Imagine a world where neobanks run rampant without regulatory oversight, the big four are tightening their grip on the market, and regional and community banks – the backbones of the US banking sector – are left behind. It’s not a future I’m particularly enthusiastic about, yet it could be closer than we think. The new administration’s heavy-handed approach to federal regulators could put smaller institutions in a vulnerable position.
CFPB under fire
The Consumer Financial Protection Bureau (CFPB) was the first to come under fire and has taken heavy losses. Musk and DOGE fired nearly 200 staff members at the agency, while Vought, the newly appointed acting director of the bureau, ordered another 1,700 to down their tools and stop work (New York Times).
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The sackings only stopped after a federal judge ordered an immediate halt to the dismantling of the agency (New York Times). Still, job security for other CFPB workers remains on shaky ground. To say that the regulator’s future is in doubt would be a monumental understatement.
The administration’s approach to the CFPB has been nothing but damaging – that said, it might not be the only example of extreme cost-cutting in action. The SEC is reportedly in the Government’s firing line (Reuters), and so is the FDIC (Inc.).
We could see these agencies stripped back, merged, or even wiped off the map entirely. But what does this mean for the banks they hold to account?
In short, it’s not good news.
On a basic level, these layoffs and power reshuffles will sever regulatory oversight. Without the manpower and tried and tested power structures to keep these agencies motoring along, their regulatory reach will undoubtedly be cut short. Amid all the chaos, I wouldn’t surprised to see gaps emerging, with some financial institutions going unchecked.
The administration’s assault on the CFPB also strips away its authority and credibility. Regulators must be considered formidable forces to keep banks across the US in line, but what we have seen over recent weeks has almost been a public humiliation. It has felt personal, even cruel in places, and has fundamentally reduced the looming stature the agency previously boasted.
Regulatory attack will damage US banking ecosystem
Musk and DOGE have, frankly, defanged the agency. In the long run, this will come back to bite the banking sector.
These agencies enforce guardrails to benefit the entire US banking ecosystem. They provide clear checks and balances and are vital for discouraging anti-competitive practices.
That’s where regional and community banks come in. These smaller institutions are the hubs of local towns across the country and a crucial part of the banking sector, but they face an uphill battle when competing with some of their larger counterparts.
They don’t have enormous marketing budgets to appeal to new client bases or vast capital reserves, but they can build solid, personal relationships with their customers.
At the end of the day, regulators like the CFPB and FDIC provide a security blanket that protects the consumer confidence vital to smaller institutions. They reassure consumers that their deposits are safe and that they can access support should their hard-earned money be compromised.
That’s partly why 80% of consumers had confidence in their primary bank last year (ABA). But that figure will undoubtedly be at risk if the administration continues its indiscriminate approach.
Put simply, Trump and Musk’s frantic overhaul of bank regulators threatens to erode consumer confidence and, subsequently, smaller banks. Smaller institutions are already facing the threats of customer churn – and now, without the reassurance regulators provide, customers could seek security in the arms of bigger banks, particularly those deemed too big to fail.
To top it all off, if regulators don’t have the weight or capacity to keep a watchful eye over these larger institutions – including the big four that account for nearly half of the entire US banking sector’s profits (Financial Times) – they’ll simply tighten their grip on the sector, stamping out other competition.
Unintended consequences of legitimate drive to cut spending, relax regulation
I can understand why President Trump wants to bring down government spending, and I agree that there is space for looser regulation that drives growth and innovation across the banking ecosystem. But hollowing out regulators is no way to go about that.
With increasingly dominant neobanks and LFIs, and consumer trust ground down, regional and community banks could end up squeezed in the middle. This administration must cease its attack and take a measured, nuanced approach to making these agencies more efficient. After all, without them, we could see lasting damage to regional and community banks across the US.
Yerbol Orynbayev is President at TurmaFinTech, a fintech startup helping US community banks beat customer churn through custom, affordable AI and ML tools. Prior to his consultancy career, Orynbayev served as the Deputy Prime Minister of Kazakhstan from 2007-2013 and Aide to the President on economic policy from 2013-2015. He also worked as the Governor of the World Bank on behalf of Kazakhstan and helped steer the nation out of the 2008 Financial Crisis.
