What is the largest blind spot in current financial oversight?

We learned in the 2008 crash that letting Wall Street run rampant with fraud will eventually collapse our economy — and working families will pay the price. After tens of millions of Americans suffered, Congress enacted tougher new rules to make sure this never happens again. But President Trump is launching a full-fledged assault on these safeguards — putting the economic security of all Americans at risk. He’s gutting rules that prevent catastrophic bank failures and taxpayer bailouts, and he’s attempted to axe the Consumer Financial Protection Bureau, which has returned over $21 billion directly to more than 200 million Americans cheated by big banks and giant corporations. The warning lights are flashing red as Trump’s actions set us on a collision course with the same kind of systemic risks that triggered past crises, and where the government throws Wall Street a lifeboat while small businesses and families drown.

These risks are amplified by the unregulated and opaque private credit market loading up on highly leveraged loans. We have little insight into this $1.5 trillion market, and there are barely any safeguards to prevent panic in a moment of downturn that could spread across our economy.

The bottom line: We need a transparent economic system with rules in place to protect consumers — not a shadowy system that lines the pockets of big banks and giant corporations.

Democratic Sen. Elizabeth Warren of Massachusetts is the ranking member of the Senate Banking, Housing, and Urban Affairs Committee.

Regulators learned exactly the wrong lessons from the Global Financial Crisis, which itself was largely caused by regulatory failures that incentivized the financial sector into originating and securitizing bad loans that ultimately collapsed many banks. Subsequent rules protected large banks with too-big-to-fail status but destined small and regional banks to fail.

The latter group was severely penalized by the Dodd-Frank Act and other rules, forcing them into riskier banking practices to stay competitive with their larger rivals. One example is lending to non-depository financial institutions, which in turn lend to consumers to finance buy-now-pay-later services. Borrowers are increasingly missing payments on these debts.

Small banks have also loaded up their balance sheets to more than 30% with commercial real estate (CRE) loans compared to less than 6% at large banks. CRE is a ticking time bomb — it showed cracks in 2019 but the Federal Reserve’s near-zero interest rates in early 2020 allowed everyone to refinance bad loans, papering over the problem. In 2023, an emergency lending program by the Fed kicked the can down the road again.

Regulators pushed small and regional banks into risky financial positions and then ironically never bothered to evaluate the new situation that evolved from overregulation.

E.J. Antoni is chief economist and the Richard Aster fellow at The Heritage Foundation and a senior fellow at Unleash Prosperity.

The largest blind spot in financial oversight is the assumption that banks, investment banks and insurance companies are adequately capitalized for the risks held on their balance sheets and well-positioned to withstand unexpected financial shocks. The banking industry receives subsidized deposit insurance and liquidity backstops that enable it to increase leverage to levels that the market would not otherwise accept. For example, the largest banks are among the most leveraged institutions in the financial sector. They fund their balance sheets with only 7 cents of capital for every dollar of assets. They hold an estimated $2 trillion of off-balance-sheet liabilities, including derivative exposures and unfunded loan commitments. Such subsidies create enormous moral hazard, enabling banks to assume far greater risks than their capital can absorb. History has shown that despite a pretense of strength, the largest institutions have required government rescues involving billions of dollars of public money. Finally, this regulatory blind spot has fostered the expansion of complex rules and directives that have raised the cost of financial oversight with little improvement in outcomes.

Thomas Hoenig is a distinguished senior fellow with the Mercatus Center at George Mason University and former president and CEO of the Federal Reserve Bank of Kansas City.

The largest blind spot is the amount of leverage and concentration risk in collateralized funding markets. The U.S. repo market, which includes repo for Treasuries, mortgages, corporates and equities, is estimated to have grown to almost $12 trillion. Regulators and market participants have little visibility into haircuts, margins and possible cross-margining arrangements, which makes it difficult to measure leverage, and no data exist to measure whether there are large, concentrated positions by leveraged funds. A sudden, sharp drop in asset prices or failure of a leveraged fund could cause margins to be increased or a loss of repo funding and lead to fire sales, generating a downward price spiral. This dynamic would lead to further losses for the financial system and risks for the whole economy.

