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The author is a professor of finance at Stanford University Graduate School of Business and a senior fellow at the Hoover Institution.
The U.S. banking system is burdened by a complex regulatory structure, with multiple federal and state agencies overseeing financial institutions with overlapping jurisdiction and, in some cases, competing interests.
Although this fragmented structure was originally intended to increase oversight, it often creates inefficiencies, delays, and inconsistencies in enforcement. The incoming administration of Donald Trump has an opportunity to address some of these deficiencies.
The failures of Silicon Valley Bank and First Republic Bank, where regulators shifted blame and reacted too slowly, reveal that the system is reactive rather than proactive. It is time to ask more questions about whether this multi-regulatory framework truly promotes stability, or rather inhibits innovation, responsiveness, and accountability.
Nearly 70% of U.S. commercial banks, including SVB and First Republic, operate under a dual regulatory system in which state and federal regulators alternate oversight. Some banks are regulated by multiple federal regulators, such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
Supporters say this will strengthen resilience by providing multiple perspectives and reduce political interference by giving banks choice over key regulators. But this structure also comes with clear costs: inconsistent enforcement, regulatory arbitrage, and delays in responding to new risks.
The 2008 Washington Mutual bankruptcy, the largest bank failure in U.S. history, is a case in point. A Congressional investigation found that WaMu’s downfall was compounded by oversight issues between the Office of Thrift Oversight and the FDIC. Due to their poor coordination, they were unable to act decisively, further exacerbating their vulnerability.
Recent events reflect that these problems persist. At SVB, for example, early warning signs of losses in the bond portfolio and concentration of the depositor base went unaddressed, regulators failed to enforce standards, and efforts were weakened by overlapping authorities. Research shows that such discrepancies create opportunities for regulatory arbitrage, leading banks to exploit disparities and engage in riskier activities.
These issues extend beyond banks to the emerging fintech sector. Nonbank and fintech companies are driving innovation in payments and lending, but jurisdictional disputes between regulators, state vs. federal, and even federal agencies are holding back the development of a sound regulatory framework.
Streamlining the regulatory framework is difficult. Significant consolidation regulations require Congressional approval, a challenge that has historically stalled far-reaching reforms. For example, Dodd-Frank reforms in response to the collapse of Washington Mutual following the financial crisis eliminated the Office of Thrift Supervision, but additional consolidation efforts faced strong political resistance. Similarly, completely eliminating the entrenched system of dual regulation of federal and state banks may not be realistic.
But there is much more the Trump administration can do to target unnecessary duplication and improve coordination. Efforts should be made to consolidate oversight responsibilities among regulatory agencies, address inefficiencies between federal and state regulatory agencies, and introduce tools such as performance scorecards to evaluate regulatory agencies. A clear example of regulatory duplication is the dual oversight of national banks by the OCC and FDIC, with both agencies conducting separate inspections of the same institutions.
Importantly, regulatory incentives can also be aligned so that government agencies prioritize fiscal stability and sound oversight over bureaucratic interests. It is also a time to question the assumption that stronger regulations will improve safety. Overregulation imposes significant costs, with compliance costs alone for financial institutions increasing by nearly $50 billion annually since 2008, disproportionately harming small banks. Reforms must emphasize accountability rather than adding endless layers of oversight. This means that the bank has to bear the consequences of the risk.
The U.S. banking system remains essential to global finance, but its outdated regulatory structure threatens its resilience and public trust. By reducing complexity, promoting accountability, and aligning incentives, we can create a smarter, leaner framework that fosters both stability and innovation, allowing American finance to thrive. , can allow you to move forward.
