After Trump’s victory, Wall Street has expressed a lot of optimism. However, the US banking system is complicated due to several federal and state organizations, overseeing financial institutions with overlapping jurisdictions and opposing interests. The upcoming Trump administration can fix some of these issues. Apparently, this fragmented structure was initially designed to improve governance, frequently resulting in inefficiencies, delays, and inconsistencies in enforcement. In the US, nearly 70% of commercial banks, such as First Republic and SVB, are subject to a dual regulatory system. This is state and federal regulators’ alternate supervision. Several federal regulators, including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, also regulate certain institutions. The regulatory system is reactive rather than proactive. This has been evidenced by the failures of Silicon Valley Bank and First Republic Bank. Regulators shifted responsibility and acted too late. As the new administration sets in a new dawn of opportunities, it is time to further investigate whether this multi-regulator framework actually promotes stability or stifles innovation, responsiveness, and accountability. Wall Street and Silicon Valley elected Donald Trump because they hated Biden’s economy and Trump was their guy. The dow has dropped 1500 points since Election Day. What a massive fuck up. pic.twitter.com/uLcE8beH8x — LadyGrey 🇦🇲🇺🇦🇺🇸 (@TWLadyGrey) January 10, 2025 Meanwhile, the markets have been experiencing a drop as certain individuals point to Trump. Still, a big percentage of people believe that there will be a difference after January 20. Failures of the dual regulatory system Supporters of this system say that it increases resilience by providing various perspectives and lessens political influence by giving banks some control over their primary regulator. However, this structure has obvious drawbacks: inconsistent enforcement, regulatory arbitrage, and delays in addressing developing hazards. What is more important? It’s hard to streamline the regulatory system. This is because any big regulation on consolidation will need to be approved by Congress. This is a problem that has stopped bigger changes in the past. One case example is the loss of Washington Mutual (WaMu) in 2008. It was the biggest bank failure in US history. A congressional probe found that problems with oversight between the FDIC and the Office of Thrift Supervision made WaMu’s problems worse. Due to poor coordination, they were unable to act quickly, which caused weaknesses to grow. The Office of Thrift Supervision was eliminated as part of the Dodd-Frank reforms after the financial crisis. This was in response to WaMu’s failure. However, there was strong political opposition to further attempts to combine banks. In the same way, getting rid of the long-standing dual Federal and state bank governing system might not be possible either. Let’s leave the past and look at recent occurrences. In the case of SVB, early warning signs, such as its concentrated depositor base and bond portfolio losses, were not addressed. Regulators either failed to enforce standards or had their efforts diluted by overlapping authorities. Research has demonstrated that these inconsistencies present opportunities for regulatory arbitrage, in which banks exploit disparities to engage in riskier practices. Additionally, these issues are not limited to banks only. They have also affected the developing fintech sector. Jurisdictional conflicts have impeded the development of sound regulatory frameworks. This is among regulators, state versus federal, or even between federal agencies, although non-bank and fintech firms are driving innovation in payments and lending. Solutions under Trump’s administration There is an array of additional measures that the Trump administration can implement to reduce unnecessary duplication and enhance coordination. It is recommended that the regulatory bodies consolidate oversight 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, both of which undertake separate examinations of the same institutions, is a clear example of regulatory overlap. Moreover, It is crucial to ensure that regulatory incentives are aligned. This is to ensure that agencies prioritize financial stability and solid supervision over bureaucratic interests. Also, it is time to question the notion that increased regulation equates to increased safety. Compliance expenses have increased by nearly $50 billion annually for financial institutions since 2008, and overregulation imposes substantial costs that disproportionately affect smaller banks. The focus of reform should be on accountability rather than the addition of an infinite number of layers of supervision. Banks should be held accountable for the risks they take. Notably, during the Biden administration, banks were obligated to allocate additional capital to mitigate risk; however, the Trump administration is anticipated to reverse this stance. Still, if Trump’s policies stimulate the U.S. economy and an increase in the number of customers applying for loans, bank equities may experience an upward trend. Mike Mayo, a banking analyst at Wells Fargo, asserted that the Trump victory has the potential to usher in a “new era” of looser financial regulation following a period of 15 years of stricter supervision in the wake of the financial crisis of 2008 to 2009.
