The current US administration’s approach to financial markets and institutions mixes familiar deregulatory policies with a range of other policies that are largely without precedent. This column, taken from a CEPR book on the economic consequences of the second Trump administration, catalogues the relevant policy shifts that are likely to affect the financial sector and considers how these shifts may impact financial stability, capital markets, and the global dollar system.
The second Trump administration’s approach to financial markets and institutions mixes familiar deregulatory policies with a range of other policies (financial and non-financial) that are largely without precedent and may lead to significant structural change in the long term. Combined, these policies have the potential to affect the financial sector in at least four ways. First, they could threaten the foundations of the global dollar system – mutual cooperation, trust, and interdependency, both between the producers and consumers of financial instruments and among the nations that constitute the dollar bloc. Second, they may undermine financial stability by loosening prudential standards, especially with respect to limits on leverage. Third, they can jeopardise consumer and investor confidence by relaxing regulatory standards and lessening financial law enforcement. Fourth, they could frustrate the financial crimes and sanctions regime, notably by promoting stablecoins, which can be used beyond the reach of governments to enable various forms of illicit activity.
These effects, in turn, could have a negative impact on the economy in the medium to long term. They raise the risk of financial instability and a messy deleveraging. They also may put upward pressure on interest rates for public and private dollar-denominated debt. Although the global dollar system has proven robust to past disruptions, and remains well entrenched, the administration’s new stance, if pursued to its logical end, could increase financial fragility and impair capital formation. If that comes to pass, a future exogenous shock to the economic or financial system would pose significant risk to economic growth if policymakers are unable, in the face of such a shock, to come together swiftly to avert a disorderly monetary contraction.
This chapter proceeds in two parts. First, it catalogues the relevant policy shifts that are likely to affect the financial sector. Then it considers how these shifts may impact financial stability, capital markets, and the global dollar system.
Policy shifts
In its first hundred days, the second Trump administration has taken a range of steps that directly affect the financial sector. They also have taken other steps (not directly related to finance), particularly in relation to international alliances and the administrative state, which may, in the long run, have significant effects on the financial sector. Some steps are of the sort that often follows a change in party control in Washington. For example, the administration has adopted deregulatory and de-supervisory approaches to banking and markets frequently pursued by prior Republican administrations. Other steps, however, are more dramatic. For instance, the administration has asserted presidential supremacy over financial regulatory agencies, undermined central bank independence, and disrupted US relations with historic allies, all in ways with little to no precedent.
Deregulation
Banking
The core framework for the prudential regulation of US banks is provided by an international agreement known as the Basel Accord. Formed in the wake of a major international banking crisis in 1974 (Braun et al. 2021), 1 and championed by the United States, Basel was created to level the playing field for dollar-denominated banking around the world. That, it was hoped, would forestall a race to the bottom in regulatory standards that could fuel dollar-based financial bubbles and ultimately precipitate acute monetary contraction. Towards this end, the latest agreement, known as Basel III, was introduced in 2010 in response to the Global Financial Crisis. It was designed to significantly reduce leverage at global banks and tighten equity and liquidity requirements on the largest, most systemically important institutions.
The new US administration is now considering stepping back from the Basel framework. For the last several years, banking regulators have been working on the final round of rule changes associated with the Basel III agreement known as ‘Basel III endgame’. This April, Secretary of the Treasury Scott Bessent questioned whether it made sense to continue with those changes. Instead, he told a group of bankers that “we could borrow selectively from them” to the extent that “they can provide inspirations”. And more generally, Bessent asserted that “[w]e should not outsource decision making for the United States to international bodies.” “Instead, we should conduct our own analysis from the ground up to determine a regulatory framework that is in the interests of the United States” (Bessent 2025a).
The administration so far has suggested several changes to banking regulation that deviate noticeably from current Basel standards. Most notably, it has questioned the current calibration of the limit on bank leverage (the ‘leverage ratio’). Secretary Bessent has criticised it as “too frequently binding” (when compared to risk-based capital rules) (Bessent 2025a). He also has recently floated excluding Treasury securities from consolidated measures of leverage, which would be at odds with current Basel standards (Tarullo 2023). The Office of the Comptroller of the Currency (OCC) also has rolled back stricter merger review policies for national banks and federal savings associations (rescinding a 2024 policy statement and amending, without notice or comment, a 2024 final rule).
