After Trump's victory, Wall Street has shown a lot of optimism. However, the US banking system is complex due to multiple federal and state agencies overseeing financial institutions with overlapping jurisdictions and competing interests. The incoming Trump administration may correct some of these issues.
Apparently, this fragmented structure was originally designed to improve governance, often resulting in inefficiency, delays, and inconsistencies in implementation.
In the US, almost 70% of commercial banks, such as First Republic and SVB, are subject to a dual regulatory system. This is another direction from state and federal regulators. Several federal regulators, including the Federal Investment Insurance Corporation and the Office of the Comptroller of the Currency, also regulate certain institutions.
The management system is reactive rather than proactive. This is proven by the failure of Silicon Valley Bank and First Republic Bank. Management shifted responsibility and acted too late.
As the new administration sets a new dawn of opportunity, it is time to further examine whether this multi-regulatory framework actually promotes stability or stifles innovation, responsiveness and accountability.
Wall Street and Silicon Valley chose Donald Trump because they hated Biden's economy and Trump was their man.
The dow has dropped 1500 points since Election Day.
What a horror it is. pic.twitter.com/uLcE8beH8x
— LadyGrey 🇦🇲🇺🇦🇺🇸 (@TWLadyGrey) January 10, 2025
At the same time, the markets has been having a meltdown as some people point to Trump. However, a large percentage of people believe that there will be a difference after January 20.
Failures in the dual governance system
Supporters of this system say it increases tolerance by providing different perspectives and reduces political influence by giving banks some control over their chief regulator. However, this structure has obvious drawbacks: inconsistent enforcement, regulatory arbitrage, and delays in responding to developing risks. What is more important?
It is difficult to streamline the management system. This is because any major consolidation regulation must be approved by Congress. This is a problem that has prevented major changes in the past.
One case example is the failure of Washington Mutual (WaMu) in 2008. This was the largest bank failure in US history. A congressional investigation found that problems with oversight between the FDIC and the Office of Thrift Management exacerbated WaMu's problems. Due to poor coordination, they could not act quickly, which caused weaknesses to develop.
The Office of Thrift Management was eliminated as part of the Dodd-Frank reforms following the financial crisis. This was in response to the failure of WaMu. However, there was strong political opposition to other attempts to merge banks. Similarly, getting rid of the longstanding system of Federal and state bank regulation may not be possible either.
Let's leave the past and look at recent events. In the case of SVB, early warning signs, such as its concentrated investment base and loss of bond portfolio, were not addressed. Regulators failed to enforce standards or their efforts were undermined by overlapping authorities.
Research has shown that these inconsistencies provide opportunities for regulatory arbitrage, in which banks take advantage of differences to engage in riskier practices.
Moreover, these issues are not limited to banks only. They have also influenced the developing fintech sector. Jurisdiction conflicts have hindered the development of strong regulatory frameworks. This is between regulators, state versus federal, or even between federal agencies, although non-bank and fintech companies are driving innovation in payments and loans.
Solutions under the Trump administration
There are a range of additional measures that the Trump administration can implement to reduce unnecessary duplication and increase coordination. It is recommended that the governing bodies consolidate supervisory responsibilities.
In addition, they should resolve inefficiencies between federal and state regulators and implement tools such as a performance scorecard to evaluate regulators. The dual oversight of national banks by the OCC and the FDIC, which both conduct separate inspections of the same institutions, is a clear example of regulatory overlap.
In addition, it is essential to ensure that regulatory incentives are aligned. This is to ensure that agencies prioritize financial stability and sound governance over bureaucratic interests.
Also, it is time to question the idea that more regulation equals more safety. Compliance costs have risen by nearly $50 billion annually for financial institutions since 2008, and excessive regulation imposes substantial costs that disproportionately affect smaller banks.
The focus of reform should be on accountability rather than adding an infinite number of layers of management. Banks should be responsible for the risks they take.
In particular, during the Biden administration, banks were mandated to allocate additional capital to reduce risk; however, the Trump administration is expected to reverse this stance.
However, if Trump's policies stimulate the US economy and an increase in the number of customers applying for loans, an upward trend could lead to an increase in bank shares.
Mike Mayo, a banking analyst at Wells Fargo, said Trump's victory has the potential to usher in a “new era” of easier financial regulation after a 15-year period of tighter regulation stemming from the 2008 financial crisis to 2009.
Source: https://www.cryptopolitan.com/wall-street-regulation-rethink-under-trump/
