The head of the Federal Deposit Insurance Corp. expressed a hint of caution Thursday about opening the banking door to tech firms and other nontraditional providers without applying the same level of oversight faced by more traditional banks.
Since arriving at the FDIC, Jelena McWilliams has signaled a willingness to move more quickly on industrial loan company applications than the agency has in the past. But asked her thoughts on letting fintech companies like Social Finance and larger firms such as Apple access to the banking system, McWilliams said regulators should not let down their guard.
“We need to be very careful about allowing firms that are not traditional banks or don’t look like traditional banks into the banking space,” she said in remarks at a New York forum hosted by the Financial Times.
However, McWilliams, who became FDIC chairman in June, also touted the potential of technological advances to enable community banks to be more competitive and allow regulators to conduct examinations more efficiently.
“Looking at five years ahead, we’re going to probably see a regulatory framework that is perhaps more open to technological advances and what that does for the banks,” she said.
While the Office of the Comptroller of the Currency has been developing a limited-purpose charter for fintech firms, the FDIC presents an alternative option for tech companies through the ILC charter. The state-chartered banking license — supervised at the federal level by the FDIC — affords federal deposit insurance. Charter recipients are exempt from bank holding company requirements, and it is one of the last banking options available to non-financial firms.
Ever since the controversy around Walmart’s 2005 ILC bid, FDIC charters approvals have been virtually nonexistent. But after she was nominated, McWilliams indicated she was open to firms obtaining the charter.
“The law of the land is that ILCs do exist … and the job of the FDIC is to give each ILC application due consideration,” she said at her confirmation hearing January. In a speech in June, McWilliams said the FDIC “has a duty to the public to actually proceed.”
“That doesn’t mean that we will approve every application. That doesn’t mean that we will deny every application,” McWilliams said in June. “But we have to move swiftly; we can’t just sit on those applications.”
The caution she articulated Thursday appears consistent with how ILC applicants have fared of late. In July, the payment processor Square confirmed that it had withdrawn its ILC application. Similarly, the nonbank student loan servicer Nelnet said in September that it had withdrawn its bid.
McWilliams said the FDIC wants to avoid a situation where nontraditional firms seeking banking licenses get placed in a different regulatory tier than other institutions supervised by the agency.
“We are trying not to create a regulatory arbitrage by allowing some companies that do banking services to be regulated differently than banks, even though their business profile and risk profile are different,” she said. “We are taking a holistic look to the extent that any of those companies apply for an industrial loan corporation and deposit insurance.”
Meanwhile, McWilliams reiterated her view that regulators should ensure smaller banks have access to technological innovations as they combat consolidation trends.
She suggested the agency may give banks more flexibility on vendor due diligence requirements.
“We’re looking at, is there a way for us to change how we look at third-party vendor due diligence with respect to technological firms to make sure that small banks can utilize aggregation of services in a way that’s efficient for them,” she said.
McWilliams also said the FDIC is exploring how artificial intelligence could reduce the amount of time examiners spend inside banks.
“If there are ways where we can use artificial intelligence, and some of the technological advances, to enable them to do more review in office and not spend so much time at the bank, that’s probably good for the bank and good for the examiners as well,” she said.
She said AI may also prove to be a “great equalizer,” limiting regional variation in how banks are examined.
With “some of the human idiosyncrasies that you may encounter … an examiner in Atlanta may look differently at a bank than an examiner in San Francisco,” McWilliams said. “The technological advances could probably provide an even playing field there.”
Kristin Broughton contributed reporting for this article.
