Rapid growth in private credit highlights the necessity for financial institution de-regulation, asserts Treasury's Bessent.
The Trump administration's financial deregulation strategy is aimed at reducing regulatory burdens on banks and financial institutions, promoting economic growth, market efficiency, and innovation. This strategy reshapes oversight priorities and impacts banks' roles, facilitating fintech disruption.
Key Elements of the Strategy
- Relaxation of Capital Requirements: The Federal Reserve plans to ease the Supplementary Leverage Ratio, freeing up to $2 trillion in balance sheet capacity for large banks, enhancing liquidity and encouraging lending activity.
- Consumer Protection Rollbacks: Efforts are underway to dismantle or substantially reduce the Consumer Financial Protection Bureau (CFPB) workforce, raising concerns about weaker safeguards for consumers in financial services and less scrutiny of credit underwriting practices.
- Digital Modernization and Deregulation: The administration mandates the transition to electronic federal payments to reduce fraud and operational costs, relaxes anti-money laundering thresholds, and rescinds restrictive guidance on digital assets, creating regulatory space for banks to innovate in crypto custody and AI-driven risk modeling.
- Shift in Supervisory Focus: Regulators prioritize material financial risks over administrative compliance burdens and remove reputational risk from supervisory considerations, allowing banks to reconsider client acceptance policies but requiring more rigorous objective risk assessments.
- AI Deregulation in Finance: While promoting AI innovation and private-sector leadership, the administration has reduced CFPB oversight of AI applications in credit decisions, raising risks of bias and consumer harm but encouraging new credit models beyond traditional FICO scores.
Impact on Banks and Fintech Disruption
Banks gain greater regulatory and capital flexibility, enabling expanded lending, more aggressive adoption of digital financial services, and entry into emerging fintech areas like cryptocurrency and AI-enabled risk management. However, reduced consumer protection oversight and AML relaxation may increase operational risks and consumer vulnerabilities, requiring banks and fintechs to self-manage compliance carefully despite lighter regulatory scrutiny.
The deregulatory environment incentivizes fintech innovation by lowering barriers, but coordination among federal agencies and interaction with state regulations remain complex, especially around AI and digital finance. Overall, the strategic reset promotes digital transformation and financial resilience through a mix of deregulation and modernization, but it necessitates banks balancing innovation opportunities with emergent risks in a less regulated landscape.
Notable Developments
- Clients of Citi are "prepping for headwinds," pulling some spending forward and holding off on certain investments, as they anticipate changes in the economic landscape.
- Citi CEO Jane Fraser, in a discussion at the Milken conference, emphasised the importance of diverse responsible tools and options in the financial market, such as the private credit and direct lending program with Apollo. Fraser did not see direct lending as a threat to the bank, stating it's "not a zero-sum game."
- Former FDIC Chair Martin Gruenberg has expressed concern about the growth of nonbank financial firms, given some are highly leveraged and "deeply connected" to the banking system.
- Scott Bessent, in an op-ed, indicated that the Trump administration intends to play a greater role in financial regulation, citing more tailored regulation for community banks and refocusing bank supervision on material financial risk as reform priorities.
- Treasury Secretary Scott Bessent emphasized the Trump administration's aim to pursue deregulation for financial institutions. If the administration's plans come to fruition, Bessent envisions downsized federal government workers ending up employed in the private sector.
- Officials have pursued deep cuts at the Consumer Financial Protection Bureau, which are being contested in court.
[1] Federal Reserve. (2019). Supplementary Leverage Ratio. [online] Available at: https://www.federalreserve.gov/supervisionreg/srletters/SR1906.htm
[2] Office of the Comptroller of the Currency. (2018). OCC Finalizes Amendments to the Bank Secrecy Act Regulations. [online] Available at: https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-101a.html
[3] Consumer Financial Protection Bureau. (2018). CFPB Announces Changes to the Qualified Mortgage Rule. [online] Available at: https://www.consumerfinance.gov/about-us/newsroom/cfpb-announces-changes-to-the-qualified-mortgage-rule/
[4] Federal Housing Finance Agency. (2019). FHFA Announces Policy Statement on Expanding Access to Credit for Low- and Moderate-Income Consumers. [online] Available at: https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Policy-Statement-on-Expanding-Access-to-Credit-for-Low-and-Moderate-Income-Consumers.aspx
- The relaxation of capital requirements by the Federal Reserve, as part of the Trump administration's deregulation strategy, might entice financial institutions to invest more in the banking-and-insurance and finance sectors, fostering growth and innovation in the industry.
- The proposed cuts at the Consumer Financial Protection Bureau and relaxation of anti-money laundering thresholds could foster fintech disruption, providing a conducive environment for fintech startups to introduce innovative solutions, such as digital assets and AI-driven risk modeling, in the business landscape.
- Federal modernization and deregulation efforts, such as the shift in supervisory focus and digitalization of federal payments, offer opportunities for banks to venture into the fintech arena, especially in areas like cryptocurrency, fintech lending, and AI applications, while maintaining a balance between innovation and managing the increased operational risks that may arise from reduced consumer protection oversight and AML relaxation.
