July 16, 2025 • 24 mins
This week, we examine whether Donald Trump’s efforts to deregulate traditional finance and move crypto further into the mainstream are laying the groundwork for a financial crisis or simply fixing bureaucratic overreach stemming from the last one.
Christine Harper, a member of Bloomberg’s editorial board and co-author of a memoir by former Federal Reserve Chair Paul Volcker, and Katanga Johnson, who covers banking regulation for Bloomberg, join host Stephanie Flanders.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
It's going to be the largest regulatory reduction in the
history of our country.
Speaker 3 (00:13):
It's going to happen very fairs.
Speaker 2 (00:25):
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
(00:46):
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
(01:07):
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
(01:28):
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.
Speaker 1 (01:49):
Thank you thanks for having us in.
Speaker 2 (01:54):
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.
Speaker 1 (02:11):
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.
(02:32):
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,
(02:53):
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.
Speaker 3 (03:06):
Okay, so that's really useful.
Speaker 2 (03:07):
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.
Speaker 1 (03:20):
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
(03:41):
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
(04:01):
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
(04:24):
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.
Speaker 2 (04:40):
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
(05:02):
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
(05:24):
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.
Speaker 3 (05:46):
But do you think.
Speaker 2 (05:48):
Overall that we're heading in a direction where the financial
system will be less safe?
Speaker 4 (05:52):
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
(06:14):
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
(06:35):
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
(06:58):
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.
(07:18):
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
(07:39):
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
(07:59):
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
(08:22):
optimism of the people there.
Speaker 2 (08:24):
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
(08:47):
is very keen to achieve. You know, roughly, what is
that aimed at doing? Katanga?
Speaker 1 (08:52):
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.
Speaker 3 (09:05):
Moment you had federal government bonds, Yeah.
Speaker 1 (09:07):
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.
Speaker 2 (09:21):
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
(09:42):
worries about this effort to change the supplemental leverage ratio
or do you think it actually makes a bit of sense.
Speaker 4 (09:49):
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
(10:12):
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
(10:32):
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.
(10:54):
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.
Speaker 2 (11:06):
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.
Speaker 3 (11:12):
It was hugely bankrupt. You know.
Speaker 2 (11:14):
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.
Speaker 4 (11:25):
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
(11:47):
is sort of the core part of the post financial
crisis regulation, and so any effort to sort of water
that down seems concerning.
Speaker 3 (11:55):
I could take it.
Speaker 2 (11:56):
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.
(12:19):
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
(12:41):
clearer unified policy making than we might have had in
previous series.
Speaker 1 (12:46):
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
(13:08):
in streamlining rules, discussing the sort of priorities around changes
to capital.
Speaker 2 (13:14):
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
(13:35):
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.
Speaker 1 (13:43):
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
(14:03):
you considered what the outcome will be by addressing things
in this way on both sides?
Speaker 2 (14:08):
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
(14:29):
welcomed into the American financial system in a way that
was just not the case under the previous administration.
Speaker 4 (14:36):
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
(14:58):
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
(15:21):
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
(15:41):
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
(16:05):
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.
Speaker 3 (16:14):
Right before his company blew up.
Speaker 4 (16:16):
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
(16:37):
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
(16:59):
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
(17:20):
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.
Speaker 2 (17:42):
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.
Speaker 3 (17:54):
Is that right?
Speaker 1 (17:55):
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
(18:16):
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.
Speaker 2 (18:24):
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
(18:46):
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.
Speaker 4 (19:08):
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,
(19:28):
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
(19:50):
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.
(20:11):
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
(20:34):
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.
Speaker 3 (20:53):
Okay, Tangia.
Speaker 2 (20:54):
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.
Speaker 1 (21:03):
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
(21:25):
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
(21:46):
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.
Speaker 2 (22:08):
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
(22:30):
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.
Speaker 4 (22:40):
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
(23:01):
a reason to be concerned that the approach being taken
at some point will regret it.
