Cuts to the FDIC- Catastrophic?

Since the Trump administration has come into office, several financial regulators have seen significant budget cuts. The Securities Exchange Commission (SEC) was cut around 20%[1] and others such as the Consumer Financial Protection Bureau (CFPB) have experienced significant cuts. The Federal Deposit Insurance Committee (FDIC) cuts (around 20% as well[2]) have been particularly alarming.

Basically, the FDIC was created after the Great Depression, it provides deposit insurance up to a certain amount to provide some assurance to depositors that in the event of default, they will keep their money. This significantly helps with deterring bank-runs, where depositors withdraw rapidly due to collapsing confidence in the financial system.

The global financial system is very globally intertwined and therefore contagion can spread; when one bank fails, others follow. This can even spread across borders. Its really important to have a robust financial system.

Now, its been known for a while that cuts would be coming to the FDIC. Based on their budget this year, it appears to be up about 2.2%[3] but the staff cuts were significant (1250 positions, or about 20% as noted earlier). Additionally, 17% of the workforce will soon be eligible for retirement[4].

With lower staff, they'll need to be more efficient, but that doesn't mean as effective or as regulating. It will probably mean faster, less detailed, and more erroneous. Not good. Aside from the market crash earlier this year, this could signal a rather large correction.

The magnitude of the correction would be uncertain but I would say it will be pretty impactful. Of course, that's only if something happens that precipitates a correction. As I stated earlier, the FDIC protects against low consumer confidence in financial institutions. Cutting the FDIC only augments a crash.

I've been monitoring this development for a while. So far, nothing is yet to come of it. But I can definitely picture it being catastrophic if its coupled with significant market and financial uncertainty, which is why I'm interested in monitoring it.

Its certainly a bad policy and investors and businesses should probably look forward to significant hedging or volatility bets over the next 4 years (please consult an investment professional before decision-making to ascertain appropriateness regarding your situation, this is not intended as investment advice).

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References

[1] Prentice, C., & Gillison, D. (2025, May 30). U.S. SEC lays out plan to keep budget flat, lower staff levels. Reuters. Retrieved from https://www.reuters.com/sustainability/boards-policy-regulation/us-sec-lays-out-plan-keep-budget-flat-lower-staff-levels-2025-05-30/ 

[2] Aspan, M. (2025, March 4). The FDIC’s goal is to prevent another banking crisis. It’s now also a Trump target. Oregon Public Broadcasting. Retrieved from https://www.opb.org/article/2025/03/04/why-the-job-cuts-at-bank-regulator-fdic-are-raising-alarms/

[3] Federal Deposit Insurance Corporation. (2024, December 17). FDIC approves 2025 operating budget [Press release]. Retrieved from https://www.fdic.gov/news/press-releases/2024/fdic-approves-2025-operating-budget?utm_source=chatgpt.com

[4] Brown, C. (2025, March 24). Watchdog warns DOGE cuts threaten financial system. Axios. Retrieved from https://www.axios.com/2025/03/24/fdic-doge-banks-regulator?utm_source=chatgpt.com