The layoffs of federal workers in the US as a result of the government shutdown could create numerous blind spots in the regulation of the country's banking sector, says the CEO of a fintech startup.
According to Adam Turmakhan, CEO of Florida-based startup TurmaFinTech, cuts to already gutted regulators means that such blind spots will become rife across the banking sector, opening the doors to more banking collpases akin to the demise of Silicon Valley Bank (SVB) that went bust in March 2023.
The warning comes as the standoff between Republicans and Democrats continues in the US, leading to the prospect of further layoffs across banking regulators and watchdogs.
This could prove "catastrophic" for regional and community banks, says Turmakhan.
Should these banks overextend their risk capacity, there is the prospect of an institution collapsiong. This could then lead to a domino effect as was seen in 2023 when the fall of SVB then sparked the collapse of two more banks - Signature Bank, and then First Republic Bank.
According to Turmakhan, a u-turn is needed. “Trump’s promised layoffs could be catastrophic for the US banking sector. Slashing capacity at key regulators will only leave more room for risk across the banking landscape, putting regional and community banks, which are more vulnerable to market volatility, at risk of collapse," said Turmakhan.
“Regulators are critical for protecting banks from insolvency, and this promise is just yet another move to defang their power. They’ve already felt the full force of DOGE, and new federal layoffs could render them completely limp, preventing them from setting guardrails that stop banks from inadvertently overextending their risk capacity.
“We learned in 2023 that bank runs are contagious – the domino effect is hard to stop at the best of times, let alone when regulators’ capacity has been significantly diminished. Unless there’s an urgent U-turn, we’re at risk of sleepwalking into another regional banking crisis.”
It is not the first time such concerns have been aired. A Finextra survey of US fintech executives conducted earlier this year found that uncertainty around Trump's approach to deregulation had banking executives concerned about potential gaps in both technology development and supervision.