The Trump transition team's reported consideration of merging major U.S. banking regulators — including by abolishing the Federal Deposit Insurance Corp. and absorbing its deposit insurance functions into the Treasury Department — has reignited debate about the feasibility of streamlining the patchwork of federal bank regulatory agencies.
While such proposals align with Trump and his allies' goal to reduce government size and bring the American system in line with those of European nations, U.S. banks and lawmakers generally support the current system, according to financial regulatory historian Peter Conti-Brown, who is also an associate professor of financial regulation at the Wharton School of the University of Pennsylvania.
"Any effort to abolish one or take one or one of the big three [agencies] out of the running, I would take the other side of that bet," Conti-Brown said. "It doesn't matter who Elon Musk is or what the Department of Government Efficiency says, we have seen this story before, and the architecture of the FDIC, [Office of the Comptroller of the Currency] and Federal Reserve-split today functions pretty well."
No one has been willing to do that, no one has taken the FDIC chair and said, 'You know what we should be? Second or third fiddle.'
The Trump administration's recently announced Department of Government Efficiency is an outside advisory group co-chaired by Elon Musk and Vivek Ramaswamy, focused on rethinking and streamlining government functions. Its goal is to reduce the size of the federal government, eliminate inefficiencies, and potentially consolidate or eliminate certain regulatory bodies.
Given that any changes would require legislative approval, overhauling the system seems nearly impossible in a narrowly divided Congress, according to Carl Fornaris, a partner at Winston & Strawn.
"This has been something that's been floated every 10, 15 years or so, of trying to consolidate and make a single federal bank regulatory authority," Fornaris said.
Right now, "you're stuck with a hodgepodge of acts of Congress that all quilted together based on historical precedent and based on political pressure and you would have to start to really rip that apart," he said.
Deeply entrenched
The banking system splits regulation between state and federal charters, with the former regulated by the Fed and the FDIC and the latter by the OCC. Varying standards across federal financial agencies has sometimes produced incentives for regulatory arbitration, whereby banks can seek to be held to differing standards by "charter-shopping" across the agencies. In some cases, different standards are merited, but at other times it can result in regulatory gaps. The Federal Financial Institutions Examination Council, established in 1979, is tasked with improving the uniformity of standards across financial agencies, and since its founding has narrowed the policy discrepancies among the three bodies.
"I don't think anyone would sit down and design the system that we have from the beginning, but no one is designing from the beginning, we're all building on what has come before," Conti-Brown said. "I think the political interests are too deeply entrenched … the status quo solves too many important problems to attempt to gamble at something totally new, different."
The differing priorities of small and large banks also drive the industry to support the dual system. This structure gives smaller institutions more flexibility, which makes them reluctant to change a system they believe works well for them, said Todd Baker, managing principal at Broadmoor Consulting and a senior fellow at Columbia University.
"On the banking side, there has historically been a prejudice for 'We like the regulator we have, and are worried about what would happen if our regulator went away,'" Baker said. "In particular, small banks have typically preferred having a state regulator and perhaps the FDIC, as opposed to being lumped in with the giant banks that are primarily regulated by the OCC."
Consolidating regulatory agencies could also require lawmakers in positions of leadership to relinquish jurisdiction over certain industries — along with the political contributions and influence tied to their oversight and control under the existing system. That's already a major roadblock to even more moderate proposals like regulating digital assets.
"You have congressional opposition due to committee structure and the political contributions that go along with having supervision of an industry," Baker said. "So this is seen most starkly in the
Trump's proposed consolidation plans could also face significant resistance from the thousands of employees who work at the Fed, the OCC and the FDIC — agencies known for offering some of the highest-paying positions in the federal government. With more than 30,000 staff members across these agencies, many employees are embedded in the current system, and any shift toward consolidation could disrupt their job security and career paths.
In other jurisdictions, like the United Kingdom — where prudential regulation is consolidated into a single body — it's less difficult to restructure the national financial regulatory system, according to Fornaris. It's harder in the U.S. because the system has created a variety of license types and regulators between federal and state governments, he said.
Historically speaking
Scholars trace the origins of the federal banking regulation system to the late years of the Civil War, when most banks were chartered by state authorities. In 1863, President Abraham Lincoln signed the National Currency Act into law. This act established the national banking system and created the Office of the Comptroller of the Currency to oversee it.
"The creation of national banks was meant to kind of end that entire dual banking system [in that] there would be only one kind of bank and that would be national banks, with one kind of regulator and that would be the Comptroller of the Currency," Conti-Brown said. "That's why the OCC is called, still to this day, the Comptroller of the Currency, even though the OCC has virtually nothing to do with the currency."
In 1863, banks were producing bank notes, which were a form of currency. Over time, they shifted to producing bank deposits, the naming mechanism of money to this day, Conti-Brown said.
By 1913, the U.S. banking system was a chaotic mix of state banks, trust organizations and national banks. The Fed was created to unify the system, with the Comptroller of the Currency initially sitting on the Fed's board to coordinate efforts. However, conflicts between the Fed and the comptroller erupted almost immediately, and the two agencies clashed throughout the 1910s and 1920s all the way up to the Great Depression.
