC of writing and proposing rules, far exceeding his predecessors, and many of the rules he was proposing were not required by statute, so he was really going above and beyond, and that is all being dialed back pretty quickly. The people who are in place are just right now just trying to and anything that was happening under their predecessors. And as I said,
some of that makes sense. For instance, these really onerous requirements on mergers between banks and probably don't make that much sense. Bank mergers are in and of themselves not a bad thing. They can actually make the system safer sometimes. That said, I mean, they've basically gutted the Consumer Financial Protection Bureau, which had done some pretty useful work in
protecting consumers. And remains to be seen how lowering capital requirements as are proposing will affect the resilience of banks if things go wrong. And then they're dialing back some of the oversight that had been proposed over the sort of so called shadow banking system, which poses its own set of potential dangers. I thought it was interesting just to make one point that the SEC one of the commissioners who's still on the Commission, who's a Republican, is
Hester Pierce. She's so pro the cryptocurrency industry that she's known as crypto mom, but she actually put out a fascinating last week pushing back at the effort to tokenize all the financial instruments. If you tokenize things, it doesn't magically change the underlying thing. You can't just avoid securities
laws by tokenizing something. So even people are who are industry advocates who are starting to see they need to push back a little bit against some of the excessive optimism of the people there.
So just to touch into the weeds a little bit. One of the rules that has certainly been a little bit unpopular among some of the big banks is this supplemental ratio, which is supposed to be about maintaining the strength of the balance sheet of the bank and making sure that they can't be too highly leveraged. But there's a change in effective loosening in that which the administration is very keen to achieve. You know, roughly, what is that aimed at doing? Katanga?
Roughly, the regulators hope that by making changes to the ratio, to the enhanced supplementary leverage ratio, that trading in the twenty nine trillion dollar treasuries market, particularly in a.
Moment you had federal government bonds, Yeah.
Would be easier for the likes of JP, Morgan Goldmansas, and Morgan Stanley, And by lowering that requirement for those banks, it would allow them and their subsidiaries to sort of have the same requirement.
So, Christine, I'm remembering in the first Trump administration, some of the constraints that were put on banks after the global financial crisis were paired back, and then it was suggested later that those changes had helped put us on a path to the bank failures we had a couple of years ago. I guess you know, Silicon Valley Banks
signature First Republic. Do you have the same kind of worries about this effort to change the supplemental leverage ratio or do you think it actually makes a bit of sense.
Well, I mean, it's certainly true that the size of the treasury market has grown dramatically since those rules were first proposed back in I think twenty fourteen, and so when they were proposed, there was supposed to be this limit on how many assets banks could have compared to their level of capital, even if those assets were super
safe things like treasuries or central bank reserves. So they wanted to make sure that there was a minimum sort of backstop, no matter what the riskiness of their assets was. But as this treasury market has grown, now the banks are constrained when things really developed from being able to just buy unlimited treasuries, and as a result you've seen a lot of hedge funds and proprietary trading firms step in and do a lot more activity in the treasury market.
The problem is that if you lower that backstop, that sort of minimum capital requirement for banks, you're just reducing the safety that bank depositors and other investors have that if something goes wrong in the assets on the bank's balance sheet, that they'll have enough capital to deal with it. So things just go wrong, they always do, and so as a result, it would make more sense in my view to have capital requirements where they are. It doesn't
seem necessarily to lower them. There are other ways you could solve the problems in the treasury market.
It is funny when you look at a bank balance sheet, there is this kind of basic fact that if it was any other business, you would say.
It was hugely bankrupt. You know.
It's like they're the only institutions that are able to have a relatively small amount of equity, and then they're lending a huge amount on the back of that, which you'd never be able to do if you were just a sort of normal, normal company.
Right, And that's by design. And that's one of the arguments that a lot of the you know, private credit and non bank companies are saying is that you know, we have a different model where we have more permanent capital, and so there's no risk that depositors suddenly flee and you have a problem with, you know, trying to repay your lenders. But banks, you know, are always going to
be leveraged. But making sure that they're not over leverage is sort of the core part of the post financial crisis regulation, and so any effort to sort of water that down seems concerning.
I could take it.
I think, I mean Scott Besson, the Treasury Sectuary, it does seem to be one of the key movers in this financial deregulation or certainly to this push to change banking regulation. And of course the Treasure Secutor has always had quite a lot of power in these areas, but I guess the way that the administration has concentrated power and gained a lot more influence over the independent agencies.
