FDIC chief warns that cuts to bank regulations could be 'highly costly'

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The outgoing chairman of the Federal Deposit Insurance Corporation has warned that the U.S. financial system could pay a “high price” if the Trump administration cuts bank regulations too aggressively.

“Short-term changes aimed at achieving short-term results in finance can have real costs and undermine our long-term goals in a way,” Martin Grunberg told the Financial Times.

Grunberg's warning comes as President-elect Donald Trump vows to cut rules and bureaucracy as part of a plan to boost the U.S. economy. According to a previous report by the Financial Times, Trump ally Elon Musk and Vivek Ramaswamy, the head of Trump’s newly established Office of Government Effectiveness, said Interested in streamlining U.S. financial regulators.

Financial stocks surged after Trump's election on Nov. 5, but Grunberg, who will step down next week, warned bankers and regulators to keep long-term risks in mind: “Be careful not to get carried away. Because prices can be very high. “

Grunberg said the U.S. remains vulnerable to a host of problems that led to recent major crises, including the savings and loan collapse of the 1980s, the 2008 financial crisis and regional bank runs in 2023. In each case, deregulation and loose regulations spurred rapid growth in new products and non-bank financial companies that later turned out to be riskier than expected.

“There is a key conclusion, which is that history does repeat itself,” Grunberg said before his final formal remarks on Tuesday. “I'm worried we're going to have to go through the hard process again.”

If deregulation continues in the United States, other large financial centers may follow suit. When a row erupted in the United States over proposed higher capital rules, known as the final phase of Basel III, the UK delayed implementation in the United States.

“After the 2008 crisis, the United States led the world in strengthening prudential requirements, regulations and solutions,” Grunberg said. “We need to be careful not to steer the world in the opposite direction.”

Grunberg added that deepening ties between banks and other financial groups remained a significant risk and heightened the need for policymakers to avoid reducing the role of regulators.

“Today, a risk that has clear systemic consequences that remains unresolved is the overall relationship between non-bank financial companies and the insured banking industry, whether they are hedge funds, private credit or mortgage servicers,” he said.

He said the financial system remains highly vulnerable to geopolitical shocks, which could cause interest rates to spike and destabilize financial companies that rely heavily on borrowing.

While cutting-edge products such as cryptocurrencies and exchange-traded funds that rely on lending do not currently pose a systemic threat, deregulation could change that.

“As we look at new activity that has not yet had systemic consequences, consider what rapid growth might mean . . . and make sure we take appropriate steps to manage the potential risks there.”