This piece originally ran in The American Prospect. Read the original here.
With headlines about demolishing Eleanor Roosevelt’s White House office, deploying National Guard units to Democratic-run cities, and skyrocketing health care insurance premiums, the more banal machinations of Trump 2.0 have a tendency to fade into the background. Among the most important is a complete retreat from bank supervision. In less than a year, the regulatory regime overseeing one of the most important and interconnected sectors of our economy has been reduced to a mere cutout.
Unlike taking a wrecking ball to the East Wing, when it comes to financial regulation, “a lot of changes might seem fine on their own, but all together it’s the proverbial death by a thousand paper cuts,” according to Graham Steele, a fellow at Stanford Law School and former top Treasury Department official under Joe Biden.
“Every Federal Register that gets published has a new land mine” for the banking industry, said Horacio Mendez, president and CEO of the Woodstock Institute. Right now, the big question seems to be what blows up first.
As a by-product of historical quirks and federalism, bank supervision in the United States is distributed haphazardly across five agencies: the Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA), and the Consumer Financial Protection Bureau (CFPB). Those five agencies collectively oversee the depository institutions most people have in mind when they talk about their bank or credit union. The regulatory structure gets even messier when you start talking about other types of institutions, like non-banks that issue loans or make payments.
Prior to the 2010 Dodd-Frank Act, compliance with consumer protection laws was enforced by each individual financial institution inspection agency (FDIC, OCC, Fed, or NCUA), along with other regulators including the Office of Thrift Supervision and the Federal Trade Commission. The CFPB’s formation moved most consumer protection regulations for financial institutions with over $10 billion in assets into its orbit. As the intellectual force behind the CFPB, then-Harvard professor Elizabeth Warren, envisioned, this centralization would establish one agency with the primary goal of protecting consumers, rather than those laws distributed to bank supervisors with conflicting goals.
Now, just 15 years from its inception, the CFPB is a hollow shell of itself. Since Trump’s inauguration, the administration has been seeking to terminate every position not explicitly created by statute. That would leave the agency as just “five men and a phone.” Despite protracted legal battles, the administration is still planning on shuttering the CFPB by the start of 2026, even though it has said the opposite to federal judges.
But while decimating the CFPB was the opening salvo, the general pattern of destroying capacity and selectively ignoring statutory requirements can be seen across the bank regulators.
Staffing cuts driven by DOGE have reduced headcount at the FDIC, OCC, and NCUA, according to multiple sources. As Jeremy Kress, associate professor of business Law at the University of Michigan, put it, “If your goal is to go in and hollow out an agency and restrict an agency’s ability to criticize banks, [then] you cut staff and place all sorts of restrictions on what staff are allowed to do.”
In a statement, Warren, now the senior senator from Massachusetts, criticized the moves: “President Trump’s idea of safeguarding our financial system is rolling back rules for the big banks, dropping lawsuits or investigations into those who help enrich him and his family, and making it easier for criminals like Jeffrey Epstein to finance their illicit activity. The Trump Administration is paving a gold-plated road to the next financial crisis while they also kill off the government’s capacity to respond to it. It’ll be American families who pay the price.”
The second Trump administration’s bank regulators have moved at blistering speed and have already undone many of the advances made under President Biden. Rulemakings strengthening the Community Reinvestment Act and establishing procedures to handle banks’ exposure to climate change risk have already been targeted for repeal.
There are also less overtly ideological rollbacks, like moving to prohibit examiners from using “reputational risk” in issuing matters requiring attention (MRAs) and loosening capital requirements for large banks. The FDIC and Federal Reserve withdrew two Biden-era statements that expressed wariness about banks investing in cryptocurrency assets. Alongside the Financial Crimes Enforcement Network, or FinCEN, the banking agencies have also moved to weaken anti–money laundering enforcement, notably by weakening requirements for filing suspicious activity reports under the Bank Secrecy Act.
According to Kress, “The through line is de-emphasizing supervisor discretion.”
The banks have taken notice. JPMorgan Chase has agreed to allow Bitcoin and Ether as loan collateral, bringing crypto into the financial system, for example, and several major bank mergers have been announced, including Fifth Third’s acquisition of Comerica.
Mendez said that bank supervision had “taken several significant steps back” from where it was when he started working at the Fed in 1993. When I quipped that the administration was taking oversight back to the Stone Age, Mendez added, “I don’t know what the bank supervision was like in the Stone Age, but it can’t be much worse than where we’re going.”
BANK SUPERVISION CONSISTS OF TWO MAIN PRONGS: risk management and compliance. On the compliance side, consumer protection laws are being enforced less than at any time since at least the Great Recession. The CFPB lacks both the means and the inclination, particularly under Office of Management and Budget director Russ Vought’s “acting” leadership, to do any meaningful regulatory action. The big banks that are subject to CFPB oversight represent roughly 85 percent of total assets in the Federal Reserve system. The issue is still being litigated by unions representing CFPB staff, though this Supreme Court is not usually a bastion of pro-labor decisions.
