Loose capital requirements, weak regulation, light stress testing... Is Trump pushing Wall Street's big banks into a "de-regulation era"?

As Trump’s second term progresses, Wall Street is ushering in its most sweeping regulatory overhaul since the 2008 financial crisis. U.S. regulatory agencies are working together to dismantle the complex rules that have long restrained the banking industry, aiming to trade a relaxed regulatory environment for economic growth and market competitiveness.

The core of this “deregulation” storm is a significant reduction of restrictions on bank capital and daily operations. Federal Reserve Vice Chair for Supervision Michelle Bowman has cut the size of the Fed’s bank supervision department by about 30% and instructed staff to focus only on “major” risks that affect banks’ solvency, not on administrative details. Meanwhile, the Federal Reserve Board has voted to completely overhaul the annual stress test program, allowing banks to receive advance notice of test criteria and provide feedback—a move critics have mocked as turning what was once a rigorous regulatory exam into an “open-book test.”

The capital markets have responded instantly, as expectations of regulatory relaxation have directly translated into investor returns. With the passing of the 2025 stress tests and looser rules, Wall Street lending giants have raised dividends; both Goldman Sachs and Morgan Stanley have increased their quarterly payouts, and JPMorgan Chase announced its largest stock buyback program in history. Regulators also quickly finalized plans to loosen the supplementary leverage ratio, designed to free up banks’ balance sheets to support their trading activity in the Treasury market.

However, these aggressive actions have ignited fierce debates in Washington over financial stability. White House officials and regulators argue these measures are essential to boost innovation and competitiveness, and Treasury Secretary Besant has stated the agenda to simplify regulation will continue into 2026. But Democrats and consumer advocates warn that the current changes may not just “unshackle” banks, but in fact return to the lax regulatory regime before the 2008 crisis, once again burying risk deep within the financial system.

Deregulation and the “Open-Book Test”

After Trump’s inauguration, regulatory personnel changes quickly translated into concrete policy shifts. According to Bloomberg, as the Fed’s chief bank supervisor, Michelle Bowman not only made significant cuts to staff, but also promoted simplified procedures for banks to obtain “well-managed” ratings—a key credential for mergers, acquisitions, and reduced regulatory scrutiny.

The most notable changes are reflected in the stress test mechanism. Originally designed to ensure banks could keep lending to households and businesses during severe downturns, this system now faces fundamental adjustments. Under the proposal, banks will be able to provide feedback on hypothetical recession scenarios that the Fed plans to use.

While the Fed argues this aims for transparency, critics point out that it means banks will help set the test questions, thereby weakening the seriousness and effectiveness of the tests. The public comment period for the proposal lasts until February 21.

Removing the Shackles on Capital

Beyond easing daily supervision, the rules around banks’ capacity to withstand risk are also being rewritten. Regulators have started negotiating a new risk-based capital measurement framework, which will require capital based on the riskiness of bank assets. Compared to plans under the Biden administration—which were never finalized due to industry pushback—the new rules will sharply reduce capital requirements for large U.S. banks.

In addition, regulators quickly finalized plans last November to loosen the supplementary leverage ratio, which requires banks to hold capital equal to a set proportion of assets. The financial industry has long complained that this rule discourages banks from buying U.S. Treasuries and acting as market intermediaries. Fed Chairman Powell acknowledged at a hearing that when the leverage ratio is binding, it can hinder banks from engaging in low-margin but fairly safe activities, such as providing intermediation in the Treasury market.

Embracing Crypto Assets and Countering “Debanking”

Beyond traditional capital and regulatory rules, agencies are actively bringing crypto assets into the formal banking system, introducing competition in the process. FDIC Chairman Travis Hill stated that regulators are drafting guidance on how deposit insurance will apply to blockchain digital deposits. Meanwhile, in the face of industry opposition, the Office of the Comptroller of the Currency (OCC) approved requests from five cryptocurrency companies for U.S. bank licenses—a complete reversal from prior regulator attitudes framing the sector as rife with “scams and fraud.”

On another front, regulators have taken a tough stance toward banks that discriminate against customers for ideological reasons. Under OCC head Jonathan Gould, the agency identified nine major U.S. lenders that “inappropriately differentiated” among clients between 2020 and 2023, restricting some customers’ access to banking services.

The Hidden Worries Behind Wall Street’s Euphoria

Although the banking industry has welcomed these moves—the Bank Policy Institute called the leverage ratio revisions “long overdue reform”—academics and some former officials are deeply concerned about potential systemic risks.

Jeremy Kress, University of Michigan business law professor and former Fed bank policy attorney, noted that downgrading supervision outside of major risks to capital and liquidity could cause regulators to ignore rare but catastrophic risks. He warned that deregulation essentially lets banks transfer risk to the public: with weakened oversight, banks have incentives to take more risks for higher returns; when they succeed, shareholders profit, but when they fail, the government is often forced to step in.

Arthur Wilmarth, honorary professor at George Washington University Law School, sounded an even harsher warning. He believes the current approach is a reckless combination of “decapitalization, deregulation, and de-supervision.” Wilmarth stated the Trump administration’s policies will almost certainly bring on a disastrous financial crisis, specifically highlighting bubbles forming in crypto and artificial intelligence as possible flashpoints.

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