There are two ways to consolidate federal bank regulation. First, you can change the law and, as detailed in my memo a few weeks back, transform agency responsibilities to reduce duplication and regulatory arbitrage. The other way is for one federal entity to assert all the power it has under law and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two, setting key policy goals and “coordinating” among the agencies. Will Treasury keep banking within essential guardrails? Mr. Bessent might just pull this off, at least for as long as he’s Treasury Secretary in this super-volatile Administration.
Just weeks ago, I would have said a Treasury putsch was impossible because of the Fed’s inviolable status as an independent agency that, even under a more Trump-ready vice chair, would avoid the appearance of taking Treasury’s orders less this subservience spill over to monetary policymaking. Now, though, the President has claimed via executive order that there are no more independent agencies exempt from Executive Branch control. This covers the OCC and FDIC, which were in any case sure to do what was asked of them in this Administration, but it also covers Fed supervisory and regulatory responsibilities. The Fed’s express statutory independence does not cover these activities, making it likely now that the Fed will concede on most sup-and-reg points to defend the fragile barricades surrounding monetary-policy independence. More than a few Fed Governors would even be keen to see these responsibilities move elsewhere to permit them to focus full-time on sacrosanct macro obligations.
What would Treasury-led banking standards look like? Much like Gov. Bowman’s last comments, the Secretary’s speech made it clear that he wants supervision focused on material risks, not list-completion – a critical and overdue reform to effective bank supervision.
Mr. Bessent also wants a more certain and sensible bank-merger policy. No one should expect that this will also be one that allows the very biggest banks to acquire other banks or nonbanks. During his confirmation, the Secretary was clear about the five biggest banks being too big and the new DOJ antitrust head is also wary of big-bank market power. Under the Secretary’s direction, new merger policies from the OCC, FDIC, and – at long last – the Fed will include shorter timeframes, better quantitative and qualitative decision criteria, and a lot less of the community-group consideration that sometimes smacked of extortion.
What about new rules? There is no doubt that the Secretary wants the SLR revised to exclude central-bank deposits and short-term Treasuries. These days, he’s not the only one – despite four years of bank pleading, Chair Powell suddenly thought this made sense during his first appearance before Congress after Mr. Trump took office. Once there is a confirmed vice chair for supervision, the Fed may even try to prove its deregulatory bona fides to the Trump Administration and start a leverage-ratio rewrite on its own ahead of the risk-based rewrite also in the works. As we noted, an SLR revision also reopens the questions long surrounding the enhanced SLR for the largest banks and the completely confused way they figure into the stress capital buffer. Look for this also to come quickly to the fore.
Secretary Bessent said he will also use the FSOC and President’s Working Group to corral bank regulators. Odds on that he’ll focus not only on the banking agencies, but also on the SEC and CFTC. Neither FSOC nor the PWG allow Treasury to order primary federal regulators around, but Mr. Bessent is unlikely to have to do so. He’ll thus get what he wants, but what does he want?
First up will be another round of efforts to stabilize the Treasury market, a market that is of course the Treasury’s most important concern. This will advance by SLR reform as well as with a new look at central clearing, primary-dealer governance, and various Fed facilities.
I doubt FSOC will name any more systemic nonbanks or even designate new activities or practices unless Fannie and Freddie are privatized – a very big unless. But Treasury via the FSOC can use a lot of pressure for changes to limit bank interconnections into NBFIs as well as designate financial-market utilities (FMUs). I think Mr. Bessent will look hard not only at the Treasury market, but also at other clearing and settlement arenas such as foreign exchange, prime brokerage, nonbank mortgage servicing, and nonbank payment providers to see if any is an FMU or warrants additional safeguards.
In short, Treasury at the helm will not mean no regulation; it will in fact mean a lot of regulation, but new rules will also be a lot different than those the Biden Administration talked up, proposed, and occasionally even implemented. It is clear that Secretary Bessent has the power to get what he wants. If he also has the bandwidth and we are not overtaken by events, then much will quickly start to change that is much to the liking of most U.S. banks.