Nellie Liang is a senior fellow at the Hutchins Center on Fiscal and Monetary Policy at The Brookings Institution. She is a former under secretary for domestic finance at the U.S. Treasury.

Cash is the people’s fintech. It’s a public utility — i.e. legal tender, free to use, and not reliant on private intermediaries like banks, money transmitters or cryptocurrency miners. It is also resilient, residing at the edges of the network on ubiquitous, cheap hardware, with offline settlement capability. Finally, it is pro-privacy by design — that means no IDs, data surveillance, built-in use restrictions, or third-party censorship risk. Instead, cash lives in your pocket, and belongs to you.

Most crucially, cash undergirds individual and collective freedom. The power to censor transactions is the power to suppress social dissent. Defending cash, and translating its capacities into the 21st century digital context, thus should be a first-order priority for all public officials.

However, in recent decades, cash has come under public and private attack. Valid concerns about scams and money laundering have created inherent suspicion bordering on outright criminalization. De facto holding limits and transaction limits haven’t kept up with inflation, and have often been actively reduced in the name of fighting terrorism and crime. Traditional financial institutions and new-wave fintechs, weary of competition and exchange costs, have demonized cash as dirty, inefficient and inflationary. Yet cash remains the most used, trusted and convenient payment technology available.

Cities like New York and Philadelphia have passed laws requiring stores to continue accepting cash alongside newer digital payments. This is a critical step toward reversing the longstanding war on cash, but policymakers need to go further. It is no longer enough to fight a rearguard defensive action. If we want to prevent cash from disappearing forever, we need to reinvent it for the 21st century. In addition to restoring legally permissible personal cash holding and transactional limits to the modern equivalent of where they were in the 1970s — before the wars on drugs and terror — federal officials should develop and introduce new digital dollar infrastructure that preserves cash-like functionality in the digital payments space: anonymity, local on-device value storage, offline settlement capability (i.e. device-to-device via Bluetooth or Near-Field Communication) and non-intermediated, direct, peer-to-peer settlement.

It is easy to take cash for granted, but we will all miss it when it’s gone, and by then it will be too late.

Rohan Grey is an assistant professor at Willamette University School of Law.

Nonbank financial intermediation is a coarse term for the investment funds, insurance companies and other financial firms that create money and credit outside the banking system. Six out of the 10 biggest mortgage originators are nonbanks. The volume of new loans originated by private credit — a modest but rapidly growing part of the nonbank sector — has quintupled since 2009. Congress just passed a new law that will facilitate the spread of stablecoins. These are just some of the dimensions along which the massive nonbank financial intermediation sector continues to grow.

The 2008 financial crisis started in the nonbank sector and then spilled over to banks. The next financial crisis may follow a similar trajectory. Private credit is deeply intertwined with the banking sector. Nonbank mortgage originators don’t have depositors, so they don’t have a reliable source of liquidity during periods of stress. Academics showed that open-end bond funds, another part of the nonbank sector, were susceptible to runs well before 2020. Those funds experienced widespread runs in March 2020, and yet no meaningful reform is on the horizon.

The Financial Stability Oversight Council, created by the Dodd-Frank Act, has failed to live up to its name. As a result, the nonbank financial sector remains characterized by opacity and regulatory fragmentation. No financial crisis seems imminent, but this blind spot could well come to bite.

Kathryn Judge is the Harvey J. Goldschmid Professor of Law at Columbia Law School.

The most significant blind spot in financial oversight results from incomplete data regarding the build-up of leverage in the nonbank financial system, including in the crypto markets. History has shown us time and time again that overleveraged financial systems are fragile, and when market prices drop, fire sales are likely to result, further depressing prices across financial markets in a vicious cycle. Panics and institutional failures can follow.