Consumer and investor protection
A similar liberalising push is apparent in other areas of financial regulatory policy. Most notably, the administration has nearly shuttered the Consumer Financial Protection Bureau (CFPB). Established as an independent federal agency by Congress in response to the 2008 financial crisis (as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010), the CFPB was intended to better protect American consumers from fraudulent and deceptive practices in the offering of financial products. As Rohit Chopra, who ran the agency under President Biden, recently put it: “At its core, [the CFPB] is a law enforcement agency. It takes big financial institutions to court who cheat consumers, whether it’s a credit reporting agency or a large bank or a credit card giant”. Various lawmakers have been attempting to defund and disable the CFPB since its founding (Sitaraman 2021), and the first Trump administration sharply curtailed its enforcement actions (Peterson 2019). But the new administration has functionally dismantled the organisation, slashing its funding, firing the vast majority of its staff and leaving it without a dedicated leader (see Chapter 8 by Neale Mahoney).
Investor protection is also facing reversals. To date, the Securities and Exchange Commission (SEC) has delayed implementation of new rules related to Treasury markets mandating clearing for much of the Treasury market (SEC 2025; see also Yadav and Younger 2025). The SEC also has indicated a desire to make it easier for retail investors to invest in private funds (“Such higher-risk, higher reward investments can help complete a diversified portfolio”) (Uyeda 2025).
The new administration also has rapidly embraced cryptocurrencies. In his first week in office, President Trump signed an Executive Order designed to fashion the US into the “crypto capital of the world”. In March, the White House announced a Strategic Bitcoin Reserve and a US Digital Asset Stockpile. In April, the Department of Justice announced that it would disband its National Cryptocurrency Enforcement Team. Also in April, the new SEC Chair gave his first speech to a crypto roundtable, stating his view that the rise of cryptocurrencies would help to “modernize aspects of our financial system” (Atkins 2025).
Presidential supremacy over regulators
The White House also has asserted unprecedented claims to control government agencies including the financial regulators (see Chapter 3 by Gensler and Menand in this volume). These regulators have long benefited from significant autonomy from White House staff, especially in formulating legislative rules such as capital and liquidity requirements (Congressional Research Service 2023). Under the administration’s new policy, financial regulators will have to submit all proposed rules for review to the Office of Information and Regulatory Affairs (OIRA) in the White House, which can reject those proposals by declining to pass them back to the agencies for promulgation.
President Trump also has claimed the power to remove financial regulators at will, despite statutory language barring the president from removing them except for cause. This change may result in partisan domination of previously balanced multimember commissions such as the Federal Deposit Insurance Corporation (FDIC), the SEC, and the Commodities Futures Trading Commission (CFTC). Further, the downsizing of agencies along with changes to civil service protections are likely to reduce policymaking capacity, lowering the expertise and experience of their staffs.
Central bank independence
In an even sharper break from recent administrations, the White House has attacked the legal foundations of central bank independence in the United States. In a recent Executive Order, the administration has asserted power to control the regulatory and supervisory functions of the Federal Reserve. While the Executive Order disclaims the power to control “monetary policy”, this distinction may not end up amounting to much. After all, the regulation of financial institutions is monetary policy (see Chapter 3), and a White House determined to relax monetary conditions could effectuate such a policy through changes to the rules governing bank balance sheets.
The administration also has shown little regard for monetary policy autonomy. On multiple occasions, the President has publicly called for a more accommodative stance. For example, in May he wrote: “With these costs trending so nicely downward, just what I predicted they would do, there can almost be no inflation, but there can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW.”
By statute, the president is permitted to remove Federal Reserve governors only “for cause”. The new administration has called this limit into question, however, at several points. For example, in April, the President said that “Powell’s termination cannot come fast enough!” The President also subsequently stated that “if I want him out, he’ll be out of there real fast, believe me”. The President already has fired a half dozen officials on multi-member commissions similar in structure to the Federal Reserve (see Chapter 3). Further, these statements about having the authority to remove Chair Powell are consistent with legal positions the administration has already staked out in court.
Although legal observers have questioned whether the Supreme Court would accept an attempt by the President to ignore “for cause” removal provisions in the Federal Reserve Act (allowing the president to remove Federal Reserve governors at will), the President also has made statements suggesting that he may have cause to remove Chair Powell. For example, the President said: “I don’t think he’s doing the job. He’s too late. Always too late. A little slow and I’m not happy with him. I let him know it.” Though the President has subsequently said that he was not going to remove Chair Powell, these comments at the time may have been in an effort to lay the ground for “neglect of duty” and “inefficiency” – two recognised “for cause” removal grounds (Manners and Menand 2021).