You know, Supreme Court has kind of given them the power to hire and fire many of these officials or independent agencies who we previously would have thought of as a bit more arm's length from the administration. I mean, I write in thinking that he has become a particularly important figure in this and along with Michelle Bowman, is you know, really giving the administration a much sort of clearer unified policy making than we might have had in previous series.
You're right, Stephanie, that'son has really taken the helm of the financial regulators and said, let's coordinate our efforts by meeting with the heads of the three main banked regulators, the Federal Reserve, the Federal Deposit Insurance Corp, and the Treasury Zone Office of the Control of the Currency. Together, those three agencies are now trying to coordinate their efforts in streamlining rules, discussing the sort of priorities around changes to capital.
Call me suspicious, but I can't help noticing that Scott Bessont the Treasury sector, who's now going to be also presiding over a massive increase in the number of US treasuries. I mean, the debt is going to go up by several trillion dollars at least according to almost everyone's forecast. Is it a coincidence that he also wants to make it much easier for banks to hold treasuries not worried
too much about how many they own. Isn't that going to be unbalance sort of positive for the market at a time when the cost of borrowing for governments from going up.
Many people would agree that yes. On its face, it's interesting that Beston is playing that role and seemingly following some strategy that many others either haven't haven't seen or haven't agreed on. But what the impact will be will be rather interesting, and I imagine a lot of ways people close to him privately must be discussing, Hey, have you considered what the outcome will be by addressing things in this way on both sides?
Well, that's a very careful answer, which I would expect. I would expect no less. But lots of people will be amazed that we haven't talked about crypto yet, Christine. For people on the outside, that seems like the biggest sort of mood shift and change of direction for this
administration when it comes to finance. I mean, that feels like the whole world of cryptocurrencies is being kind of welcomed into the American financial system in a way that was just not the case under the previous administration.
But that's absolutely true. And just to return to your previous point about the treasury market, one of the first things that the Banking Committee got to was the Genius Act, which is a way of creating a regulatory framework for
what are known as stable coins. This is a part of the crypto market that basically just as you know, a digital version of the dollar, let's say, and there's part of the regulatory regime will require them to own safe assets like in particularly treasuries, and there's an argument that this will increase demand for treasuries and help the dollar and whatnot. And so you're building a sort of a whole financial structure that's even more leveraged on treasury market.
So stable coins and banks, as you've talked about, At a time when the treasury market maybe is becoming a little less reliable, as you just saw a downgrade from the third of the three big rating agencies, that maybe should be a cause for some concern, but otherwise, crypto in general sort of the irony is it's being boosted by regulation because they were the least regulated thing that
existed and they could do whatever they wanted. And it turned out that was not good for the crypto industry because they went too far and they stole too much money, and people lost their life savings and got scammed and got defrauded, and there were a lot of problems. And so now they're writing rules to make people feel comfortable
about the crypto industry. And it's interesting that these are rules that were essentially very similar to what Sam Bankman Freed was proposing back when he was on the Hill, you know, asking for regulation by the commodity in futures.
Right before his company blew up.
Yeah, before he went to jail. So you know, and Trump himself was a big skeptic of crypto back in the day, kind of in the same vein as Jamie Diamond and Warren Buffett. But now he's he's in the business, so he's a proponent. So yeah, everything seems to be designed on Capitol Hill to do whatever they can to
help the crypto industry. And you know, there's I think a genuinely large degree of risk in that, you know, the volatility of these assets they're just not They don't have the tradition of risk management that the sort of you know, more established banking and financial system have, So there's a lot more volatility and there's no fundamental value in a lot of these sort of meme coins or
different tokens. I mean stable coins are different, obviously, but even stable coins, it's going to be a lot of tech companies starting these. One way of thinking of it is you've sort of had banks that were becoming more technologically focused, and now you're having tech companies that are becoming more bank focused, and which do you feel safe for putting your money in. It's a real question. The risk is that there we're having a bubble, which you
know is very possible. We had one in twenty twenty two that popped, and then if it all turns around, then you have a big you know. And the more the more that it's a traditional financial system is connected to it, the more risk you have for the broader economy and people who aren't connected to crypto.
Good Tanka weren't. There's some limits that were put on the banks to prevent them having too much exposure to crypto, and the administrator's been talking about pairing those back.
Is that right?