"The Federal Reserve System was, in its first generation, a failure, the OCC was a failure," Conti-Brown said. "And we can call it that because by the time of the Great Depression, the entire banking system, national and state, totally failed."
President Franklin Roosevelt later reorganized the banking system in response to the economic calamity, creating the Federal Deposit Insurance Corp. within the Fed at the request of the Democratic Party's left wing. The FDIC remained part of the Fed until 1951, when it became its own agency.
"They were setting up the FDIC as kind of an arm of the existing apparatus, but people started to love deposit insurance [because] it solved a major problem that the Fed and the comptroller hadn't solved before," Conti-Brown said.
From the 1930s onward, there were similar efforts nearly every decade to consolidate the supervisory and regulatory functions, he said.
In 1962, the OCC's Advisory Committee on Banking issued a report recommending that the bank supervision and examination powers of the Fed be transferred to the OCC. That effort failed.
In 1975, the Senate Banking Committee recommended the FDIC become the primary federal supervisor, and in 1977, the Senate Governmental Affairs Committee proposed the Consolidated Banking Regulation Act aimed at merging regulatory functions into a Federal Bank Commission. Those proposals didn't gain traction.
In 1983, the FDIC released its "Deposit Insurance in a Changing Environment" study, which recommended merging the FDIC and the Federal Savings and Loan Insurance Corp. into a single agency and combining the supervisory functions of the Fed, the OCC and the Federal Home Loan Bank Board — a now defunct ancestor of the the Federal Housing Finance Agency — into another agency. FSLIC did eventually merge with the FDIC after it became insolvent during the savings and loan crisis.
In the 1990s, the Clinton administration sponsored a plan to consolidate the supervision of all FDIC-insured banks and thrifts into a new Federal Banking Commission, but the Fed under Alan Greenspan opposed the measure.
Former Fed Chair Paul Volcker also championed a regulatory consolidation bill that nearly became part of the Dodd-Frank Act in 2010. However, regional Federal Reserve banks opposed the proposal, asserting their desire to retain supervisory authority over banks. As a result, the proposed consolidation did not materialize, and Dodd-Frank ended up expanding the supervisory authority of existing agencies.
More recently, proposals to consolidate U.S. banking regulatory agencies generally fall into two categories. The first involves removing the Fed and the FDIC from direct supervisory roles, consolidating bank oversight under a single agency while allowing the FDIC to retain its insurance function and related supervision. This approach aims to reduce redundancy among the FDIC, the Fed and the OCC but has been complicated by the creation of the Consumer Financial Protection Bureau, which added another layer of regulatory complexity.
The second, inspired by the European "Twin Peaks" model, proposes dividing regulation into two entities: one focused on prudential oversight (safety, soundness and systemic risk) and the other on market conduct and consumer protection. Despite many attempts, none of these efforts have gained enough traction to be enacted by Congress.
Part of the reason for such failure, Conti-Brown said, is that the U.S. system is deeply rooted in the legislative history upon which it sits.
"You never get to wipe the slate clean in American governance, you're always building on what came before and what has come before," he said. "We have a kind of equilibrium where the FDIC is laser-focused on the [deposit] insurance fund, the Federal Reserve is laser-focused on economic stability and the Comptroller of the Currency is laser-focused on the viability of a national banking system."
Bank regulatory agency consolidation, when it has happened, typically has been in response to financial crises, such as the 2008 collapse, which led to the Dodd-Frank Act's folding of the Office of Thrift Supervision into the OCC.
Proposed changes to the regulatory framework face narrow Republican majorities, skepticism from the industry as well as an element of power struggle. While consolidating agencies could simplify oversight, getting the chair of an agency like the FDIC to essentially cede its power to others is a tall task.
"If you're gonna have consolidation, you're gonna have to have something like a Trump administration that we've never seen before, and that is an FDIC willing to subordinate itself to the OCC and to the Federal Reserve," Conti-Brown said. "No one has been willing to do that, no one has taken the FDIC chair and said, 'You know what we should be? Second or third fiddle.'"
After the Trump camp's interest in consolidation became public, former FDIC Chair Sheila Bair voiced her opposition, calling such efforts a waste of time and an unnecessary endeavor to fix what isn't broken. Bair said she believes the FDIC is trusted by consumers and has a good track record of protecting depositors. She said that while there are inefficiencies in the system that could be improved, she believes the proposal to dissolve the FDIC is unworkable.
"I think we do need some regulatory streamlining … but there's no duplication of the depository insurance, the FDIC does it, nobody else does that … where you have arguable duplication overlap is with the supervisory, the regulatory functions," she said. "[Historically,] the industry just doesn't put their muscle into it…[so] if they want to spin their wheels on it, you know, fine, but I just think we've got bigger problems to worry about than this."
Baker said the Trump administration's push to eliminate or reduce the role of the CFPB could drive a broader reorganization bill, but Republicans would face a challenge as their coalition includes a variety of dueling constituencies, making it difficult to achieve consensus.
"You have no real agreement within the Republican coalition as to what direction they would like this to take, other than a broadly deregulatory direction … [and] it's not clear that any reorganization would significantly save costs, given the size of the U.S. banking industry, the number of entities," Baker said. "I wonder whether this is the type of legislation that the Republicans want to spend time on when they have other priorities."
