Do Americans really want to eliminate the agency that has protected their bank deposits (to a point) from sudden, unexpected losses due to their financial institution’s failure – and done so since the Great Depression? We’re about to find out, if
stories circulating recently through Wall Street and Washington, DC are true.
According to many major media
outlets, incoming President Trump and his appointed Department of Governmental Efficiency (DOGE) co-heads, entrepreneurs Elon Musk and former presidential challenger Vivek Ramaswamy, are actively considering abolishing the Federal Deposit Insurance Corporation
(FDIC) as well as other regulatory agencies, including the Consumer Financial Protection Bureau (CFPB) – which was formed to provide greater advocacy for consumers in
financial services matters and disputes as part of Dodd-Frank legislation that followed the last major financial crisis in 2008-09.
As fights in Congress to keep the US government funded - after Trump and Musk suddenly objected to a previous bipartisan agreement - continued into the last two weeks of 2024, talk is heating up around the president-elect and his advisors’ demands. They include
potential options of abolishing and/or combining the FDIC with the Office of Comptroller of the Currency (OCC) and the
Federal Reserve.
The latter two agencies, like the FDIC, have been especially in the limelight lately. The OCC is in the news for enforcement actions against banks and individuals, part of its oversight
mandate, and the Fed grabbed global and stock market headlines for its 25-basis point cut in the Fed Funds target rate to 4.25% - notably for its board’s sharing
signals along with the rate cut announcement. In that message, the Fed Board stated that it will be cautious going forward into 2025, planning any future rate cuts only as directly justified by actual economic results.
FDIC facts offer lots of history, a strong track record, and some surprises
Most know that the FDIC “examines and supervises financial institutions for safety and soundness,” along with other functions, and provides insured individuals and households in regulated banks and savings institutions with
protection for their bank deposits up to $250,000 per relationship. Many might not be as aware that this huge insurance commitment requires no government financial support, but is actually self-funded by industry
providers: “The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage. The FDIC insures trillions of dollars of deposits in U.S. banks and thrifts - deposits in virtually
every bank and savings association in the country.”
These insurance coverage limits have increased over time since the agency was
created in 1933 amid widespread ‘runs’ or rapid withdrawals against deposit balances that become increasingly common in prior decades. These financial panics were often fueled by rumours or other irrational fears of financial loss rather than actual facts
or impending events. They afflicted banks and governments and customers across the country (and in some cases, the
world) as citizens lost faith in the financial system amid the collapse of the stock market, massive job loss, and a resulting chain of various economic woes. But, as the agency states: “Since the FDIC’s creation, no one has lost a penny of their FDIC-insured
deposits.”
It’s also not widely known, at least in our modern, digitally-focused society that bipartisan discussions in Congress and with many of the banks themselves had been held for decades on how the government might help minimise the negative impacts to individuals
and companies of financial institution failures. This was an ongoing worry due to a series of recessions and depressions, frequently accompanied by small to large financial
'panics' that seemed to strike the US economy every three to five years or so from the time of the nation’s founding.
The panic of 1873 and the 'long depression that followed it into the 1880s demonstrated to business and government leaders alike that constant upheaval wasn’t in most citizens’, companies’, or the nation’s interests. In fact, according to the FDIC’s history
timeline: “Between 1886 and 1933, Congress considered 150 proposals to create a national deposit insurance system.”
Holiday movies' messages rang true for many Americans up until FDIC’s creation
As simplistic as it might seem - though a particularly apt example at this time of year - not every bank across America’s history had the financial resources and capital to withstand sudden attacks on their deposit rolls. This was especially when the threats
were completely unrelated to their own lending activities and capital held in reserves.
In Frank Capra’s 1946 holiday classic, It’s a Wonderful Life, when Mr. Potter (played by Lionel Barrymore) urges the earnest and worried
George Bailey to take a loan (with significant ‘strings attached’) from his dominant bank to save the Bailey Brothers Building and Loan - and the deposits and mortgages of its customers from an unexpected ‘run’ - it’s an example of the way the banking system
used to primarily function. To some extent, it still does, through support via reserves, once in gold and later in either precious metals, securities, or reciprocal stores of cash or credit lines retained in the vaults and balance sheets of their correspondent
institutions. That said, Jimmy Stewart’s character of George Bailey could sense, and envision, just what the results would be to him and his loyal depositors and borrowers if he put his trust in Potter’s offer and support, and Capra’s film goes on to show
that starkly different world to its audience as one of its main plot points.
In real life, even before the United States’ founding (The Panic of 1772) and for more than a century-and-a-half afterward, with minimal government interference, banks could form – and sometimes fail – as their investors wished, as long as they met basic
guidelines for operation and control in the marketplace. The problem was, when failures occurred, due to unsound practices, bad decisions, deliberate acts, or negative market ‘surprises,’ there was no external ‘safety net’ to protect depositors. Instead, they
were often caught in the middle, with temporary or permanent lack of access to funds and reduced financial security, and in countless cases, causing them to lose their life savings.
In the wake of the October 1929 financial crash, 9,000 banks suspended operations in the US between 1930 and 1933, in cities and states from coast to coast. Despite the decaying economy, President Herbert Hoover refused to intervene. After President Franklin
D. Roosevelt was elected to replace him in 1932, he made the extraordinary decision in March of 1933, only days after his inauguration, to declare a Federal ‘bank holiday’ to allow banks a ‘breather’ against uncoordinated bank runs in 48 states and to provide
space to introduce the
Banking Act of 1933 with its new account insurance (initially $2,500 per depositor, then increased to $5,000 the following year) provisions. Concurrent with the creation of what became the FDIC, Congressional investigations into allegedly crooked dealings
in the financial services industry led to the other major focus of this landmark legislation, alternatively called the
Glass-Steagall Act, which after Roosevelt signed it in June 1933 legally required separation of the activities of investment firms from those of commercial banking institutions.
Modern agency provides oversight, coverage, and coordination in financial crises
Since its inception, the FDIC has provided full coverage for insured depositors through thousands of bank failures, many occurring during periodic
financial crises leading up to the present. As depositors have either received their funds from their covered accounts or the FDIC has coordinated with other agencies and insured banks to take on their deposits, thus easing any concerns of financial loss
for millions of individuals and organisations.
In the period from 2001-2024 alone, the FDIC has dealt with 568 bank failures, with combined assets of nearly $1.3 trillion. Just in the past two years, seven of these, representing $550 billion in assets, including the collapse of Silicon Valley Bank and
First Republic Bank, have resulted in FDIC-covered losses or arrangements to transfer deposits to other institutions.
As no FDIC-insured depositor has ever lost a dime of their covered funds, it’s an open question why eliminating the FDIC now would make sense to the American consumer and business marketplace. Responding on Musk’s X platform
to the recent rumbles on the topic from him, Ramaswamy, and the incoming president, former FDIC Chair Sheila Bair, who was appointed by Republican President George Bush, led the agency from 2006-2011, and presided over resolution of one of the country’s (and
world’s) largest banking crises in history gave her opinion of such proposed actions: “Eliminating the FDIC is so out there, not sure it needs response. FDIC has a perfect record of protecting insured deposits for over 90 years.”