Banks Going Past 2008 Crisis Regulations in Trump Era

Lobbying by banks helped torpedo a major proposal, and a top regulator announced this week that he would step down from a leadership role.

[ABS News Service/10.01.2025]

Banks are on a winning streak, one that’s poised to intensify as President-elect Donald J. Trump takes office.

Biden-appointed regulators at the Federal Reserve and other agencies presided over a relatively fruitless era of bank oversight. They tried to enact stricter rules for the nation’s biggest banks, hoping to create a stronger safety net for the financial system even if it cut into bank profits.

But the rules were considered so onerous — including by some top Fed officials — that they died of their own ambitions.

As proposals stalled, the foundation for existing bank oversight became increasingly shaky thanks to bank-friendly courts. During his first term, Mr. Trump appointed a slate of conservative judges who then slowly but significantly shifted the legal environment against strict federal oversight.

The result? Big banks have been notching major victories that could allow them to avoid regulatory checks that were drawn up after the 2008 financial crisis, when weaknesses at the world’s largest lenders nearly toppled the global economy.

And with Mr. Trump once again poised to run the White House, analysts predict that the regulations and supervisory practices that are supposed to prevent America’s biggest and most interconnected financial institutions from making risky bets could be further chipped away in the months ahead.

The tone in regulation is already shifting to focus on providing transparency for banks and unleashing finance.

The first sign of that change was evident on Monday when the Fed’s vice chair of bank supervision, Michael S. Barr, whom Mr. Biden appointed in 2022, said he would step down from his post one and a half years early to avoid a legal fight with Mr. Trump.

People within the incoming Trump administration had been discussing removing Mr. Barr from his Senate-confirmed role as vice chair for supervision. In an interview, Mr. Barr said that while he believed he would have prevailed in court had Mr. Trump tried to demote him, the protracted legal fight was not worth taking.

“What I decided was that no, it’s not good for the Fed — it would be a serious distraction from our ability to serve our mission,” Mr. Barr said.

Mr. Barr’s decision to step down was good news for large banks, which have long butted heads with him. Big banks and their lobbyists fought back against the stricter rules that he tried to push through, helping to scuttle the proposal.

Banks also notched a quiet but important win in the days leading up to Christmas.

On Dec. 23 at 4 p.m., the Fed announced that it would look to make “significant changes” to bank stress tests, the checkups that America’s largest banks undergo to make sure they have access to enough money to weather unexpected financial turmoil. The Fed said it would consider disclosing the models the tests were based on, opening them up for public comment, and averaging the results over time to make them less volatile.

That’s a significant concession. Banks have argued for years that the Fed’s stress tests are problematic, amounting to a binding rule that should legally require public comment. The Fed had long ignored that argument.

The central bank pointed to “the evolving legal landscape” as a reason for the change. That new legal environment has not gone unnoticed by the banking industry.

On Dec. 24, a day after the announcement, a group of big banks and business groups sued the Fed over the stress tests. The plaintiffs include the Bank Policy Institute, which represents big banks like JPMorgan Chase and Goldman Sachs; the American Bankers Association; and the U.S. Chamber of Commerce. The banking groups said in a release that legal deadlines had prompted them to file now.

That could keep the pressure on the Fed as it works on its stress test review — with the stress tests likely to become easier for the banks.

Disclosing models ahead of time would be akin to giving students answers to the quiz they are about to take, according to opponents of the idea. Greater predictability could allow banks to hold less of a buffer of capital over time, which they would prefer, since keeping a big safety cushion eats into their profits.

“The cumulative effect of these proposed changes will likely allow banks to reduce their capital cushions over time,” Jeremy Kress, co-director of the University of Michigan’s Center on Finance, Law & Policy, said in an email.

The Fed said the changes “are not designed to materially affect overall capital requirements” — suggesting that its officials would try to find a way to keep capital requirements steady over time.

But Daniel K. Tarullo, who helped to pioneer the stress tests as a Fed governor after the financial crisis, said there were questions about whether such a transparent test was “really a test at all.”

He said the Fed should consider decoupling the stress tests from capital requirements, lifting the amount of capital that banks need to keep on tap but not making it dependent on year-to-year results.

“If it’s not really serving the purpose” of testing a bank’s ability to withstand the unexpected, Mr. Tarullo said, it is requiring a lot of resources for what is essentially a “compliance exercise.”

Randal K. Quarles, a former vice chair for supervision at the Fed appointed by Mr. Trump, disagreed, comparing it instead to “giving them the textbook” so they can prepare.

It was just the latest win for the industry. For years, regulators have been trying and failing to complete major changes to how banks are policed.

In early 2023, Mr. Barr and other regulators appointed by Mr. Biden proposed a design for rules known as “Basel III endgame.” It would have been a final piece of the post-2008 global regulatory puzzle. But while the blueprint for the rule was part of an internationally agreed-upon plan, the U.S. regulators tried to make it stricter in several places.

From the start, the souped-up design drew backlash. Even Mr. Barr’s Biden-appointed colleagues questioned some details. And the bank lobby came out in full force, running television ads featuring farmers and distressed grocery shoppers.

The opposition proved too much. Mr. Barr announced in September that the proposal would be revised. But that version has not been forthcoming, leaving the entire project in limbo.

The episode sucked up so much oxygen that other banking regulation priorities fell by the wayside. Even Silicon Valley Bank’s implosion in 2023, which threatened a wider financial crisis and forced regulators into swift action, has spurred little change to bank oversight under Mr. Biden.

Now, Mr. Trump’s return heralds an era of gentler bank oversight. He has long been a fan of deregulation in general, including for financial firms, raising questions about what the Basel III endgame might ultimately look like — or whether it will get finished at all. If it does not, the door could be open for America’s global peers to forgo the final part of the rule.

“There are a lot of possible outcomes,” Mr. Tarullo said.

One key unknown is who will lead bank supervision after Mr. Barr’s decision to step down. Another Fed governor, Michelle Bowman, is often floated as a possible replacement.

While Mr. Trump said on Tuesday that he would be “announcing somebody soon” to replace Mr. Barr, the Fed’s Washington-based board is already complete with seven governors. At least for now, Mr. Trump will have to pick someone who is already sitting at the Fed.

The Trump administration will also be able to replace the leaders of the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, giving them an opportunity to reshape the way finance is overseen.

Christina Parajon Skinner, an expert in bank regulation at the University of Pennsylvania who is prominent in conservative policy circles, said the new regulatory bent was likely to be in line with the administration’s other goals — which include encouraging markets and embracing new financial technologies like cryptocurrency.

It will be “generally consistent with the focus on economic growth,” predicted Ms. Skinner, whose name is sometimes raised as a potential candidate for the Fed vice chair for supervision.