Representatives from Donald Trump's planned Department of Government Efficiency (DOGE) have reportedly been considering plans that should alarm market participants even before the designated US President takes office.

According to the Wall Street Journal, DOGE is exploring drastic reductions, mergers, or even the dissolution of Washington's banking regulatory bodies. Among the ideas being discussed is the possibility of dissolving the Federal Deposit Insurance Corporation (FDIC) and transferring its responsibilities to the Treasury Department. However, any measure that even remotely suggests Washington might tamper with US deposit insurance risks triggering massive uncertainty within the financial system.

It is true that the FDIC, under the current leadership of Chairman Martin Gruenberg, has often failed in its supervisory role. A prime example of this is the crisis among regional US banks, which saw three of the four largest bank failures in American history in 2023, a situation that remains unresolved to this day.

The FDIC examiners missed numerous warning signs indicating that the Federal Reserve's restrictive monetary policy would lead to unsustainable losses in securities portfolios, such as those at Silicon Valley Bank, and could cause massive deposit outflows. This failure likely stemmed from the fact that the FDIC's fewer than 6,000 employees were overwhelmed by the responsibility of overseeing nearly 4,500 active US banks. Additionally, the reportedly sexist work culture at the regulator did not help foster effective oversight.

But the answer to these issues cannot be the dissolution of the FDIC. Instead, strengthening and expanding deposit insurance is needed to stabilise the country’s struggling small banks. While the FDIC may not have always acted efficiently in crisis prevention, its core task of guaranteeing deposits and preventing bank runs is crucial for the stability of the financial system. This can best be achieved by maintaining the FDIC as an independent agency with a deposit insurance fund supported by the banks themselves. Only in this way – and with the help of the Fed's emergency facilities – can we prevent taxpayers from directly footing the bill for future government bailouts during sectoral disruptions.