‘Small banks are disappearing’: FDIC’s Jelena McWilliams

Transcription below

Penny Crosman: (00:03)
Welcome to the American banker podcast, I'm Penny Crosman. It is an honor to be here today with a special guest: Jelena McWilliams, chairman of the FDIC. Jelena has accomplished many things during her three and a half years running the agency, but I invited her to join us today during her last week in office to talk about the focus she has had on supporting minority owned banks and the overall need across the industry to serve the underbanked. Chairman McWilliams, thank you for coming.

Jelena McWilliams: (00:32)
Oh, it's a pleasure to be here, Penny. Thank you so much.

Penny Crosman: (00:36)
I was speaking recently with Dominik Mjartan, CEO of Opus Bank, a minority-owned depository institution in Columbia, Georgia. He shared that a couple of weeks after he joined Opus, he received a letter from you introducing yourself and thanking him for the work his bank does. His first thought was, why is the chairman of the FDIC, an immigrant from his part of the world — he's from Czechoslovakia, you came here from Yugoslavia — writing to me? What does she know about black banks? The next time he was in Washington, D.C., he asked to meet with you. And he said you spent almost two hours with him and the chairman of his bank, Paul Mitchell. Dominik told me he got the sense there was no political agenda, no marketing ploy. "She's just genuine in believing that the financial ecosystem is woefully inadequate in serving all people in all communities, except for the unique mission-driven banks." So Chairman McWilliams, how did you arrive at this point of view and this focus?

Jelena McWilliams: (01:36)
I would say it's been a long journey. I would say that my life experiences have been a little bit unorthodox. When I first came to the United States at the age of 18 by myself, with $500 to my name, I financially struggled to survive. I cleaned houses for $5 an hour. I worked closing night shift at Blockbuster for $4.25 an hour. I sold knives door to door and sold cars and had other jobs just trying to survive. And when you struggle to survive and you don't come from money that your family can procure or connections or the pedigree, so to speak, you start to understand the common struggle among the people that don't have the bare minimum to survive. And so, as I emerged through life and got educated in the United States, and yes, I had student loans to make sure that happened, I have not forgotten those roots to this day.

Jelena McWilliams: (02:33)
You know, when I cook dinner for my family, no food gets thrown away. Why? Because so many people are hungry. And so I make sure everybody eats everything and there are no leftovers in our house that go to waste. When I assumed chairmanship of the FDIC, I looked at the banking system through the lens of one who feels like they belong to the banking system and who feels like they don't, one who feels like the banking system is working for them and who doesn't. And quite often, when we think about the unbanked and the so-called underbanked consumers in the United States, we look at, do they have a checking account? And a checking account is a wonderful thing. We encourage formation of checking accounts. We encourage people to look at the Bank On coalition, which is a coalition of banks that offer low- and no-fee checking accounts.

Jelena McWilliams: (03:20)
But the real question about the unbanked and underbanked in the United States is really about is the system working for you. And so when I thought about that early on in my tenure, I was like, well, who are the banks who are working in these communities that have traditionally not received banking representation, or have not been served as well as some other communities in the United States? And I realized that minority run institutions, so-called MDIs — we also call them mission driven banks — are it. And I did reach out to a number of CEOs and told them to tell me about their communities, about their business model, the obstacles. And I said, I don't profess to know what it's like to walk in your shoes, but I know a lot what it's like to walk in the shoes of poverty, and I want to understand your communities.

Jelena McWilliams: (04:09)
And I want to understand the obstacles you have in making sure that the people you serve, the communities you serve, feel like they belong to the financial system. And these CEOs started telling me stories about how they started, told me how their banks struggled, how the recovery in a lot of their communities from the 2008 recession took much longer and in some cases it is still ongoing, and that what they need most is capital. That led to the creation of this mission-driven bank fund that we set up. But that's a whole other question. So I don't know if that's on your list or not. But that's basically how it came to the point of supporting mission-driven banks, the MDIs and community development, financial institutions that generally serve low and moderate income communities.

Penny Crosman: (04:57)
Can you tell us a little bit about this mission-driven bank fund and how it works?

