Work on a “new direction” for the federal bank deposit insurer will begin on Jan. 20, the likely next acting chairman of the agency’s board said Friday, including a lesser focus on process, an “open-minded approach” to innovation and technology, a new proposal on capital requirements, and likely an end to a “misguided focus on climate.”
Federal Deposit Insurance Corp. (FDIC) Board Vice Chairman Travis Hill, in a speech to the American Bar Association, said the change in the agency’s leadership with the retirement of current board chairman Martin Gruenberg Jan. 19 will provide a needed new course for the agency – “one way or another.”
“Today, I will discuss a few issues I expect the agency to begin addressing in the coming weeks and months, though there are many others that deserve (and I anticipate in the future will receive) attention,” Hill said.
Gruenberg is retiring in the wake of a sexual harassment scandal that roiled the agency since more than a year ago. The scandal led to the creation of a special office at the agency to investigate alleged harassment and to address, and fix, the workplace culture at the agency.
As vice chairman, Hill – a Republican appointed to the board — is next in line to lead the agency until a new chairman is nominated by incoming President Donald Trump (R) and confirmed by the Senate. Trump could also name an acting chairman to fill the seat.
Regarding process, Hill said it is far more common for examiners to focus on a litany of process-related issues that have little bearing on a bank’s core financial condition or solvency. He said that was the case instead of focusing on obvious, well-known management, governance, or control issues that can potentially threaten the safety and soundness of the institution. Today, he said, those are “outlier cases.”
He called the focus on process “deeply entrenched” in FDIC manuals and guidance, adding it is “partly rooted in so-called ‘forward-looking supervision.’” He called that a “desire to address weaknesses before they show up in financial metrics.”
“Changes in this area will take time, but are critically needed,” Hill said. “We will need to make adjustments to how we implement the CAMELS rating system and to our examination manuals, and we will need to modify how we train examiners. Basic controls and risk management infrastructure still matter, but should not be the overwhelming focus.”
In other comments, Hill said:
- He expects the agency to take a more “open-minded approach” to innovation and technology adoption, while still promoting core safety and soundness principles. He asserted that the agency has done a “poor job” in recent years striking a balance between allowing banks to evolve with the times and ensuring that they continue to manage risks prudently. He also said the agency should consider issuing additional guidance on several topics, such as fintech partnerships, artificial intelligence, and digital assets and tokenization.
- Ending an alleged practice of “debanking,” particularly in respect to digital assets. “Over the past few years, there have been various accounts of individuals and businesses associated with the crypto industry losing access to bank accounts without explanation,” Hill said. He also advocated a reevaluation of the regulatory approach to anti-money laundering actions implemented under the Bank Secrecy Act (BSA). “The current BSA regime creates an incentive for banks to close accounts rather than risk massive fines for inadequate BSA compliance,” Hill said.
- The agency has had a “misguided focus on climate.” He said there is no record of a bank failing due to climate-related events, and no evidence that such events “pose an elevated safety and soundness or financial stability risk for banks.” He said the agency’s role is not to use banks to pursue environmental policy and expects that, soon after the change in FDIC leadership, he expects the agency to withdraw from the international Network for Greening the Financial System (NGFS). Further he said he does not expect the FDIC to be issuing any future “quantitative or qualitative climate disclosure regime” for banks in the U.S., such as that proposed by the Basel Committee.
- It is possible that in 2025 the banking agencies may consider a new proposal to implement the 2017 “Basel endgame” agreement. “If the capital rule is being reopened, the agencies should consider expanding the scope of the rule to address other longstanding capital issues,” he said. “For example, interagency discussions earlier in this process included consideration of credit risk transfers and the supplementary leverage ratio. Tackling the capital treatment of credit risk transfers is particularly ripe given the growing interest from institutions in engaging in these types of transactions.”
Charting a New Course: Preliminary Thoughts on FDIC Policy Issues
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