Even before the next administration is sworn in, FDIC Vice Chairman Travis Hill is already signaling that changes are coming to the FDIC’s approach to regulating banks. The text of Vice Chair Hill’s speech is worth reading in its entirety, but there are several key takeaways:

Form over Substance

Many bankers have been frustrated during examinations by a relentless focus on process and procedures. Vice Chair Hill acknowledges that many examinations have elevated form over substance: “examiners [ ] focus on a litany of process-related issues that have little bearing on a bank’s core financial condition or solvency.” 

Vice Chair Hill specifically points to sensitivity examinations’ emphasis on requiring banks to justify assumptions used in modelling. FDIC manuals and guidance justify this emphasis by explaining that strong processes will help uncover weaknesses before they manifest critical problems. Vice Chair Hill, however, is skeptical:

This [emphasis on process] might work on the margins, but only if the improvements to process actually result in better management of risk and/or less risky banks. Instead, the criticisms often have little bearing on a bank’s actual health or solvency, are a major distraction for examiners and banks, and are contributing to crushing compliance costs, particularly for community and regional banks. (emphasis added).

Many banks will appreciate the candor of Vice Chair Hill’s comments recognizing that emphasizing form over substance does little to improve a bank’s safety and soundness. Changes in this area will take time. Prioritizing a bank’s overall health and solvency over a bank’s processes will be a welcome change for many banks. 

Information Technology and FinTech

Vice Chair Hill also criticizes the FDIC’s approach to digital assets and fintechs. Regulatory skepticism has created the impression that the FDIC is “closed for business.”  

The FDIC should, according to Vice Chair Hill, allow for greater experimentation with technology without “time-consuming engagements with examiners.” The FDIC should also prepare clearer guidance on artificial intelligence, fintech partnerships, and digital assets. Prior FDIC leadership ended these initiatives in favor of individualized review of proposals.

The FDIC may soon provide clearer guidance on how to use emerging technologies. This could also affect community banks in unexpected ways. New fintechs may increase competition, so community banks will need to keep pace with these new technologies. 

Debanking

Vice Chair Hill criticized the current approach to BSA compliance. According to Vice Chair Hill, the current regime creates an incentive to close questionable accounts. 

Many banks that confront questionable account transactions usually find it easier to simply close an account than deal with the regulatory oversight. While that may remain the best option in some cases, Vice Chair Hill suggests that the current regulatory approach to BSA has gone too far. 

Climate

Vice Chair Hill criticized the current regulatory emphasis on climate change for banks. He stated that he expects “the FDIC will not be issuing any quantitative or qualitative climate disclosure regime for banks in the U.S.”

Capital

Finally, Vice Chair Hill criticized the approach of federal banking regulations related to the implementation of Basel capital requirements to large banking organizations. While these comments are not generally applicable to Iowa banks, they are nevertheless consistent with the philosophy of requiring greater transparency and uniformity in regulation. 

Vice Chair Hill’s speech provides tantalizing insight into what regulation may look like under a new presidential administration. However, banks should be patient waiting for any significant changes. Vice Chair Hill notes that changes to examination practices will take time to filter through the FDIC. In the meantime, banks should continue to be responsive to examiner recommendations. 

However, the potential for change at the top of the FDIC also means banks should be willing to take issues to the top of the FDIC if they believe examination findings are inconsistent with FDIC policy. The FDIC has an internal appeal procedure that allows banks to seek review of examination findings that the bank believes are inconsistent with FDIC policy and regulations. The Supervision Appeals Review Committee (“SARC”) is composed of:

(1) One inside FDIC Board member, either the Chairperson, the Vice Chairperson, or the FDIC Director (Appointive), as designated by the FDIC Chairperson (this person would serve as the Chairperson of the SARC); and (2) one deputy or special assistant to each of the inside FDIC Board members who are not designated as the SARC Chairperson.  

Given its makeup, SARC is likely much more responsive to policy shifts at the FDIC than regional offices and examination teams. If policy at the FDIC does indeed change, then banks may need to challenge local findings that have not kept up with the times.