Jelena McWilliams: (05:02)
Sure, sure. So, as we look at different ways of how can we help MDIs, I challenged the, the staff at FDIC to think outside the box. I was like, what else can we do for them? So we created a number of things that we thought would highlight what these banks do in their communities and make it easier on them to do so. So we created networking events across the country. I call them speed dating. I think if you label anything as speed dating, people actually show up. So we had non-MDIs and MDIs, or regular banks and minority banks, get in the room together and literally switch tables to talk about business models and business practices and potential partnerships and investments. We provided more technical assistance to MDIs than we did in the past.

Jelena McWilliams: (05:45)
We created a protocol for MDIs to bid on failing MDI banks so that those banks remain in the same community, so that they're not acquired by non-MDI banks. We increased representation in our community advisory committee at the FDIC for MDIs, from one to three. So now they're one-sixth of the committee. We created the subcommittee for MDIs so they can exchange their ideas. We went into a marketing campaign called the origin story where we went to some of these banks and they talked to us about what they do in their communities. And yet, Penny, none of that was enough. So I was coming back from a conference that I think was in Texas and I had what I remember being a middle-row government seat in the back of the plane and looking at the screen in front of me and it was DIRECTV and so no good movies.

Jelena McWilliams: (06:36)
And I came across an episode of Shark Tank and I was mesmerized. I was just like a kid in the candy store. I knew about the concept. I just never saw an episode. So as I was watching an episode, I was thinking, well, what if we could create a shark tank for minority banks? And so, by the time I landed, I called up my chief of staff and I said, I want a shark tank for minority banks. And he said, well, how are we going to do that? I said, I don't know, but we've got over 400 lawyers. One of them should figure this out. So it took about two years, but we actually created the so-called mission-driven bank fund, which we launched a couple of months ago.

Jelena McWilliams: (07:19)
And as everything else in government, things move at a tectonic pace. So I'm actually upset it took two years because this was so needed much sooner, but it's better now or late than never. And this past fall we launched the fund. It's a public-private partnership where we put the name of the FDIC and the brand behind this fund, but the fund is privately operated, privately managed and privately funded. And we're thrilled that Microsoft Corporation, Truist Financial and last was Discovery Channel, came to us and offered to be the founding investors and anchor investors in this fund collectively. They pledged $120 million. So this fund is going to start off with $120 million. And that's going to be leveraged one to 10. So for the minority banks that come and do their pitches to this fund, the fund will dispense capital to those banks. For each dollar of capital, those banks will be able to lend $10 in the community. So I will say I walk away from this job knowing that if I did nothing else good for communities that needed it, there's this creation of a mission-driven bank fund. And I hope that the next chairman makes it even bigger.

Penny Crosman: (08:35)
And will the minority depository institutions' leaders have to come and make pitches in front of a panel of sharks or something?

Jelena McWilliams: (08:45)
Yes. Maybe they won't call them sharks. They will come and prepare a pitch as to what they're thinking about as necessary in their communities. And of course, these bankers know their communities intimately. So if it's increasing home ownership in African American communities, they'll pitch that idea and prepare a business plan. And if it's finding food deserts in low income neighborhoods, so that better quality produce is available through small businesses and making small business loans to grocery stores, whatever it is that those communities need, that will be the pitch. They will prepare for the fund investors. And we're looking at this as patient capital. This fund is not looking to beat S&P Index. This fund is not looking to compete with large funds in the United States. The value that this fund will bring to the table is the success of the communities which these banks are fighting for.

Penny Crosman: (09:37)
And is the FDIC actually managing the fund? I'm getting in the weeds here, but...

Jelena McWilliams: (09:42)
No, it's the good weeds to get into. No, as a government entity, we couldn't manage the fund. We do have limitations and restrictions. So there's going to be a professional fund manager that the anchor investors will pick, and the fund will be managed like others again, with a view that the primary mission of the fund is not the return to the investors. It's the patient capital that will produce a lot of good in the communities where it's dispensed.

Penny Crosman: (10:10)
And do you expect to see more corporate investors step up, or do you expect other kinds of investors to pitch in?

Jelena McWilliams: (10:18)
I'm certainly hoping that more investors will come in. During the rest of my tenure, had I been able to stay longer. I was hoping to actually go on a financial inclusion tour, where we were going to showcase what this fund is capable of doing in a lot of communities where it's desperately needed, in the southern rural communities and inner cities. And I was hoping that through that marketing campaign we would be able to attract more investors and more attention to the fund. I'm hoping the next chairman does that, and that this fund only continues to grow. And that someday I say, remember when that fund had only $120 million worth of investments?