Speaker 2 (23:07):
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.
Speaker 3 (23:23):
Thanks you very much.
Speaker 1 (23:24):
Thanks for having us, Thank you.
Speaker 2 (23:31):
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
(23:53):
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
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
It's going to be the largest regulatory reduction in the
history of our country.
Speaker 3 (00:13):
It's going to happen very fairs.
Speaker 2 (00:25):
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
(00:46):
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
(01:07):
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
(01:28):
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.
Speaker 1 (01:49):
Thank you thanks for having us in.
Speaker 2 (01:54):
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.
Speaker 1 (02:11):
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.
(02:32):
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,
(02:53):
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.
Speaker 3 (03:06):
Okay, so that's really useful.
Speaker 2 (03:07):
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.
Speaker 1 (03:20):
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
(03:41):
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
(04:01):
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
(04:24):
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.
Speaker 2 (04:40):
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
(05:02):
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
(05:24):
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.
Speaker 3 (05:46):
But do you think.
Speaker 2 (05:48):
Overall that we're heading in a direction where the financial
system will be less safe?
Speaker 4 (05:52):
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
(06:14):
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
(06:35):
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
(06:58):
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.
(07:18):
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
(07:39):
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
(07:59):
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
(08:22):
optimism of the people there.
Speaker 2 (08:24):
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
(08:47):
is very keen to achieve. You know, roughly, what is
that aimed at doing? Katanga?
Speaker 1 (08:52):
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.
Speaker 3 (09:05):
Moment you had federal government bonds, Yeah.
Speaker 1 (09:07):
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.
Speaker 2 (09:21):
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
(09:42):
worries about this effort to change the supplemental leverage ratio
or do you think it actually makes a bit of sense.
Speaker 4 (09:49):
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
(10:12):
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
(10:32):
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.
(10:54):
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.
Speaker 2 (11:06):
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.
Speaker 3 (11:12):
It was hugely bankrupt. You know.
Speaker 2 (11:14):
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.
Speaker 4 (11:25):
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
(11:47):
is sort of the core part of the post financial
crisis regulation, and so any effort to sort of water
that down seems concerning.
Speaker 3 (11:55):
I could take it.
Speaker 2 (11:56):
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.
(12:19):
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
(12:41):
clearer unified policy making than we might have had in
previous series.
Speaker 1 (12:46):
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
(13:08):
in streamlining rules, discussing the sort of priorities around changes
to capital.
Speaker 2 (13:14):
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
(13:35):
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.
Speaker 1 (13:43):
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
(14:03):
you considered what the outcome will be by addressing things
in this way on both sides?
Speaker 2 (14:08):
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
(14:29):
welcomed into the American financial system in a way that
was just not the case under the previous administration.
Speaker 4 (14:36):
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
(14:58):
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
(15:21):
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
(15:41):
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
(16:05):
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.
Speaker 3 (16:14):
Right before his company blew up.
Speaker 4 (16:16):
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
(16:37):
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
(16:59):
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
(17:20):
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.
Speaker 2 (17:42):
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.
Speaker 3 (17:54):
Is that right?
Speaker 1 (17:55):
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
(18:16):
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.
Speaker 2 (18:24):
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
(18:46):
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.
Speaker 4 (19:08):
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,
(19:28):
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
(19:50):
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.
(20:11):
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
(20:34):
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.
Speaker 3 (20:53):
Okay, Tangia.
Speaker 2 (20:54):
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.
Speaker 1 (21:03):
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
(21:25):
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
(21:46):
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.
Speaker 2 (22:08):
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
(22:30):
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.
Speaker 4 (22:40):
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
(23:01):
a reason to be concerned that the approach being taken
at some point will regret it.
Speaker 2 (23:07):
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.
Speaker 3 (23:23):
Thanks you very much.
Speaker 1 (23:24):
Thanks for having us, Thank you.
Speaker 2 (23:31):
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
(23:53):
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
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