If there’s one takeaway from the Federal Deposit Insurance Corp.’s latest annual report, it’s that there’s a new sheriff in town.
The sheriff, Jelena McWilliams, isn’t literally new, of course, given the FDIC’s new chairman was confirmed in May 2018. Yet, it wasn’t until last month that her imprint on the FDIC became clear, with the release of the agency’s annual report.
In last year’s report, former Chairman Martin Gruenberg spent the first half of his Message from the Chairman—the FDIC’s equivalent to an annual shareholder letter—reviewing the risks facing the banking industry and emphasizing the need for banks and regulatory agencies to stay vigilant despite the strength of the ongoing economic expansion.
“History shows that surprising and adverse developments in financial markets occur with some frequency,” wrote Gruenberg. "History also shows that the seeds of banking crises are sown by the decisions banks and bank policymakers make when they have maximum confidence that the horizon is clear.”
The net result, wrote Gruenberg, is that, “[w]hile the banking system is much stronger now than it was entering the crisis, continued vigilance is warranted.”
Gruenberg’s tone was that of a parent, not a partner.
This paternalistic tone is one reason that bankers have grown so frustrated with regulators. Sure, regulators have a job to do, but to imply that bankers are ignorant of the economic cycle belies the fact that most bankers have more experience in the industry than regulators.
This is why McWilliams’ message will come as a relief to the industry.
It’s not that she disagrees with Gruenberg on the need to maintain vigilance, because there’s no reason to think she does. But the tone of her message implies that she views the FDIC as more of a partner to the banking industry than a parent.
This is reflected in her list of priorities. These include encouraging more de novo formations, reducing the regulatory burden on community banks, increasing transparency of the agency’s performance and establishing an office of innovation to help banks understand how technology is changing the industry.
To be clear, it’s not that Gruenberg didn’t promote de novo formations, because he did. It was under his tenure that the FDIC conducted outreach meetings around the country aimed at educating prospective bank organizers about the application process.
But while Gruenberg’s conversation about de novo banks was buried deep in his message, it was front and center in McWilliams’ message, appearing in the fourth paragraph.
“One of my top priorities as FDIC Chairman is to encourage more de novo formation, and we are hard at work to make this a reality,” wrote McWilliams. “De novo banks are a key source of new capital, talent, ideas, and ways to serve customers, and the FDIC will do its part to support this segment of the industry.”
To this end, the FDIC has requested public comment on streamlining and identifying potential improvements in the deposit insurance application process. Coincidence or not, the number of approved de novo applications increased last year to 17—the most since the financial crisis.
The progress on McWilliams’ second priority, chipping away at the regulatory burden on community banks, is more quantifiably apparent.
The FDIC eliminated over 400 out of a total of 800 pieces of outstanding supervisory guidance and, in her first month as chairman, launched a pilot program that allows examiners to review digitally scanned loan files offsite, reducing the length of onsite exams.
Relatedly, the number of enforcement actions initiated by the FDIC continued to decline last year. In 2016, the FDIC initiated 259 risk and consumer enforcement actions. That fell to 231 the following year. And in 2018, it was down to 177.
“We will continue [in 2019] to focus on reducing unnecessary regulatory burdens for community banks without sacrificing consumer protections or prudential requirements,” McWilliams wrote. “When we make these adjustments, we allow banks to focus on the business of banking, not on the unraveling of red tape.”
Another of McWilliams’ priorities is promoting transparency at the agency. This was the theme of her first public initiative announced as chairman, titled “Trust through Transparency.”
The substance of the initiative is to publish a list of the FDIC’s performance metrics online, including call center response rates and turnaround times for examinations and applications. In the first two months the webpage was live, it received more than 34,000 page views.
Finally, reflecting a central challenge faced by banks today, the FDIC is in the process of establishing an Office of Innovation that, according to McWilliams, “will partner with banks and nonbanks to understand how technology is changing the business of banking.”
The office is tasked with addressing a number of specific questions, including how the FDIC can provide a safe regulatory environment that promotes continuous innovation. It’s ultimate objective, though, is in line with McWilliams’ other priorities.
“Through increased collaboration with FDIC-regulated institutions, consumers, and financial services innovators, we will help increase the velocity of innovation in our business,” wrote McWilliams.
In short, while the industry has known since the middle of last year that a new sheriff is in town at the FDIC, the agency’s 2018 annual report lays out more clearly how she intends to govern.