Penny Crosman: (11:01)
So I know that Gene Ludwig, who was the comptroller of the currency under the Clinton Administration recently wrote a column for Politico where he said minority banks are disappearing. Do you share that view and that concern?

Jelena McWilliams: (11:15)
Well, minority banks are disappearing. And to tell you the truth, small banks around the United States are disappearing as well. Consolidation has been taking place in the banking industry for the past 30 or 40 years quite heavily. And I don't profess to know what the right number of community banks in the United States is. But I do know that for minority communities, those branches, the ability to walk in and say, you gave a loan to my grandfather, and now I'm asking you for a loan to start my own barber shop or whatever it may be, that presence and that significance for the community is immensely more than just that being a bank, quite often. They're the very backbone of those communities where they serve. So we are concerned when there is a smaller number of minority depository institutions when they keep on consolidating and losing presence in their community.

Jelena McWilliams: (12:12)
This is why one of the things we did was, as I mentioned, when a minority bank is failing, we give a two-week window before anybody else to other minority banks to bid on that failing institution, in order to keep the spirit of the community as the principal driver behind the acquirer bank. We allowed the de novo process for creation of new banks and their deposit insurance applications to be processed in a way that would encourage formation, especially in low- and moderate-income communities. So we now have a couple more MDIs than we had before I came to the office. But it's something that cannot be taken lightly and it has to be concerted and conscious. It has to be something that we work on as a regulatory agency, every single day.

Jelena McWilliams: (13:02)
We also created under my tenure, an office of mission-driven banks to highlight the work that they do and to provide additional resources for them, and to have them have an advocate inside the FDIC for the work that they do. So I do think it's concerning that the number is decreasing, but I do think there are ways to, through the mission-driven bank fund, through technical assistance, to this revised process on both how to get deposit insurance for new banks, as well as to allow minority deposit institutions to bid on failed minority depository institutions, and other ways that we have done to allow these banks to prosper. And to also let them know that we at the FDIC care profoundly about the work they do in their communities. And we care profoundly for the significance they have for improving equity in the United States.

Penny Crosman: (13:57)
Are there any traditional banks or fintechs that you feel have done some good work in this area of trying to support low-income communities and the underbanked?

Jelena McWilliams: (14:10)
Yes, absolutely. And I will say among the banks, you have anybody from a community bank to a very, very large bank — some of the global systemically important banks do significant investments in their communities. Quite often, it is through the Community Reinvestment Act. And quite often it is because it's the right thing for the communities that they serve. So we have seen very, very large banks be very proactive about creating community plans and work with local communities where they have branches and where they have customers to make sure that they have access to patient capital and equity. And I will say from the community banks, we know there has been a lot of emphasis, especially in small communities, on having a personal relationship with their borrowers and customers.

Jelena McWilliams: (14:58)
So if they can't put a lot of money behind that, like the larger banks, then at least they will do more of a service-oriented banking model on the fintech side. I have been, frankly, really pleased that a number of fintechs have done extensive lending to low- and moderate-income consumers and that their algorithms and machine learning models, artificial intelligence models are so good that they're able to take a look at previously unbankable customers, customers that couldn't go to a bank for a number of reasons, including our regulations, to get a small dollar loan. These fintechs are able to look at their profile, at their spending habits, at their payment of their utility bills, rent and cell phone bills, and to ascertain whether they are a good credit risk or not.

Jelena McWilliams: (15:47)
And then offer them, frankly, in many cases, very good quality credit for these consumers who are perhaps in the traditional 520 and above credit score. Now they have access to the 720 type of credit quality. And so I have seen a lot of wonderful movement in that area. Is it enough? No, it's never going to be enough. We have to keep on working and making sure that innovation can prosper, entrepreneurship can prosper in the United States that we don't kill these good business models. And that we find the path for banks to team up with these fintechs for the benefit of the consumers.

Penny Crosman: (16:24)
That's another thing I wanted to ask you about, because I know that you have also tried to encourage innovation in the industry. For example, the FDIC has been running tech sprints for a few years. How do you look at innovation in financial services? Do you think that banks and fintechs are going in the right direction and are they doing enough? You sort of just said there's more to be done...

