Trump-Era Financial Reforms: Deregulation, Lighter Capital Rules & Market Risks

The Cato Institute’s “Reforming the Federal Reserve, Part 7” argues forcefully that the dual mandate of the Fed—stable prices and full employment—conflicts inherently with its role as banking regulator, especially when its monetary tightening destabilizes institutions it also must supervise [1]. To resolve this, they propose Congress strip the Fed entirely of its regulatory authority or, at minimum, shift most of its supervisory functions to the Office of the Comptroller of the Currency for large banks, while retaining Fed district banks for smaller institutions [1].

These proposals are not merely academic. Under Vice Chair for Supervision Michelle Bowman, the Fed is reducing its S&R division’s workforce by 30%, shrinking it from ~500 to ~350 baseline staff by end-2026. This aligns with the administration’s deregulatory agenda and President Trump’s directive for a leaner federal workforce [3][2].

Additionally, Fed Governor Stephen Miran tied easing regulatory burdens to the possibility of reducing the Fed’s balance sheet. His argument: lighter supervision rules could lower optimal reserves and allow resumption of balance sheet run-off after the pause caused by recent funding pressures [4]. Meanwhile, in late Nov 2025, the FDIC, Fed, and OCC issued a final rule modifying leverage and capital standards. Key figures: bank holding companies face <2% reduction in Tier 1 capital requirements in aggregate; depository institution subsidiaries gain relief but face stricter enhanced supplemental leverage rules capped at 1%, with a total requirement up to 4% [5].

In parallel, Treasury Secretary Scott Bessent directed the Financial Stability Oversight Council to reprioritize its regulatory mission. The new FSOC mandate emphasizes pruning regulations deemed duplicative or growth-inhibiting, while downplaying systemic risk in favor of flexibility and innovation—yet critics, including scholars and policy advocates, warn this could roll back safeguards established since the 2008 financial crisis [6][2].

Strategic implications are broad: banking risk profiles may change, capital buffers may erode modestly, and institutional behavior—particularly of large banks—could shift back toward higher leverage or risk concentration. For investors and financial institutions, regulatory tailwinds may improve profitability but increase exposure to stress-events. For regulators and Congress, the question is how to balance autonomy, governance, and the potential for future crises.

Open questions remain: what legislative route(s) would be required to remove the Fed’s supervisory role entirely? Would transferring supervision to the OCC or another body truly resolve conflicts or merely shift them? How will financial markets and markets for bank debt and equity price in these regulatory changes—and what thresholds of risk will trigger pushback or crisis? Finally, what will be the role of stress testing and capital planning under the new paradigm?