Risk management examiners review banks’ financials, focusing on capitalization, asset quality, management, earnings, liquidity, and sensitivity, or “CAMELS.” Compliance examiners review whether banks are adequately meeting their legal obligations under federal statutes, such as community reinvestment and fair lending laws. Given staff cuts, federal regulators are no longer well positioned to carry out any of that.
According to Mendez, examination teams at the FDIC and OCC were culled by DOGE, despite the fact that such reductions in staff do not actually save the government any money, since both the OCC and FDIC are funded by assessments and fees on the banks they regulate. Even the Fed, which is not controlled directly by the administration, is slashing bank supervision staff by 30 percent, under the direction of Trump’s hand-picked vice chair for supervision Michelle Bowman.
The OCC is pausing compliance examinations until February of 2026 in an attempt to retool Community Reinvestment rules to focus on alleged debanking—a conspiratorial narrative pushed by cryptocurrency investors and some “anti-woke” conservative groups—rather than ensuring banks lend to marginalized communities.
Fortunately, there is something of a backstop for risk management; when noncompliance threatens the financial stability of a bank, risk examiners are able to note that as a risk the bank needs to manage. Unfortunately, the Trump administration is ripping out that backstop too. In addition to dwindling staff capacity, supervisory teams face a bevy of new risk management rules that would prevent examiners from taking meaningful preemptive action.
To start, under a newly proposed rule, examiners will be barred from using “reputational risk” in their assessment. Reputational risk is a useful tool that enables regulators to raise concerns about damage to a bank’s brand. While only rarely used on its own, it can help to put the body of evidence supporting concern over the top. Without reputational risk, examiners will not be able to raise concerns about banks’ public perceptions, which do impact their bottom line.
Mendez told me about how when he joined Japanese bank MUFG, they lost a lot of business over brand damage when they financed the Dakota Access Pipeline. That was foreseeable, but only as a consequence of reputational risk.
Worse, another new proposal would require that examiners restrict concerns they raise to matters that are both “material” and “reasonably foreseeable.” Neither term is clearly defined. This move to restrict what examiners are able to raise concerns over “undermines the entire supervisory function” of regulation, said Shayna Olesiuk, director of banking policy at Better Markets.
It can be hard to grasp the harms of this type of policy change, but as Sen. Warren noted in her statement, they leave us ill-prepared for the next time we face down a financial crisis. Moreover, as Steele explained, “early intervention is what’s valuable,” and the capacity for regulators to engage in preemptive action is rapidly “whittling away.”
The Consumer Federation of America recently issued a paper, “The United States of Amnesia,” making similar points. “Recent policy decisions, especially around fintech, buy now pay later lending, and stablecoins, mark a return to uneven rules and regulatory blind spots,” author Adam Rust wrote. “Once again, companies offering similar financial services are being treated differently under the law. And once again, short-term gains for a few are coming at the expense of long-term protections for many.”
Early intervention is being taken off the table at the same time as the economy faces growing risk of a financial crisis, as Art Wilmarth, professor emeritus at George Washington University Law School, laid out recently for Open Banker. Wilmarth identified potential bubbles in crypto, AI, and the subprime credit market as likely origins for a new financial bust. Wilmarth told me that regulators under Trump are “willfully putting blinders on themselves.”
The bevy of deregulatory actions would leave banks more open to a host of risks, both known and unknown. For instance, under the new “unsafe and unsound” definition, it is unclear whether the fact that Silicon Valley Bank did not have a chief risk officer could be raised as an MRA. In retrospect, we know that the harm that resulted from poor risk management was material, but without hindsight it’s difficult to say whether or not it would be foreseeable. Similarly, it’s clear as day that a bank that specializes in mortgage lending in Miami faces serious risk due to climate change–driven natural disaster. But now climate risk is being thrown out of the agencies’ toolbox.
And as Kress pointed out, the new protocols functionally remove operational risks, like IT vulnerabilities, from consideration, because they are by nature “low likelihood, high significance.”
Another major source of risk is concentration risk, where a bank’s holdings are dangerously centered on a certain type of asset. The higher standard for unsafe and unsound, paired with a prohibition on reputational considerations, would make it difficult to flag concentrations in industries that are currently experiencing bubbles, like (seemingly) AI. Under the new regime, if an examiner tried to flag such a problem, banks could likely dismiss it by arguing that financial harm is not foreseeable. Or that efforts to rein in investment in asset bubbles is an example of “debanking,” as former Sen. Pat Toomey argued in The Hill.
“The risks don’t go away,” Steele told me. “The agencies just create this legal fiction that they don’t exist.”
Everyone I spoke to was concerned that these deregulatory moves would have a chilling effect on examiners. The message coming from the top is that the agencies are supposed to adopt a more hands-off approach. Mendez noted that many examiners now feel that they are being told not to do the job. He concluded: “I don’t think there are cops on the beat anymore.”
Image credit: “CFPB Consumer Financial Protection Bureau entrance Washington DC 2025-02-10 11-14-45” by G. Edward Johnson is licensed under CC BY 4.0.