The Trump administration has moved quickly to reverse several Biden-era banking regulations. The Federal Deposit Insurance Corporation (FDIC) recently scrapped five significant policies affecting bank mergers, governance, executive compensation, ownership structures, and brokered deposits. These deregulatory actions have been met with both approval and apprehension. While the banking industry broadly supports the rollbacks to reduce regulatory burdens and promote growth, regulators and experts caution that these changes could reintroduce risks reminiscent of past financial crises. The long-term impact of these policy shifts will depend on how effectively banks balance the newfound regulatory freedoms with prudent risk management practices.
Let’s explore these changes, their implications, and case studies illustrating their impact.
1. Bank Merger Policy: Reduced Scrutiny and Market Impact
What Changed?
The FDIC rescinded the 2024 Merger Review Policy, which previously required:
- Public hearings for mergers forming banks with over $50 billion in assets.
- Detailed impact assessments on local communities.
- Stricter oversight for mergers creating banks with more than $100 billion in assets.
The rollback shifts the focus back to deposit concentration, meaning mergers will primarily be evaluated based on the market share of deposits the combined bank would control in a specific region.
Case Studies & Examples
Truist (BB&T and SunTrust Merger - 2019)
- A $66 billion merger that created the sixth-largest U.S. bank.
- Regulators required the new entity to sell off 30+ branches in areas with high deposit concentration.
- Under the new policy, a similar merger would likely face fewer regulatory hurdles.
PNC’s Acquisition of BBVA USA (2021)
- A $11.6 billion deal that faced extensive regulatory scrutiny under Biden-era rules.
- Future deals of this nature could be approved more quickly with fewer community impact assessments.
Potential Impacts
Positives:
- Encourages mergers that can help struggling banks consolidate and stay afloat.
- Reduces regulatory bottlenecks, allowing banks to scale operations efficiently.
Risks:
- "Too big to fail" risks may increase.
- Less competition could lead to higher banking fees for consumers.
- Weakens community oversight, which could reduce access to banking in underserved areas.
2. Governance and Risk Management: Less Oversight for Bank Boards
What Changed?
The FDIC repealed rules requiring:
- Independent directors to form the majority of bank boards.
- A three-line risk management framework, ensuring risk managers report directly to boards and CEOs.
Case Studies & Examples
Silicon Valley Bank (2023)
- Poor governance allowed risky asset-liability mismatches, leading to its collapse.
- Stricter risk reporting rules might have flagged problems sooner.
Wells Fargo Fake Accounts Scandal (2016)
- Weak board oversight allowed employees to create millions of fraudulent accounts.
- This scandal resulted in billions in fines and reputational damage.
Potential Impacts
Positives:
- Banks gain flexibility in governance structures.
- Reduces compliance costs for banks.
Risks:
- Weaker risk oversight, increasing the likelihood of governance failures.
- More room for insider-friendly decisions that could harm consumers.
3. Executive Compensation: Removing Clawback and Deferral Provisions
What Changed?
The FDIC abandoned 2024 rules that required:
- Deferred executive bonuses to prevent short-term risk-taking.
- Clawback provisions allow banks to reclaim bonuses if executives’ decisions lead to losses.
Case Studies & Examples
Lehman Brothers (2008)
- Executives received massive bonuses while the firm accumulated risky assets.
- When Lehman collapsed, executives kept their pay while investors and employees suffered.
First Republic Bank (2023)
- Even though the bank faced liquidity stress, executives received millions in bonuses before its failure.
- Clawback provisions would have allowed regulators to recover some funds.
Potential Impacts
Positives:
- Allows banks to attract top executives with competitive pay structures.
- Reduces regulatory overhead in compensation management.
Risks:
- Encourages short-term risk-taking, increasing systemic instability.
- Can lead to a public backlash if executives profit while banks fail.
4. Brokered Deposits: Reversal of Disclosure Requirements
What Changed?
The FDIC rescinded rules requiring banks to disclose their brokered deposits. Brokered deposits are funds sourced through third parties, often carrying higher risk and volatility than traditional retail deposits.
Why It Matters
- Brokered deposits are less stable, often moving quickly to higher-yielding institutions.
- They have been involved in past bank failures due to sudden withdrawals during crises.
Case Studies & Examples
Signature Bank Collapse (2023)
- Signature Bank relied heavily on crypto-linked brokered deposits.
- A sudden outflow of deposits contributed to its rapid failure.
Washington Mutual (2008)
- Heavy dependence on brokered deposits accelerated WaMu’s downfall when liquidity dried up.
Potential Impacts
Positives:
- Reduces compliance costs for banks.
- Allows banks more flexibility in managing deposit sources.
Risks:
- Increases liquidity risks, as brokered deposits can disappear quickly.
- Lack of disclosure could mask financial instability, making early intervention harder.
5. Change in Bank Control Act: Easing Ownership Limits
What Changed?
The FDIC removed restrictions on large asset managers acquiring significant stakes in banks. Previously, ownership above 10% required rigorous regulatory review.
Case Studies & Examples
IndyMac Bank (2009)
- Acquired by private equity firms after its failure.
- Investors prioritized short-term profits, leading to high-risk lending.
Citigroup (2008 Bailout)
- Received significant investments from sovereign wealth funds.
- Raised concerns about outsized influence from non-banking entities.
Potential Impacts
Positives:
- Encourages fresh capital inflow into banking.
- Allows struggling banks to attract investment.
Risks:
- Short-term profit motives could overshadow long-term financial stability.
- Non-banking investors may exert undue influence on banking policies.
Other Expected Deregulation Areas
Beyond these five FDIC changes, the administration is expected to pursue broader deregulation in:
- Crypto Markets: Relaxed enforcement on digital assets.
- Energy and Environmental Rules: Rollback of ESG-related financial disclosures.
- Labor Laws: Reduced restrictions on gig economy worker classification.
Conclusion
The FDIC’s policy reversals represent a significant shift toward a more pro-business, less regulated banking environment. While this approach may stimulate growth and investment, it reintroduces risks reminiscent of past financial crises. Whether these changes lead to a more competitive market or another wave of instability remains to be seen.
Coforge offers AI-powered risk management, governance, and regulatory compliance solutions to help banks navigate evolving regulatory landscapes. Our advanced analytics, automation, and compliance frameworks enable financial institutions to mitigate risks while maximizing operational efficiency. Whether enhancing due diligence for mergers, strengthening risk oversight, or optimizing compliance processes, Coforge empowers banks to stay resilient in an era of deregulation.