So trust regulators have indeed sort of reversed those guardrails that were put in place f I mean the twenty twenty two issues in the industry, But since then they've tried to underscore the importance of banks that are holding crypto custody, as recently as this month saying banks really should bear in mind that the onus is on those institutions for any types they have with crypto firms to make sure that they are disclosed adequately and spell it
for their customers with the risks are which is commonplace. Right, that's an expectation.
You know, we saw that really work very well in two thousand and eight. Just to just be careful, just make sure you know the risks on your balance sheet if you were one of the big banks. There has to be something a little bit alarming about this zeal to have this whole new form of finance that, really, although it's somewhat regulated, now makes a virtue of not being very transparent, of being difficult to track, and somewhat
outside the traditional system. You have the Peter Tiels of this world and others they actively want to you would say, dis intermediate you know, bring the final outside of traditional banks. It is a threat to the traditional financial system ultimately, and its administration seems to be all in favor.
Well, I mean in two ways. So I would say one thing that's been a rallying cry among Republicans this year has been this claim that the big banks were debanking, meaning denying banking services to crypto related companies, just on the basis of sort of reputation or not liking them, and that this was a wrong thing and that it had to be stopped. And so you know, there was put in place a change so that you know, regulators
couldn't consider reputation risk when they're assessing banks. Banks have a lot of reasons why they legitimately had to have concerns about banking with these crypto companies. One of the with them is just how onerous it is to do the anti money laundering checks. This is a system that's designed to get around the regulated financial system. It has been used by criminal and illicit funds. So now they're almost being pushed that you have to bank crypto. If
you're not, you're somehow debanking. You're doing this illegal and sort of almost like a First Amendment the kind of thing. On the other front, there is this real concern that some of the rules that have traditionally applied to the financial sector, like the US has always had this concept of the separation of commerce and banking. In other words, we don't want Walmart to also be a bank because then somehow they're going to you know, prioritize their suppliers
and their customers over their competitors. Stable coins are going to be allowed to be issued by a lot of tech companies, or at least the private tech companies, and so you know, this is sort of these traditional rules are just being scrapped in the interest of helping the sort of crypto industry. And so yeah, I think for the big banks and for little banks, it's sort of a concerning development development.
Okay, Tangia.
Is there a concern in Washington that the financial system is going to be a bit hard to control as a result of this or is that just not a voice that you hear very much when you're talking to people.
Not quite the voice I'm hearing in Washington. But either former regulators on both sides, folks who work at the agencies under different administrations, academics researchers all point to the fact that it is increasingly becoming concerning that by at the same time deregulating and welcoming less traditional access to the financial system, and that includes crypto but also thinking about FinTechs that are trying to get access to bank charters and making their positions in that way, as well
as a reduced workforce, meaning the ranks of regulators who are actually day to day trying to evaluate how banks have tie ups with FinTechs and crypto firms, what that looks like, and other potential novel activities that are around the corner that are not yet known. There's concern about altogether that spells potential trouble. But they'd say it's too soon to say whether a christ is imminine or not.
But the signs based on previous crises and the ways that the administration, the pace of the administration is moving with its effort is trolley.
I mean, as a final thought to you, Christine, I mean anyone who pays any attention to these different eras of banking regulation basil and the domestic changes and rules. I mean, the process can seem insanely slow, but I guess you'd argue it has to be slow because it's so complicated, and we know the cost of making a mistake of moving too quickly could be very high for all of us when it comes to the financial sector. You know, you think about that process and then you
think about the way this administration does things. I mean, it's not a good fit, is it.
Yeah, I mean this is an administration that likes to do things quickly and have quick results, and the pace of financial regulation and sort of supervision of you know, important companies takes time. It takes effort, it takes you know, a methodical approach, and that's not really the way things are being done. Oh there is, you know, I think a reason to be concerned that the approach being taken at some point will regret it.
We've gone a little bit into the weeds, and there's probably still plenty that we don't understand. The lesson of experience is that in a few years time something terrible will happen. And I wish that we'd understood at least one of the things we've discussed today better. But in the meantime, you've been very good guide to Katango and Christine.
Thanks you very much.
Thanks for having us, Thank you.
Thanks for listening to Trump Andomics from Bloomerg. It was hosted by me Stephanie Flanders and I was joined this week by Christine Harper and Katanga Johnson. Trump and Nomics is produced by Samasadi and Moses and with help from Amy Keen and special thanks again this week to Rachel Lewis Chrisky and Dashelle Bennett. Sound design is by Blake Maples and Sage Bowman is head of Bloomberg Podcast and please help others find the show and enjoy it, rate it and review it highly wherever you listen