Stablecoins
The administration’s stance toward stablecoin issuers is of relevance to the monetary system. Stablecoins are digital assets designed to maintain a constant value relative to more traditional currencies. By far the most common application has been to mimic a US dollar. This is typically achieved by holding short-term, low-risk US dollar-denominated securities and bank deposits in a ‘reserve fund’. Stablecoin tokens are ‘minted’ when funds are deposited; they are ‘burned’ when holders ask for their fiat currency back (subject to restrictions after being redeemed, either for currency or in kind) (Gorton and Zhang 2023).
The stated goal of stablecoin issuers is to create ‘on-chain’ dollars which are imbued with all the technological advantages of cryptocurrencies but maintain access to the payments and economic networks used by more traditional monies. Practically, they have offered people a way to move dollars outside of the banking system via transfers on permissionless (i.e. open) blockchains. They initially were created because many cryptocurrency intermediaries were unable to get bank accounts due to their inability or unwillingness to sufficiently comply with anti-money laundering requirements. Their primary use, by far, has been within the crypto trading and lending ecosystem. At present, the size of the market is between $200 and $250 billion and is dominated by two issuers, Tether and Circle.
An Executive Order released days into the new administration called on federal agencies to “[take] actions to promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide”. Congress is currently considering legislation that would provide a legal framework for banks and nonbanks to issue stablecoins. In May 2025, the US Senate voted to debate a bill which, if enacted, would regulate stablecoin issuers operating in the United States. It would require issuers to back reserves at least one to one with highly liquid short-term assets (e.g. Federal Reserve liabilities, Treasury bills, repurchase agreements, and demand deposits at federally regulated commercial banks), not pay interest, and confirms that such issuers are financial institutions under the Bank Secrecy Act. These steps address a number of issues raised during the Biden administration. (President’s Working Group Report on Stablecoins et al. 2021) As the legislation would address stablecoins issued or sold only in the United States and stablecoins could still be transferred on permissionless ledgers, it leaves open their overseas use outside of the money laundering laws.
In a separate set of developments, the US Treasury Department announced that it has removed the requirement that US firms comply with Congressionally mandated beneficial ownership data collection. This had been an important initiative by Congress and prior administrations to fill holes in entity ownership information to best enforce anti-money laundering and sanctions laws.
International alliances
In its opening months, the new administration has taken an aggressive stance towards historical allies. The White House has challenged the sovereignty of independent nation states including Greenland, Panama, and even Canada. It has terminated longstanding international programmes such as USAID. Through the imposition of tariffs that are in many cases prohibitively high, it has upended a global trading system that has been in place for generations.
In recent months, market observers have raised concerns that the administration’s adversarial posture might affect the future reliability of Federal Reserve central bank liquidity swap lines. Central bank liquidity swap lines are a key element of the existing global dollar system. These swap lines, often referred to as simply FX swap lines, are standing arrangements between the Fed and foreign central banks to lend dollars against foreign currencies. They date back to 1962 when they were first used to stabilise offshore dollar markets as well as for exchange rate management (McCauley and Shenck 2020). Large-scale provisioning of offshore dollar liquidity using the swap lines proved essential in the Global Financial Crisis (Fleming and Klagge 2010) and Covid pandemic (Choi et al. 2021).
Financial and economic consequences
The new administration’s policy direction may have a range of possible financial and economic consequences including undermining the global dollar system, increasing risks to financial stability, reducing consumer and investor protections, and weakening controls on illicit financial activities.
The global dollar system
The global dollar system is an extensive and complex network. It is the product of a political project begun after World War II to build an international economy centred on the US dollar. This project, carried on by presidents of both parties, produced deep and liquid global capital markets and bank-based payment systems run on dollars as the international ‘key’ currency (Mehrling 2002). 6 Its stability depends on the confidence of a wide variety of participants. That confidence ultimately flows from governments, and particularly the willingness of those governments to cooperate amongst each other and, to some extent, sacrifice some of their own sovereignty in the interest of the collective whole. As one former Secretary of the Basel Committee on Banking Supervision once put it: “Global financial stability is a public good.” Governments cooperate not to check each other but to provide this public good by checking the markets.
Many of the second Trump administration’s moves threaten to erode the trust that undergirds the system (Rogoff 2025). The first and most consequential area of concern is an uncertainty regarding the current administration’s willingness to backstop global dollar liquidity. Although nothing concrete has been made public, the adversarial posture of the administration toward historical allies has led some to question whether, due to a combination of domestic political considerations and geopolitical brinksmanship, the swap lines may not be available or not active in time to avoid damaging scenarios in a future financial crisis (McCauley 2025).
