Banks have been encouraged by the Trump administration's
"It's certainly possible that they will cut not just fat, but also muscle and bone," Ian Katz, an analyst with Capital Alpha Partners, said. "And if that happens, things can fall through the cracks."
Just short of half of commercial bankers who donated to a 2024 presidential campaign
One concern is that a significant reduction in regulatory staff would slow or stall agency efforts to roll back regulations that had already been put in place. Todd Baker, a senior fellow at the Richman Center for Business, Law & Public Policy at Columbia University and managing principal of Broadmoor Consulting, said big staff cuts at regulatory agencies could also create the conditions for risk to accumulate in the banking sector through diminished oversight, while the efforts to bring the regulatory agencies more directly under White House control could set the stage for a more dramatic reversal whenever Democrats return to power in the future.
"Reductions of the size experienced at the FDIC and in other agencies (around 40%) would seriously undermine enforcement capabilities and force regulators to let many problems fester," he said. "This could encourage some regulated entities to operate at the edge of legality, although this is an unwise course if one believes that there will be a Democratic president and Congress anytime soon, as much of this would be reversed."
The Heritage Foundation's whole-of-government blueprint for the Trump administration known as Project 2025 — parts of which Russel Vought, Trump's director of the Office of Management and Budget and currently the acting CFPB director, wrote — advocates for a major overhaul of the U.S. banking regulatory system. Under the blueprint, financial regulatory agencies like the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve's non-monetary supervisory functions would be merged into a single agency.
The Department of Government Efficiency, or DOGE — a newly formed rebranding of the U.S. Digital Service spearheaded by White House advisor and billionaire entrepreneur Elon Musk — has embarked upon an effort to reduce the headcounts across government. A series of executive orders in recent weeks have expressly folded the FDIC and the OCC into those efforts, while also bringing the regulatory functions of the Federal Reserve under closer White House scrutiny.
Jaret Seiberg, an analyst with TD Cowen, said that while the nominal purpose of Trump's workforce consolidation initiative is to reduce the federal spending deficit, the effects of reducing staff among bank regulators seem to primarily be a reduction of functional capacity.
"This is not primarily about reducing the deficit, as the way to tackle that problem is by cutting entitlement," Seiberg wrote in an email. "To us, it is Team Trump using personnel reductions as a way to curb supervisory and enforcement policies that they view as costly, ineffective and harmful to economic growth."
While the most immediate effects on staff have been contained to the Consumer Financial Protection Bureau so far, Seiberg said more reductions are likely coming for other banking and financial regulators in the coming months.
"The FDIC is also assessing staffing, while we expect the OCC, [the Securities and Exchange Commission] and [the Commodity Futures Trading Commission] will follow suit. Only the Federal Reserve may be largely immune," he said. "The idea is to reduce government oversight by reducing personnel available to enforce laws and rules."
While the short-term benefit of shrunken agencies may appeal to many in the industry, structural changes — like consolidating the federal regulatory apparatus — could be harmful to financial stability, according to Graham Steele, an academic fellow at Stanford University and former assistant secretary for financial institutions at the Treasury Department.
"Don't get me wrong, there are clearly executives at financial companies in my world who are excited for the potential deregulatory binge that is to come and so they're very excited about that component of it," Steele said. "But a lot of the other things that DOGE is doing are about reducing the capacity of some of these agencies in the financial space."
But even when those staffing cuts are ultimately realized, Katz said, the deregulatory effect that banks have been counting on will take some time to come to fruition. In the meantime, banks will have to continue to comply with the rules and regulations on the books, he said.
"Banks aren't going to stop complying with rules because they think their regulator may be short-staffed or focused on something else," he said. "Unless they get an indication or guidance from the regulator that certain things won't be enforced, I don't think banks are going to throw caution to the wind."
Seiberg echoed those concerns, saying that reducing the regulatory workforce can slow the development of new and more stringent standards, but also slows the process for reducing regulatory burdens through rulemaking.
"We generally view deregulation as positive for economic growth, though achieving it via layoffs is an imperfect solution," Seiberg said. "Rules will remain, which means financial firms retain legal risk from the states and future administrations. In addition, needed approvals could take longer with fewer personnel and this sets the stage for even harsher supervision if there is consumer harm or economic troubles attributable to understaffed regulators."
Baker said an unintended side effect of the reduction in regulatory staff means that regulators will be compelled to prioritize straightforward enforcement actions over more complex but forward-looking cases. That means bigger, industry-wide issues might end up being addressed through enforcement rather than through the slower but more transparent regulatory process.
"With regulation hamstrung, the only recourse for the agency when violations appear will be enforcement … given coming staff reductions, regulators will either be forced to prioritize the most important issues or, as seems much more likely, will find themselves prioritizing 'easy' cases that don't take up resources," he said. "It is worth noting that the halt on new regulations is the exact opposite of the usual industry complaint, which is that they prefer an open regulatory process to regulation by enforcement."
Baker said the industry may even need to press for maintaining staffing at the agency to minimum levels required for agency work they appreciate — rubber-stamping consolidation and issuing charters — can continue.
"My view is that the high from 'sticking it to the man' will fade very quickly and that the industry will start advocating for more staffing, particularly in areas like de novo charters, M&A, etc.," he said. "They will not prioritize enforcement funding, however."
Steele said short-staffing agencies could also compel the most experienced and competent workers to leave the agencies, leaving the agencies less able to handle a bank failure or a broader financial crisis, potentially leading to disastrous consequences.
"When you have periods of market and financial instability you have to respond as quickly as possible, you have to have people with good institutional knowledge who know what they're doing — and these are people who are being laid off right now," Steele said. "Another piece of it is, to what extent are some of these actions going to end up bungling us into a situation where they cause financial or economic instability otherwise.
"There's a lot of companies that would take some of the benefits that this administration has been offering them in terms of deregulation and tax cuts and things like that, but are — I think — now starting to come to their senses and wondering what other costs are going to come along with that particular bargain."
