"Eliminating the FDIC regarded as 'reckless': Eliminating the FDIC could potentially harm Trump and his associates"
Today, amidst widespread mistrust towards the government, the FDIC stands out as a unique entity in the alphabet soup of bank regulators. With a solid history of safeguarding insured bank deposits during both good and challenging times, many Americans have faith in this agency. However, there's uncertainty about whether the FDIC will endure under a potential second term of President Trump.
Confidential sources shared with CNN's Kayla Tausche that the President-elect's associates have pondered over dismantling the FDIC, transferring deposit insurance oversight to the Treasury Department, and shrinking or even shutting down the rest of the agency.
Former regulators and scholars voiced their concern to CNN, stating that the idea of eliminating the FDIC is not logical and it's highly unlikely that Congress would approve such a plan.
Patricia McCoy, a law professor at Boston College and ex-regulator, argued that this idea poses a major risk of causing panic among depositors about the security of their savings, potentially triggering bank runs.
Through an industry-funded system, the FDIC guarantees protection to customers in case their bank goes under. Each depositor is automatically entitled to at least $250,000 of insurance at each FDIC-insured bank they are associated with.
Aaron Klein, a senior fellow at the Brookings Institution, stated that even though the United States has an excess of bank regulators, there's no likelihood that lawmakers would approve shutting down the FDIC.
“Attempting to eliminate the FDIC is as nonsensical as questioning if Donald Trump can abolish a specific day of the week and split it between others,” Klein said, comparing it to absurdity.
The Trump transition team has yet to respond to CNN's request for comment.
‘A REALLY BAD CONCEPT’
Sheila Bair, who led the FDIC during the 2008 financial crisis in which numerous major banks collapsed, voiced her disagreement against the concept of dismantling the FDIC.
“The FDIC has preserved insured deposits flawlessly for more than 90 years,” Bair wrote on X. “The substitution of a different insurance provider would create confusion among depositors, who find comfort in the ‘FDIC Insured' sign placed in their banks.”
The FDIC's operations, including supervising and scrutinizing more than 5,000 banks and savings institutions, doesn’t receive financial aid from Congress. The deposit insurance fund, responsible for insuring trillions of dollars in deposits, is sponsored through collecting premiums from banks instead of relying on taxpayer money. Occasionally, these costs can be passed on to bank patrons in the form of fees.
Sources revealed to CNN that the allies of President Trump have also considered other techniques to restructure the authority of banking regulators, such as transferring the non-monetary authority of the Federal Reserve to the Office of the Comptroller of the Currency and reorganizing the Consumer Financial Protection Bureau.
Senator Elizabeth Warren is not in favor of ending the FDIC.
“Whenever rumors arise that banks may not have sufficient capital to cover all their deposits, people tend to withdraw their money. The FDIC’s deposit insurance was designed to alleviate fears among American citizens regarding the safety of their savings,” Warren stated to CNN. “I can't fathom why anyone would aim to spread doubt about the FDIC’s commitment to financial stability or undermine an officer tasked with preventing a new financial catastrophe.”
The proposition of dismantling or shrinking the FDIC, initially reported by The Wall Street Journal, bears resemblance to Project 2025, the white paper published by the conservative think tank Heritage Foundation, considered the blueprint for how certain conservatives envision Trump 2.0 to operate.
Even so, dismantling or merging banking regulators was no novel idea prior to the 2008 financial crisis. Former Treasury Secretary Hank Paulson proposed merging various financial regulatory bodies, such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), and integrating the Office of the Comptroller of the Currency (OCC) with the Office of Thrift Supervision (OTS).
Eventually, Congress opted to disband the OTC in the Dodd-Frank overhaul, although they created the Consumer Financial Protection Bureau.
‘A DISASTER FOR THE AMERICAN PEOPLE’
Those advocating for stricter oversight of big banks voiced their displeasure at the idea of eliminating the FDIC.
“This is one of the most nonsensical ideas anyone could possibly come up with, and it demonstrates the disconnect between wealthy individuals and the populace,” said Dennis Kelleher, the CEO of Better Markets, a government watchdog promoting financial reform.
Kelleher lauded the FDIC as one of the most successful agencies in American history, serving as the gold standard for effectively handling bank failures while minimizing losses for bank clients.
“The FDIC played a pivotal role in restoring financial stability and preventing a second Great Depression during the 2008 crisis,” Kelleher said. “Eliminating or downsizing the FDIC would be disastrous for the American people.”
Some conservatives also oppose dismantling the FDIC.
Steve Moore, an economist who has advised Trump, declared to CNN that he isn't in favor of closing the FDIC, although he did suggest a need for consolidating banking regulators.
Douglas Holtz-Eakin, president of American Action Forum, a centrist think tank, stated that he believes the FDIC is not going anywhere, given a strong allegiance towards the current system.
“People have a preference for the familiar,” Holtz-Eakin said. “It would be a significant leap into the unknown for banks.”
Holtz-Eakin described the FDIC as a ‘highly successful regulator.'
“It’s not as if it’s a failing entity,” he added.
Sure, I'll paraphrase the text for you:
That's not to imply that America's banking regulation system is flawless. There's definitely room for improvement in organizations like the FDIC and its fellow banking regulators.
Recently, the work environment at the FDIC has faced criticism due to allegations of a harmful work environment filled with sexual harassment, discrimination, and bullying.
Additionally, some experts argue that it would be beneficial to simplify the complex web of financial regulators, where certain responsibilities overlap.
"Our financial regulatory system is nothing less than a creation of Frankenstein," said Isaac Boltansky, director of policy research at BTIG.
While Boltansky acknowledges that there's a strong argument for revising the regulatory framework, he finds it challenging to understand how this issue might gain traction or garner support from Democrats.
It's highly unlikely that lawmakers will agree to abolishing the FDIC.
Klein, a senior fellow at Brookings, pointed out that after the 2008 financial crisis, lawmakers overwhelmingly rejected a proposal to consolidate bank regulators.
"It has historically almost no support in Congress," Klein said.
An understated warning
It's not even certain that the banking industry would support shutting down bank regulators, as it could backfire.
"The industry enjoys playing regulators against each other," said Ed Mills, Washington policy analyst at Raymond James.
The intricate banking regulatory landscape makes it challenging to put new regulations into effect quickly, as it takes time to get all the regulators in agreement. The process can easily become bogged down in bureaucracy.
Although banks might be hoping for swift deregulation under Trump, they also recognize that political tides eventually change. And when they do, a super-regulator could swiftly apply stringent regulations.
"Banks wouldn't want a super-regulator if AOC (Alexandria Ocasio-Cortez) is president," Mills said.
The Bank Policy Institute, a trade group representing Bank of America, JPMorgan Chase, Wells Fargo, and other big banks, declined to comment on the FDIC news.
Mills believes that there's "about zero-percent chance" that the FDIC will be abolished under Trump, as such a move would require 60 votes in the US Senate, a difficult feat.
Rather than a meaningful proposal, Mills considers the news about eliminating the FDIC to be a subtle way to send a warning to Trump appointees.
"If they don't align with the regulatory agenda of Donald Trump, there's an existential threat in the background that could be triggered," said Mills. "In my opinion, this is a method of influencing the referee – before the referee even takes the job."
CNN’s Kayla Tausche contributed to this report.
Despite the proposed ideas to discard or downsize the FDIC, it's highly unlikely that Congress will approve such a plan due to the agency's significant role in safeguarding American deposits and ensuring financial stability. Additionally, industry experts view the FDIC as a highly successful regulator that should not be eliminated or significantly altered.