However, operational risks associated with our financial infrastructure are another significant risk, one that receives insufficient attention. With increasing automation, increasing dependence on shared infrastructure like cloud computing, and increasing vulnerability to serious weather events and cyberattacks, there should be more focus on financial institutions’ vulnerabilities to business disruption and system failures and the possible systemic consequences of such episodes.

Most traditional financial-market infrastructure providers are expected to comply with the internationally-agreed-upon Principles for Financial Market Infrastructures. In the crypto markets, however, there is no equivalent, and the operational risks in those markets are significant and under-scrutinized. There is often no one who can be held accountable for maintaining the cybersecurity and general resilience of a blockchain, and no one who can be relied upon to get the blockchain up and running in a timely manner after an outage. These operational risk issues are critical, but Congress has not addressed them in any of its crypto bills.

Hilary Allen is a professor at the American University Washington College of Law.

People are justifiably unhappy with what they are getting out of the economy today. They’re paying more and getting less, and household debt is at a record high. But with markets up and the economy limping along, there’s a dangerous illusion of calm. Nobody feels great, but people aren’t alert to how fragile the system really is.

It isn’t supposed to be everyday Americans’ job to be looking out for the next financial crisis. That’s what we have government for. Yet this administration is weakening safeguards meant to protect people and stabilize markets. The Consumer Financial Protection Bureau has been all but shut down, and oversight of financial markets has been hollowed out. Meanwhile, crypto, private credit or some other market may be racing toward a crash.

Given how the system has failed working people in recent years, it’s not surprising that many feel the government hasn’t done much for them. People will have every right to be even angrier when today’s calm eventually explodes — because we know who usually ends up holding the bag when the music stops.

Brad Lipton is director of the corporate power and financial regulation program at the Roosevelt Institute.

The largest blind spot in current financial oversight is the belief that financial oversight in the U.S. still exists.

Financial oversight assumes a rule of law — that rules have meaning, that contracts matter and that those who break the rules are treated equally under the law. Although a court system, Congress and regulators nominally still exist in the U.S., their actions have little meaning if they happen to conflict with the desires of the Trump administration. Thus, current financial oversight is merely performative, a vestigial tail of analyses, reports and duties that had meaning and consequence in an earlier time.

To take one example: Watching federal agencies liberalize their policies on crypto, and members of Congress negotiate a crypto market structure bill, seems farcical as the president and his family harvest billions from crypto activities. Why bother to update financial regulation when what truly matters is not well-honed regulation, but whether the subjects of regulation have paid (the administration) to play or managed to provoke its ire?

The consequences to businesses, the financial system and the global economy from the loss of the rule of law in the U.S. cannot be overstated. Nothing — including government contracts and statistics, congressional appropriations, treaties, alliances, trade deals or private contracts — can be relied upon.

Uncertainty is the mortal enemy of stability, no matter how well regulators and businesses playact that they operate under a rule of law.

Angela Walch is an expert on crypto and writes the Angela Walch newsletter. She previously was a professor at St. Mary’s University School of Law and has advised high-level policymakers globally on crypto and finance.

Our biggest blind spots have actually been in plain sight. There is a dangerous lack of safeguards over uninsured deposits issued inside and outside the banking system. When big depositors panic, it can set off a domino effect that can wreak havoc on the economy.

When it’s a big player like Silicon Valley Bank or money market funds, the public rushes to the rescue. But when it’s small banks, like the First National Bank of Lindsay, which failed a year ago, small-town depositors pay a price.

Because the public and our markets assume the largest players will be bailed out by the Federal Reserve, they enjoy free, unlimited deposit insurance. This isn’t fair. This uneven playing field has led to a shift in deposits and lending away from local markets into global markets. That makes it more costly to borrow for small businesses, farms and others in regional economies.

It’s time to block backdoor bailouts for the biggest banks and for counterfeit banks with massive pools of uninsured deposits and deposit-like liabilities. One way to help is to expand deposit insurance availability, since this can strengthen the resilience of the banking system and reduce the chance of future flare-ups.

Rohit Chopra is a former director of the Consumer Financial Protection Bureau and a former FDIC board member.