The FX swap lines are not just a crisis fighting tool, they are critical to confidence in the global dollar itself. In the same way that federal deposit insurance and access to the Federal Reserve’s discount window are critical to ensuring the safety and interoperability of the $20 trillion bank deposits issued by the US banking and credit union systems, the swap lines smooth out and lubricate the daily operations of dollar-issuing banks and the over $12 trillion in Eurodollar deposits across the world.
In other words, the stability of the global dollar system as presently constituted rests on the uninterrupted and mostly unconditional access to US dollar liquidity. This element of the global dollar system is often overlooked, due to the perceived pre-existing commitment of the Federal Reserve and the US government to offer it when needed. This may be a reflection of military and political alliances that have themselves, until this administration, also been considered as firm commitments. Without reliable and timely access to emergency dollars, the next global crisis would be significantly more severe (Ricks 2016). Even if participants in the global dollar system were to come to believe emergency liquidity might have political strings attached, it could potentially precipitate a crisis in the first instance.
Stepping back from the Basel Accord also could have negative repercussions for the global dollar. The Accord may not always be popular with each of its participating countries. International agreements rarely are. But they have proven effective at fostering a congruent set of principles to safety and soundness regulation – a key element of maintaining confidence in the global dollar system without requiring depositors to be fully versed on the intricacies of each local banking system. Without it, the global dollar system could come to resemble the ‘free banking era’ of the 19th century in the United States, when substantial regional variation in bank regulation was a major impendent to the free flow of capital and, ultimately, a material drag on economic growth (e.g. Sprague 1910, Jalil 2015).
In that vein, Secretary Bessent’s comments and the broader posture of the administration represent a potentially worrisome departure from prior norms. While the United States, under prior administrations, has not implemented all of the recommendations of the various Basel Accords, it has generally made a good faith attempt to incorporate the spirit of those standards. If the United States. were to deviate significantly from international standards, it is plausible that other countries may feel both license and competitive pressure to abandon them as well. The frequent panics and rampant instability of the United States’ antebellum banking system still serves as a valuable lesson for those who might consider going down that road.
That said, to date the administration has taken few concrete steps toward changing regulatory standards. One exception of great relevance internationally is the potential for changes to the implementation of Basel III in the United States. The devil will be in the details. Modest deviations from international standards are commonplace. More substantial changes, however, could contribute to the unravelling of international economic and financial cooperation. Such an unravelling could, in turn, trigger a global deregulatory unwinding that could be difficult to stop. Among other things, the global system allows the US government to borrow at lower interest rates and supports robust economic growth (Levine 2003); a shift to other currencies and away from dollars could reverse these effects over time.
Financial stability
The administration’s relaxation of regulatory standards has the potential to increase risks to financial stability by contributing to the buildup of additional leverage across the financial system over time.
That large financial institutions do not internalise the costs of their failure on their creditors and the economy at large can skew their incentives to adopt high leverage. To the extent that leverage is a binding constraint on a given institution, loosening those requirements without counterbalancing adjustments to equity requirements will therefore lead to lower capital levels. De-supervision – policies that reduce the intensity of stress tests and oversight by examiners – also may lead to increased regulatory arbitrage, including actions geared toward achieving greater synthetic and on-balance sheet leverage. A similar dynamic preceded the 2008 financial crisis, where a rollback in discretionary supervision facilitated firm behaviour that undermined the efficacy of bright-line rules (Menand 2018). Increased reliance on leverage has been associated with fragility in Treasury markets (Kashyap et al. 2025). More recently, the bank runs in 2023 were associated with de-supervision and deregulation of mid-sized banks and significant undercapitalisation (Hoenig 2023).
Presidential supremacy over financial regulators also could threaten financial stability over the medium to long term. This is because greater White House control over regulatory policy could favour financial actors seeking to arbitrage rules and, on the margin, could hamstring regulators seeking to prevent evasion. Enforcement, especially by markets regulators, could drop. More highly resourced and politically favoured actors may benefit disproportionately. Further, the pace of rulemaking is likely to slow, with White House deregulatory goals prioritised (see Chapter 3).
Consumer and investor protection
Relaxed regulatory standards, as well as the shrinking of policymaking and enforcement capacity at financial regulators, is likely to put consumers and investors at greater risk.
What will happen to the enforcement authority the CFPB previously exercised is, as yet, uncertain. Though the new administration has suggested that these authorities should be transferred to other regulators, it is unclear if they will be and if so, how effectively or efficiently they will be used.
