WASHINGTON — Former Federal Deposit Insurance Corp. Chair Sheila Bair is warning that U.S. regulators are repeating mistakes that contributed to the 2008 financial crisis by allowing banks to operate with thinner capital cushions, as new academic research presented to central bankers similarly cautions that efforts to simplify banking regulations could make the financial system more vulnerable.
Bair, who led the FDIC during the global financial crisis after being appointed by President George W. Bush in 2006, told Politico that regulators must resist pressure from banks seeking lower capital requirements and preserve safeguards designed to protect taxpayers and the broader economy.
“Regulators have to stand strong, because the banks, it’s in their financial interest to drive those capital levels as low as possible,” Bair told Politico. “And if they don’t stand firm against it, we’re going to have another crisis.”
Researchers Flag Concerns
The concerns raised by Bair come as researchers are also questioning regulatory trends in the United States and Britain. According to Reuters, a study scheduled to be presented at the European Central Bank’s annual conference in Sintra, Portugal, concludes that simplifying banking regulations could inadvertently weaken the financial system by making rules easier for banks to circumvent.
The paper, co-authored by researchers including Mariassunta Giannetti, a professor at the Stockholm School of Economics, argues that complexity in financial regulation serves an important purpose by making it more difficult for financial institutions to shift risk or exploit loopholes.
The researchers found that simpler regulations — even those that appear equally stringent on paper — are more susceptible to being gamed as banks move risk to other parts of the financial system.
‘Risks Going too Far’
“Our evidence suggests the U.S. rollback risks going too far,” the authors wrote, according to Reuters, adding that Britain also appears to be moving gradually in the same direction.
The findings contrast with current regulatory trends in both countries. In the United States, regulators have been easing supervisory requirements and capital rules in an effort to encourage lending and promote innovation. Britain is also reviewing post-financial crisis banking regulations, including ring-fencing requirements, to provide lenders with greater operational flexibility.
Bair told Politico she is concerned that regulators under President Donald Trump are rolling back reforms enacted after the 2008 financial crisis and weakening oversight across the financial sector.
According to Politico, Bair pointed to measures of bank leverage showing that some of the nation’s largest banks now maintain capital levels roughly comparable to those seen in 2009, shortly after the financial crisis.
She argued that regulators must maintain a long-term perspective, particularly during periods when banks are profitable and lobbying for reduced regulatory burdens.
Heard This Before
“We were hearing that right before the 2008 crisis,” Bair told Politico. “A lot of this is same old, same old. But regulators need to have a long memory, even if the industry doesn’t.”
Bair also criticized what she characterized as an increasing willingness by regulators to support financial institutions during times of stress, citing the federal response to the 2023 failure of Silicon Valley Bank.
According to Politico, she expressed concern that some financial institutions may assume the government will intervene in future crises, reducing incentives to maintain stronger capital positions.
Bair noted that major banks have continued to return significant amounts of capital to shareholders through stock buybacks and dividends while arguing that regulatory capital requirements constrain lending.
‘It’s Frightening’
“It’s frightening how much more the big banks have levered up,” she told Politico.
The Reuters study echoed concerns about deregulation, cautioning that while simplified rules may be easier to administer, they also may be easier for financial institutions to avoid or exploit.
According to Reuters, the researchers said the European Union’s approach of simplifying its regulatory framework while maintaining overall capital requirements is generally consistent with the study’s conclusions, provided policymakers preserve what the authors described as the “load bearing” provisions that make regulations effective.
Reuters also reported that Switzerland’s response following the 2023 collapse of Credit Suisse aligns with the paper’s findings by combining stringent capital requirements with detailed regulations designed to minimize regulatory loopholes.
‘A Lot of Parallels’
Asked whether she sees similarities between current conditions and those that preceded the 2008 financial crisis, Bair said there are “a lot of parallels,” particularly regarding deregulatory trends and the growth of lending outside the traditional banking sector.
While Bair said she is less concerned about digital assets and cryptocurrency markets, she identified private credit as a growing area of risk.
Private credit refers to loans made by nonbank lenders, often to businesses that may not qualify for traditional bank financing. The market has grown rapidly in recent years as investors seek higher yields.
According to Politico, Bair said the sector shares some characteristics with the mortgage lending practices that contributed to the 2008 financial crisis, including nonbank lending and loans backed by potentially weaker collateral.
Warning Over Private Credit
She also warned that financing arrangements tied to private credit are becoming increasingly complex.
“One of the things that made me feel better about private credit is that I didn’t think there was all this financial engineering sitting on top of it the way that we did with the mortgages,” Bair told Politico. “But the financial engineering around private credit financing arrangements is also growing more complex.”
The researchers behind the Reuters study cautioned that their analysis is based on market data from publicly traded financial institutions and may not fully capture risks developing in less-regulated sectors, including private credit markets and private equity-backed lending.
