Loose capital, weak regulation, light pressure testing... Is Trump pushing Wall Street's major banks into an "era of deregulation"?

As Trump's second term deepens, Wall Street is experiencing the most thorough regulatory reshaping since the 2008 financial crisis. U.S. regulatory agencies are working together to dismantle the complex rules that have long constrained the banking industry, attempting to exchange a relaxed regulatory environment for economic growth and market competitiveness.

The core of this "deregulation" storm lies in significantly reducing restrictions on bank capital and daily operations. Federal Reserve Vice Chair Michelle Bowman has cut the size of the Federal Reserve's bank regulatory department by about 30% and instructed staff to focus only on "significant" risks affecting bank solvency, rather than administrative details. At the same time, the Federal Reserve Board voted to completely reform the annual stress testing process, allowing banks to know the testing standards in advance and provide feedback, a move criticized by detractors as turning the originally stringent regulatory exam into an "open-book test."

The capital markets reacted immediately, with expectations of regulatory easing directly translating into investor returns. With the passing of the 2025 stress tests and the relaxation of rules, Wall Street lending giants have raised dividends, with Goldman Sachs and Morgan Stanley both increasing their quarterly payouts, and JPMorgan announcing its largest stock buyback plan in history. Regulators also quickly finalized plans to relax the supplementary leverage ratio, aimed at freeing up bank balance sheet space to support their trading activities in the Treasury market.

However, this series of radical measures has sparked intense debate about financial stability in Washington. White House officials and regulators argue that these measures are crucial for promoting innovation and competitiveness, and Treasury Secretary Janet Yellen has made it clear that the agenda for simplifying regulation will continue into 2026. But Democrats and consumer rights advocates warn that the current changes may not only "unshackle" banks but also effectively restore the loose regulatory mechanisms that existed before the 2008 crisis, burying risk hazards deep within the financial system once again.

Deregulation and "Open-Book Tests"

Since Trump's inauguration, personnel changes in the regulatory sector have quickly translated into specific policy shifts. According to Bloomberg, as the Federal Reserve's top bank regulator, Michelle Bowman has not only significantly reduced regulatory staff but also pushed to simplify the process for banks to obtain a "well-managed" rating, which is a key pass for banks to engage in mergers and reduce regulatory scrutiny.

The most significant changes are reflected in the stress testing mechanism. This mechanism, designed to ensure that banks can still lend to households and businesses during severe recessions, is facing fundamental adjustments. Under the proposal, banks will be able to provide feedback on the hypothetical recession scenarios the Federal Reserve intends to use.

Although the Federal Reserve argues that this is for transparency, critics point out that this means banks will participate in setting the exam questions, thereby undermining the seriousness and effectiveness of the tests. The public comment period for this proposal will last until February 21.

Unlocking Capital Constraints

In addition to the relaxation of daily regulations, capital rules concerning banks' risk resistance capabilities are also being rewritten. Regulators have begun negotiations on a new risk capital measurement measure, which will determine the required capital based on the risk level of bank assets. Compared to the plan that was not ultimately implemented during the Biden administration due to strong industry opposition, **the new rules will significantly reduce capital requirements for large U.S. banks **

In addition, the regulatory authorities quickly finalized plans to relax the supplementary leverage ratio in November last year. This ratio requires banks to hold a certain proportion of capital relative to their assets. The financial industry had previously complained that this rule suppressed banks' motivation to purchase U.S. Treasury bonds and act as market intermediaries. Federal Reserve Chairman Jerome Powell stated at a hearing that when the leverage ratio is binding, it hinders banks from engaging in low-margin but relatively safe activities, such as intermediary services in the Treasury market.

Embracing Crypto Assets and Countering "De-Banking"

Beyond traditional capital and regulatory rules, regulators are also actively incorporating crypto assets into the formal banking system and introducing competition in the process. Federal Deposit Insurance Corporation (FDIC) Chairman Travis Hill stated that regulators are drafting guidance on how bank deposit insurance applies to blockchain digital deposits. Meanwhile, the Office of the Comptroller of the Currency (OCC), despite opposition from industry groups, approved requests from five cryptocurrency companies to obtain U.S. banking licenses, marking a complete reversal of the previous regulatory stance that viewed the industry as filled with "scams and fraud."

On the other hand, regarding the issue of banks refusing service based on ideology, regulators have also taken a tough stance. Under the leadership of OCC head Jonathan Gould, the agency found that nine large U.S. lending institutions had engaged in "improper discrimination" against customers, restricting access to banking services for certain clients between 2020 and 2023.

Concerns Behind Wall Street's Frenzy

Although the banking industry welcomed these measures, with the Bank Policy Institute stating that the adjustment of the leverage ratio is a "long-overdue reform," academia and some former officials expressed deep concerns about potential systemic risks.

Jeremy Kress, a business law professor at the University of Michigan and former Federal Reserve bank policy attorney, pointed out that diluting regulation beyond significant risks to capital and liquidity may lead regulators to overlook low-probability but catastrophic risks once they occur. He warned that deregulation effectively allows banks to transfer risks to the public: In the absence of strict regulation, banks have the incentive to take on more risks to enhance returns, benefiting shareholders when successful, while the government is often forced to step in when failures occur.

Arthur Wilmarth, an emeritus professor at George Washington University Law School, issued an even harsher warning. He believes that current policies represent a reckless combination of "de-capitalization, de-regulation, and de-supervision." Wilmarth stated that the policies of the Trump administration are almost certain to lead to a catastrophic financial crisis, specifically pointing out that the bubbles forming in the cryptocurrency and artificial intelligence sectors could serve as the trigger for such a crisis