FDIC upheaval offers crypto opportunity, bank uncertainty

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The Federal Deposit Insurance Corp., like many government entities, is going through a rough period of change under the new Trump administration. Experts predict that staff cuts, a problematic work culture and regulatory changes are just the start of what's to come.

Last month, acting FDIC Chair Travis Hill sent a letter to House Financial Services Committee member Dan Meuser, R-Pa., explaining how the agency would be working with the Treasury to walk back its use of reputational risk in supervisory activity — signaling a stark departure from the FDIC's stance under the Biden administration. The Office of the Comptroller of the Currency was first to do so as per a March 20 announcement.

Hill joins other changemakers working to address the trend of "debanking," wherein financial institutions are shuttering consumer and business accounts for alleged political differences or under pressure from regulators.

The FDIC also pivoted on another contested policy in the banking space in March, removing a previously necessary approval for allowing banks to engage in cryptocurrency-related activities. The new standard permits banks to engage with digital assets and manage the risks on their own.

Daniel W. Hartman, of counsel with Boston-based law firm Nutter and former counsel at the Federal Reserve Bank of Boston, said changes in both crypto and reputational-risk policies are "a clear indication" that the FDIC is keen to grant banks more freedom.

"The FDIC is going to basically allow banks to pursue the transactions and activities that are best for them, as long as they are consistent with safety and soundness, consumer protection and anti-money-laundering laws," Hartman said.

Crypto advocates like Lamine Brahimi, cofounder of the Swiss digital asset infrastructure provider Taurus SA, agreed with the sentiment that the rollback of Biden-era policies at the agency is good for the crypto industry so long as the policies that protect consumers and innovations alike are kept in place.

Read more: The FDIC should take a deliberate, phased approach to reform

Not all changes have been upbeat.

President Donald Trump's efforts to quell government spending saw the FDIC dismiss about 10% of its overall staff in February.

Data from the FDIC's Office of Inspector General published last month identified numerous problem areas in the agency that hamstring its regulatory duties, caused in large part by workplace culture issues and the layoffs. Since the firings are ongoing, the OIG couldn't speculate what the true impact is.

These cuts magnify a series of problems that existed at the FDIC prior to Trump's reelection, chief of which has been the shortage of qualified bank examiners that was cited as a key factor in the 2023 failure of Signature Bank. Hill withdrew more than 200 job offers for bank examiners in January following the federal hiring freeze.

Jared Tully, vice chair of Frost Brown Todd's Business Litigation Practice group and team leader for its Community Bank and Financial Institutions team, said while the FDIC will eventually adapt its smaller headcount for bank examinations, innovation takes time.

"In the short term, I do expect that examination capabilities will be hampered [and] in the midterm, I envision adaptation," Tully said. "Long term, I believe that the FDIC will innovate in ways that allow it to meet its examination oversight to protect depositors and the industry."

Read more: FDIC's Hill aims to cut regulation, halt climate efforts

Industry advocates are on standby for further changes at the FDIC.

"A lot of work went into the regulations following the 2008 financial crisis," said Naeem Siddiqi, senior risk advisor for business analytics software firm SAS. "No one wants to see a repeat of the mistakes that led to that crisis and the ensuing Great Recession."

Catch up on the latest changes at the FDIC below.

FDIC
Al Drago/Bloomberg

FDIC plagued by attrition, persistent office issues

New findings from the FDIC's Office of the Inspector General show that the continual outflow of staffers and unresolved workplace problems are significantly affecting the agency's regulatory performance.

The OIG's report for last month identified eight key challenges facing the FDIC that are hindering its ability to adequately oversee financial institutions. Difficulties include enhancing governance, establishing effective human capital management, improving contract management and others — many of which stem from the federal staffing cuts ordered by the Trump administration.

"As a result of staff attrition, the FDIC will need to ensure that it has sufficient staff with the necessary skills and qualifications to complete statutorily required examinations and should assess the impact of attrition on the FDIC's capacity to execute resolutions and receiverships effectively," the OIG said in its report. "We also previously identified, and continue to find, that the FDIC has not established an accountable workplace culture, including an adequate sexual harassment prevention program."

Read more: FDIC grappling with attrition, unresolved workplace issues

The FDIC's headquarters
Al Drago/Bloomberg

Mass layoffs at FDIC, CFPB put on hold

Amid widespread layoffs at the FDIC, the Consumer Financial Protection Bureau and other government agencies, Judge James K. Bredar of the U.S. District Court for the District of Maryland has put a temporary stop to the firings.

Bredar concluded that because the layoffs failed to provide states with advance notice, which is legally required, state administration was ill-prepared to handle the influx of unemployment and social service requests.

"Because the federal government's recent discharge of thousands of probationary employees was not executed in compliance with rules intended to ensure that states are ready to bear the load cast upon them when mass layoffs occur, and because the plaintiff states are not yet in fact so prepared, and because of the violations, the recent directives of various federal agencies terminating probationary employees must be stayed," the judge stated in his explanation.

Read more: Judge pauses firings at CFPB, FDIC, Treasury

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Andrew Harrer/Bloomberg

The deregulation of the FDIC invites industry volatility, experts say

Banking executives have by and large embraced the Trump administration's deregulatory attitude toward the FDIC, but industry experts say the changes could have yet-to-be-realized consequences for the long term.

FDIC officials debuted a proposal to rollback the agency's September 2024 Statement of Policy on Bank Merger Transactions last month, which took a more scrutinizing approach to bank mergers by requiring parties to provide proof of how the deal would serve to benefit low- and moderate-income communities.

"The measures underscore how quickly and dramatically rules can change with a new administration, and how oversight has become increasingly polarized and partisan," Ian Katz, managing director at Capital Alpha Partners, told American Banker. "Though the financial services industry generally favors most of the moves Trump appointees are making, the regulatory whiplash that can occur after presidential elections complicates long-term business planning."

Read more: Banks welcome FDIC deregulatory shift, but volatility looms

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Andrew Harrer/Bloomberg

FDIC lays off 10% of overall headcount

Following directives from the Office of Personnel Management, the FDIC laid off roughly 600 to 700 employees at the end of February.

The firings were a joint result of probationary employees being let go as well as departures from staff members who opted to take the deferred resignation offers and leave voluntarily.

The efforts have drawn sharp opposition from the National Treasury Employees Union, which represents employees across 37 departments and offices including the FDIC, as well as the American Federation of Government Employees — which sued the OPM that same month for the layoffs.

Read more: FDIC sheds 10% of workforce; more cuts likely

Colorado state capitol

FDIC walks back support for Colo. interest rate exportation lending law

FDIC officials have withdrawn a 2024 amicus brief supporting a Colorado state law on capping interest rates on loans to residents from out-of-state lenders, pending a new lawsuit.

In National Association of Industrial Bankers, et al v. Weiser, et al, nonbank lending advocates are challenging the legality of the Colorado statute by arguing the provisions are unclear as to which interest rate caps apply in situations where borrowers and lenders are in different states.

"Today's decision to withdraw the amicus finally restores longstanding guidelines and returns pragmatic, non-ideological policymaking to the FDIC," Phil Goldfeder, chief executive of the American Fintech Council, said in a statement supporting the FDIC's decision.

Read more: FDIC withdraws support for Colo. interest rate exportation law

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