The Federal Deposit Insurance Corporation was born during the depths of the Great Depression, a means of shoring up banks when banks were routinely failing and erasing the wealth of Americans. The incoming Trump Administration is looking to pare back — or even eliminate — the FDIC and other financial oversight agencies.
Members of Donald Trump’s presidential transition team want to “dramatically shrink, consolidate or even eliminate the top bank watchdogs,” said The Wall Street Journal. That is part of his new administration’s overall mission to “slash the size of the government and ease oversight.” But any effort to eliminate a bank regulator “would struggle to gain the support of Congress,” said the Journal. The banking industry might also resist, said former FDIC Chair Sheila Bair. “They like the status quo.”
“Though it’s not very common, a bank can fail when it takes on too much risk,” said CNBC. FDIC insurance is designed to keep account holders’ money from being wiped out when a bank goes under, insuring many kinds of deposits — for checking, savings and other kinds of accounts — up to $250,000 for each account holder. That does not only protect Americans with money in the bank; it also protects the banking system, making it less likely customers will “panic and rush” to withdraw money during a financial crisis, said CNBC. (Remember the bank rush scene from “It’s a Wonderful Life?“)
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Confidence matters
The FDIC was created in 1933 “to help the U.S. navigate a catastrophe that put thousands of banks out of business,” said NPR. The key insight: Banks required customer confidence to function — it was a “vital part” of “assuring solvency,” said an adviser to President Franklin D. Roosevelt — and deposit insurance helped bolster that confidence. Deposits were initially insured up to $2,500 per account holder, increasing over the years to $250,000 today. And it worked. “Only nine banks failed in 1934, compared to more than 9,000 in the preceding four years,” the FDIC said in a history of the agency.
“That guaranteed $250,000 does not come from taxpayers,” said CBS News. Instead, the FDIC assesses quarterly premiums on insured banks — depending on the size of their holdings — and the money invested in Treasury securities. When a bank does fail, the FDIC moves in with three options: Close the bank and pay off depositors, take over the bank operations or find a new buyer. The most important factor? “The customer experience does not change much,” said CBS.
Supervising and regulating banks
The FDIC does more than insurance — it also does regulation. The agency “directly supervises and examines more than 5,000 banks and savings associations” to ensure their operations are sound, the FDIC says on its website. It also ensures those banks comply with consumer protection laws “including the Fair Credit Billing Act, the Fair Credit Reporting Act, the Truth in Lending Act and the Fair Debt Collection Practices Act, to name a few.”
The confidence-building functions of the FDIC are why any effort to disempower the agency “could potentially be fraught,” said The New York Post. The move could create the perception that the government is “weakening deposit insurance.” It remains to be seen how the Trump Administration will proceed, said the Post, but one aspect is clear: “A dramatic deregulation of the finance system is in the offing.”