Legal protections, whether they are provided by the CFPB, SEC, CFTC, or others, are intended to provide investors and consumers with assurances that they can make informed decisions free of fraud and misleading information about risks, investments, and products. Although state regulators are primed to step into part of the breach, history suggests that only rigorous federal enforcement can provide sufficient protection. In the long run, the associated lack of confidence could harm risk appetite and capital formation more generally.
Another key area of focus of changed policy has been regarding crypto assets. The new administration has made clear that it intends to actively promote the development of crypto assets. That may leave investors more exposed to the kind of fraud and abuse revealed in these markets.
Financial crimes, illicit activities, and sanctions
The efficacy of guarding against illicit activities and enforcing sanctions depends upon the use of the dollar as the international key currency. Businesses worldwide use dollars for most large cross-border and domestic payments. That privileged position has allowed the United States and its allies a degree of control over critical nodes in financial payment networks (i.e. chokepoints) as well as an invaluable informational advantage (i.e. a panopticon; Farrell and Newman 2019).
As a result, in recent decades, financial sanctions have emerged as a key tool for advancing US interests through non-military means (Mulder 2021, Fishman 2025). National security policymakers have used sanctions to bloc problematic transactions, individuals, corporations, and even entire countries from parts of the global economy.
Stablecoins, however, can undermine the United States’ ability to guard against illicit activities and promote national security policy (Massad 2024, Rauterberg and Younger 2024). As transactions involving these tokens settle outside of the banking system and are pseudonymous, stablecoins are well designed to evade authorities. At the moment they are relatively small – less than half of 1% of the more than $45 trillion in US dollar monetary instruments circulating globally (Gensler 2024) – and, as mentioned, they are mostly used within the crypto trading and lending ecosystem. Like many digital creations, though, stablecoins have the potential to grow quickly. Already, some cryptocurrency companies are offering a way to hold stablecoins while earning interest (among the biggest competitive disadvantages at present with other monetary instruments).
Secretary Bessent recently cited expectations that stablecoins could grow to more than $2 trillion in just a couple of years (Bessent 2025b). This figure presumably reflects the anticipated effects of the administration’s advocacy, including “promot[ing] the development and growth of lawful and legitimate dollar-backed stablecoins worldwide”. (A new stablecoin issued by World Liberty Financial, an organisation majority owned by the President’s business interests, already exceeds $2 billion.) Previously there were significant hurdles to stablecoins replacing bank deposits and other more traditional forms of currency in international trade and finance. At the scale suggested by Secretary Bessent, however, in any jurisdictions in which stablecoins (or their affiliates) have the ability to pay interest, they could start to compete (although this introduces additional legal considerations; Birdthistle et al. 2025). Were that to occur, the use of the global dollar-based banking system for sanctions and guarding against illicit activities could be degraded.
Even if the growth of stablecoins falls short of more enthusiastic projections, the administration is taking other steps that reduce the efficacy of financial sanctions. The US Treasury’s recent announcements dropping requirements for new Congressionally mandated entity beneficial ownership reporting, for example, leaves a significant gap in the current tools for financial crimes and sanctions enforcement.
To the extent that this lowers the effectiveness of sanctions, it risks a destabilising shift towards more use of kinetic warfare rather than financial conflict.
Conclusion
The new administration is making policy changes that could pose long-term risks to the US financial system, including the global dollar architecture. Some of these are direct adjustments to financial policy, such as relaxing regulatory standards, reducing enforcement activity, and promoting nonbank stablecoins. Others are facially unrelated to the financial sector. Most notably, the new administration has called into question traditional economic alliances and relationships and asserted unprecedented control over regulatory agencies. Incidentally, it is these more general changes that may have the biggest effects on the financial sector and by extension the economy.
Each of these shifts is still unfolding. None has yet done lasting damage to the dollar, financial stability, capital markets, consumer protection, or national security. The administration’s actual and proposed actions, however, could eventually have significant impacts on each of these financial sector dimensions. Mark Sobel, a former senior Treasury official, recently warned: “by weakening America’s economic and institutional foundations, by not being a trusted partner, [the United States] is undermining the underpinnings of what has given rise to dollar dominance”. While there is, at present, no viable alternative to the US dollar, a transition away from key currencies to a more multipolar monetary system is certainly plausible. By its actions and policy goals, the second Trump administration is potentially pushing and accelerating that transition. Similarly, degradation of our consumer and investor protections, our ability to combat illicit finance, and checks on excessive leverage could contribute to future financial instability and higher cost of capital in the economy.
Source : VOXeu
