FDIC's Travis Hill previews new resolution standards

Amanda Andrade-Rhoades/Bloomberg

The Federal Deposit Insurance Corp. is revisiting rules issued under the Biden administration governing financial submissions large banks must provide to help the agency quickly respond in the event of a bank failure, acting Chair Travis Hill said Tuesday. 

Hill — in a speech delivered to the American Bankers Association's Washington Summit — said the Biden-era rule took the "wrong lessons" from a 2023 regional bank crisis and the agency will waive a number of the requirements for large firms in updated "frequently asked questions" in coming days. 

"We will deemphasize and broaden the strategy discussion and waive the expectation that banks identify and build their plans around a hypothetical failure scenario," Hill said. "Instead, we will look for plans focused more specifically on providing the FDIC the information it needs to rapidly market the institution and, if needed, operate the institution for a short period of time."

Many of the provisions in the so-called insured depository institution, or "IDI" rule — issued in July — sought to eliminate hurdles the agency encountered in winding down failing banks during the regional bank crisis in 2023, by requiring banks to report comprehensive strategies for resolving their firm as well as detailed valuations of the franchise and its components. 

Hill said the FDIC will also work with larger banks to improve their ability to acquire failed institutions more efficiently. By enabling these banks to swiftly bid on or purchase parts of failed firms, the agency head says he aims to reduce the cost and duration of bank resolutions.

He also called for raising the asset thresholds that determine how banks are grouped for regulatory purposes — a concept known as "tailoring." The FDIC, along with the Federal Reserve and the Office of the Comptroller of the Currency, uses these thresholds to scale oversight based on bank size. But Hill said inflation has made the current benchmarks outdated, noting that a $100 billion bank — the current marker for a "large" institution — is effectively $124 billion in today's dollars.

"Over the past several weeks, we have been inventorying and analyzing the dozens of numerical thresholds used by the FDIC, and considering different options for indexing and the impact those options would have," Hill said. "After multiple years of inflation well above the Federal Reserve's 2% target, it is worth exploring whether regulatory thresholds should be raised — and potentially indexed — to reflect inflation and/or macroeconomic and industry growth."

The FDIC appointee also touched on tariffs imposed by the Trump administration on several countries, which have recently shaken markets and triggered drops in stock prices. Hill said the FDIC is watching closely for any negative effects on the banking sector.

"We are closely monitoring conditions … banks had very strong capital and liquidity positions and so generally, seem to be well positioned for volatility, to be able to support the economy, etc.," Hill said. 

"That being said, it's our job to be attuned to the downside risk. So we will continue to monitor conditions and continue to follow the extent there is volatility and the impact on the banking sector."

Hill reaffirmed his belief that the FDIC must take an "open-minded approach" to cryptocurrencies and digital assets. While the agency has already rolled back Biden-era rules that required banks to seek regulatory approval before engaging with crypto, Hill made clear Tuesday that the FDIC plans to provide more guidelines on which activities are allowed. The FDIC plans to issue new guidance outlining which crypto-related activities banks may pursue, he said.

Under the previous administration, regulators expressed strong opposition to permissionless blockchains — open, decentralized networks that allow anyone to participate without prior approval. Hill signaled a shift in direction, when compared with his predecessor Martin Gruenberg, who argued permissionless blockchains create major money laundering and compliance issues.  

"While a complete prohibition on interacting with public chains is clearly too restrictive, what guardrails would be prudent? How should we view public chains that operate in a permissioned manner?" Hill asked. "The banking agencies will need to formally revisit the January 2023 and February 2023 interagency guidance and develop durable standards for the responsible use of public chains, as well as other activities implicated by the guidance."

The FDIC has already rescinded prior notification requirements for banks engaging in crypto activities, is drafting new guidance and plans to clarify which activities — such as custody, stablecoin reserves and issuance, and blockchain use — are permissible.

Hill signaled a more flexible stance on new bank applications and deposit insurance approvals. While the overall decline in bank numbers has slowed, he highlighted the often cited drop in new charters — just 86 since 2010, compared to nearly 100 in some years before 2008.

The agency is weighing looser standards for community bank applicants in underserved areas and fintechs seeking deposit insurance.

"It might be the case that the benefit a new community bank provides to the convenience and needs of the community to be served in regions that lack a community bank presence justifies a more flexible approach to the other statutory factors the FDIC is required to consider," Hill said. "[Additionally,] a fintech with a large number of deposit accounts may present less risk to the Deposit Insurance Fund if it becomes a regulated bank … while applicants will still need to meet the full suite of regulatory obligations of being a bank, we will, in collaboration with the chartering authorities, approach these types of applications with an open mind."

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Hill said the FDIC will launch a Request for Information on Industrial Loan Company applications, a quasi-bank charter often opposed by traditional banks. He encouraged stakeholders to weigh in once the RFI is released.

Hill addressed the FDIC's response to "debanking," or the perceived politically motivated closure of bank accounts, a major initiative under the Trump administration. He said the agency will take further action to "comprehensively end debanking."

"We are also working on a rulemaking related to reputational risk that would prohibit FDIC supervisors from (1) criticizing or taking adverse action against institutions on the basis of reputational risk," Hill said. "And (2) requiring, instructing, or encouraging institutions to close, modify, or refrain from offering accounts on the basis of political, social, cultural, or religious views."

Hill addressed the FDIC's efforts to reform its workplace culture, following a scathing inspector general report that found the agency had failed to adequately confront harassment and misconduct as of March. He acknowledged that "there is a lot of work to do" and said his priority is holding wrongdoers accountable.

"The FDIC had a history, the way I look at it, of doing the easy thing rather than the right thing — what happened all too often was people would come forward with complaints and the solution was to pay a settlement to the person who made the complaint and not impose any discipline on the person accused of wrongdoing," Hill said. "What is critically important, is to set up a process to adjudicate complaints in a way that is fair and credible and trusted by the workforce."