Post 2008, the U.S. established the Financial Stability Oversight Council (FSOC) to monitor threats from the financial services industry that could result in another financial crisis.
This group, comprising more than a dozen different regulators and headed by the Treasury secretary, has recognized myriad dangers including cyberattacks, a major bank failure, and increasing lending by lightly monitored hedge funds and private equity firms.
However, the Trump administration has posited that the regulations themselves may be causing instability. Wall Street has argued for some time that regulation makes the system prey to shocks by drying up liquidity. It can be harder to trade during periods of stress because banks have to hold more capital in reserve.
The debate is raging in the FSOC, as officials supporting Trump are urging that the council examine whether the 2010 Dodd-Frank Act is making markets more dangerous. A working group is currently studying the impact of rules on liquidity and reviewing research (some paid for by the industry), as well as considering the impact of the rise in automated electronic trading.
These developments suggest that the FSOC is becoming a force for deregulation. It has a strong influence over policy, and Secretary Mnuchin has already asked regulators to consider whether banks should have more freedom in complying with the Volcker Rule on proprietary trading.
If the council’s working group decides that rules are increasing liquidity risk, this concern could make it onto the list that lays out the top threats to the financial system. Naturally, this would suggest that deregulation is a good thing. A number of senior figures on Wall Street, including JPMorgan Chase CEO Jamie Dimon and Blackstone Group CEO Stephen Schwarzman have argued that regulations have vastly increased the danger of another financial crisis.
For more information, please read:
Wall Street Says Rules Pose Risk of Another Crisis, and Trump Regulators Agree | Bloomberg