By Andrew Karp

Partner | Financial Regulation

As the new administration settles in, it has begun to catalyze significant changes in the bank supervisory and regulatory environment. The FDIC is the first mover in this effort. Longtime director and sometime Chairman Martin Gruenberg resigned as a director over the weekend prior to the January 20 inauguration. He was succeeded by then Vice Chair, Travis Hill, who is now Acting Chair. If one were to accept reductive descriptions of their respective policy inclinations, former Chairman Gruenberg would best be described as having favored very strong regulation and as skeptical of innovation in the banking system. Acting Chair Hill, by contrast, appears to favor substantially lighter regulation and to trust the banking system with greater scope for innovation.

Within a day of his appointment, Acting Chairman Hill published a list of ambitious goals for the agency. If implemented, these goals would temper or reverse several of the measures that the Gruenberg-led FDIC considered standout achievements. Implementation of these measures would generally require approval by a majority of the FDIC board, and in some cases might also require agreement of other bank regulators. The President should be able to assure a Republican majority of the five-member board, but the board approval process, any necessary agreement among the banking  agencies, and, where applicable, the public notice-and-comment process could well draw out the timing of change and result in final actions that differ from the proposals.

This note summarizes and comments on the Acting Chairman’s goals as published on January 21:

• Acting Chairman Goal: Conduct a wholesale review of regulations, guidance, and manuals to ensure our rules and approach promote a vibrant, growing economy.
  • Comment: This goal does not target a specific prior policy or action, but instead signals a lighter regulatory and supervisory touch. It states the Acting Chairman’s overall theme.

• Acting Chairman Goal: Adopt a more open-minded approach to innovation and technology adoption, including (1) a more transparent approach to fintech partnerships and to digital assets and tokenization, and (2) engagement to address growing technology costs for community banks.
  • Comment: This goal is intended to reverse several actions that market observers considered to have impeded digital innovation in banking markets.  Most notably, these included the FDIC’s closure of its innovation lab (established by Chairman Jelena McWilliams, former Chairman Gruenberg’s immediate predecessor) and a series of letters that the FDIC issued to various banks suggesting the banks “pause” their digital asset activities.

• Acting Chairman Goal: Improve the bank merger approval process and replace the 2024 Statement of Policy to ensure that merger transactions that satisfy the Bank Merger Act are approved in a timely way. 
• Comment: This goal would repeal the FDIC’s 2024 Statement of Policy on the Bank Merger Act. The SOP implemented tighter FDIC control over bank merger applications within its jurisdiction by establishing new substantive and procedural standards perceived as substantially more burdensome than the prior process.

• Acting Chairman Goal: Withdraw problematic proposals from the past three years, such as proposals on brokered deposits and corporate governance. 
• Comment: This is a more specific manifestation of the overall theme, aimed at two rules that, respectively, (i) broadened the class of deposits subject to quantitative and qualitative restrictions and conditions, and (ii) imposed governance standards that the market perceives as both inconsistent with expectations or standards set by the OCC and the Federal Reserve and incompatible with generally accepted concepts of corporate law, including current notions of officers’ and directors’ fiduciary duties.

• Acting Chairman Goal: Improve the supervisory process to focus more on core financial risks and less on process, and reevaluate the supervisory appeals process. 
• Comment: Following the large bank failures of Spring 2023, many industry commenters, legislators, and the banking agencies themselves have observed that agencies’ focus on, or some would say obsession with, bank processes and governance has obscured or diverted the agencies’ and the banks’ attention from the banks’ true financial and operational risks. This goal is intended to remedy those errors. 

• Acting Chairman Goal: Enhance our readiness and preparedness for resolving issues within large financial institutions, incorporating lessons from the far-too-costly failures of 2023, including the need to be much more proactive and nimble, and to improve the bidding process.
• Comment:  Another criticism of the FDIC arising from the Spring 2023 bank failures was the market’s perception that the FDIC’s bidding and sale processes are unduly opaque and clumsy, with the ultimate result that the receiver’s recoveries are less than they should be.  Industry observers have long suggested process improvements. 

• Acting Chairman Goal: Pursue adjustments to our capital and liquidity rules to appropriately balance driving economic growth with ensuring safety and soundness and resilience to shocks.
• Comment: This goal points out likely specific elements of the overall theme.  It clearly suggests some forthcoming proposals in the contentious capital and liquidity areas. 

• Acting Chairman Goal: Encourage more de novo activity so there is a healthy pipeline of new entrants in the banking sector.
  • Comment: The FDIC’s pace in approving new bank charters has accelerated of late (admittedly in comparison to the long-prevailing glacial pace). However, the agency has been extremely reluctant to approve the establishment of industrial loan companies. This goal may signal a more welcoming attitude.

• Acting Chairman Goal: Work to ensure that law-abiding customers have, and do not lose, access to bank accounts and banking services. 
• Comment: This goal recalls the Choke Point project of several years ago, an echo of which many in the industry see in the pause letters noted above and the agency’s hostile attitude toward fintech-bank “partnership” arrangements. Like the principal goal appearing and many of the more specific goals, this goal suggests a moderation of the current barriers to change and innovation in the banking markets.

• Acting Chairman Goal: Modernize implementation of the Bank Secrecy Act.
• Comment: Industry commenters have asserted that current implementing regulations are ill-adapted to the current state of the financial markets and technology. This goal suggests that Acting Chairman Hill intends to push for reform.

• Acting Chairman Goal: Study deposit behavior to develop a more sophisticated understanding of the relative stability of different types of deposits and depositors.
• Comment: This goal is yet another response to the Spring 2023 bank failures, which exposed that banks and supervisors did not fully understand how and the extent to which the development of broadly available instantaneous deposit transfer technologies has exacerbated deposit-run risk.  

• Acting Chairman Goal: Reevaluate our disclosure practices, and expand transparency in areas that do not impact safety and soundness or financial stability. 
• Comment: Over the last several years academic and industry observers have criticized the agencies’ practice of keeping confidential examination and related supervisory information as, ultimately, an impediment to better bank supervision, market understanding, and bank management. While statutes designate supervisory information as confidential, this goal suggests that the FDIC may seek to refine the definition of confidential supervisory information through legislation or interpretation. Ideally, the other banking agencies would participate in any such effort, in order to promote consistency in this important area.

• Acting Chairman Goal: Ensure the FDIC remains within our statutory mandates, and stops coloring outside the lines. 
• Comment:  Several recent FDIC proposals have been criticized as undue assertions of authority reserved to other banking agencies.  Among these are the corporate governance guidelines, the Bank Merger Act Statement of Policy, and a revision of the FDIC’s regulations implementing the  Change in Bank Control Act that purports to authorize the FDIC to assert authority over certain investments thought to be reserved to a bank’s or holding company’s primary federal regulator. This goal suggests the Acting Chairman wishes to restore the prior division of authorities.

• Acting Chairman Goal: Pursue internal efficiencies to ensure we are serving as responsible stewards of the Deposit Insurance Fund. 
• Comment: This is a budget goal that might have some, as yet imponderable, effect on the FDIC’s operations and capacity.

• Acting Chairman Goal: Reestablish a strong workforce culture, where misconduct is not tolerated and those who engage in misconduct are held accountable.
• Comment: The FDIC’s efforts to improve its culture are well known. The effects of the efforts on the FDIC’s execution of its duties are, of course, hard to predict.