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The US financial system could pay a “high price” if the Trump administration slashes regulations on banks too aggressively, the outgoing chair of the Federal Deposit Insurance Corporation has warned.
Martin Gruenberg told the Financial Times that “short-term changes with the goal of realising short-term results in the the financial sector can have real costs and in some sense undermine our long-term purpose”.
Gruenberg’s warning comes as president-elect Donald Trump has vowed to cut rules and bureaucracy as part of a plan to boost the US economy. Trump allies Elon Musk and Vivek Ramaswamy, the bosses of Trump’s newly created government efficiency office, have expressed interest in streamlining US financial regulators, the FT has previously reported.
Financial stocks climbed sharply after Trump’s election on November 5, but Gruenberg, who is stepping down next week, cautioned bankers and regulators to keep longer-term risks in mind: “Be careful, don’t get carried away. Because the price could be high.”
Gruenberg said the US remained vulnerable to the same combination of problems that caused major recent crises, including the 1980s savings and loan collapse, the 2008 financial crisis and the 2023 regional bank runs. In each case, deregulation and looser supervision enabled the rapid growth of new products and nonbank financial companies that later proved to be riskier than anticipated.
“There is one key takeaway, which is history does repeat itself,” Gruenberg said ahead of his final official speech on Tuesday. “I fear we are going to have to learn the hard way again.”
If the US presses ahead with deregulation, other big financial centres are also likely to follow. When a row broke out in the US over proposed higher capital rules, known as the Basel III endgame, the UK delayed implementation there.
“In the aftermath of the 2008 crisis, the US led the world up the ladder in terms of strengthening prudential requirements, supervision and resolution,” Gruenberg said. “We need to be careful not to lead the world in the opposite direction.”
Gruenberg added that the deepening ties between banks and other financial groups remained a significant risk and sharpened the imperative for policymakers to avoid scaling back the role of regulators.
“One risk that is of clear systemic consequence today and remains unaddressed is the whole relationship between nonbank financial companies and the insured banking sector, whether you are talking about hedge funds, or private credit or mortgage servicers,” he said.
The financial system also remained highly vulnerable to a geopolitical shock that could causes an interest rate jump and destabilise financial companies that rely heavily on borrowing, he said.
While cutting-edge products such as cryptocurrency and exchange traded funds that rely on borrowing are currently not big enough to pose a systemic threat, deregulation could change that.
“As we look at new activities that are not yet of systemic consequence, consider what rapid growth might mean . . . and to be sure we have appropriate measures in place to manage the potential risk there.”
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