Jelena McWilliams: (16:49)
There's always more to be done. The glass is always half full in my world, but you should always try to fill it to the top. So yes, there's more to be done. I will say that for a long time, this is the case. Innovation has been almost like a dirty word in the regulatory sphere. If you're a regulator, you don't talk about innovation favorably, and I that's a mistake. And here's why. As regulators, we are prone to be risk averse. So less risk is good. It's better than more risk. Right? And that's a very simple formula. Having said that, we have to allow innovation to prosper because a lot of customers depend on it. People like me 30 years ago, who couldn't get a credit card, who now could get a credit card because there are different underwriting models.

Jelena McWilliams: (17:37)
And as I mentioned, artificial intelligence and machine machine learning models that could tell 30 years ago that I would've been a good credit risk like I am today. Right. And as I think about that, I think that yes, these models can be faulty. There could be problems with these models from a regulatory perspective, as well as from the consumer perspective, but let's not throw out the baby with the bathwater, let's figure out how to appropriately regulate them, work with these companies that are at the cutting edge of technology to figure out how can their models work better. And then how can we appropriately regulate that risk and allow them to manage it as well? And so, yes, I have been fighting for innovation. I sometimes feel like I'm on an island, just yelling, "innovation is good!" But I will continue doing that, even post my chairmanship, because I think it's an opportunity for us to ensure that more consumers can get good quality products and services and responsible credit while making sure that the United States remains the preeminent financial marketplace in the world. And that's something that is both a matter of our national security and economic growth. And so I will continue advocating for responsible innovation in any which way I can.

Penny Crosman: (18:47)
One thing that Jamie Dimon at JPMorgan Chase recently praised you for was that you made it easier for banks to hire workers with minor criminal records. Was that an idea that you personally came up with and, and what drove your interest in that?

Jelena McWilliams: (19:02)
So again, it was driven partly by my understanding what it's like to struggle to become a part of the banking system in the United States. One of the early issues brought to my attention at the FDIC was the call so-called Section 19 policy statement. And it basically prevented people with certain minor offenses in the past from working at a bank. And here's the problem that I became aware of. Quite often, a 20-year-old will get hired at the bank to work as a bank teller, but the security clearance, the background check would not be done for perhaps 60 days. So they would get a job offer. They would start working in the bank and 60 days from the application being processed, let's say 45 days from this person starting to work at the bank, that background check would come back.

Jelena McWilliams: (19:51)
And it would show that they had a shoplifting incident when they were 14. And all of a sudden that person was on the street, that person lost a job. And so when we think about some of these minor crimes, I've tried to figure out what can we do to help people that have had indiscretions in their past, but are not a real danger to the financial system. What can we do to allow them to work at banks? Because in many, many, many communities around the United States that teller job is one of the best jobs they can get in the community, especially if they're starting out. And as banks are also struggling to find staffing, in many cases, they're fighting with fintechs and others to find good quality workforce, why not create an opportunity for these people that had the minimalist offenses in the past to become a part of the workforce for banks. And so I challenged the staff to find ways, and it took a little bit of drafting. Again, nothing happens quickly with government, but we were able to revise that Section 19 policy statement and allow more flexibility in our approach. And again, there's a common theme. I was told first, it couldn't be done. And then it was done. And I've learned that we can, a lot of things that many people have have told us cannot be done and even internally believed, cannot be done, it just takes a lot of goodwill and frankly, a lot of political courage and I was willing to do both.

Penny Crosman: (21:18)
So what do you plan to do next? Are you going to take some time off?

Jelena McWilliams: (21:22)
I don't know. I have never left a job without having a new job lined up, usually that's how things go. So I am going to be unemployed starting on February 5th. And I will probably take a couple of months off, which in world means I move from the fifth gear to the fourth gear because I like to say I only know one gear and that's called hustle. So yes, I will take a little bit of time and, and just figure out where can I provide the most value continuing to fight for what I believe is right and continuing to fight for the United States and our economy and the people that I have grown to love both in our regulatory system and the people that banks serve.

Penny Crosman: (22:05)
Well, Chairman McWilliams, thank you so much for joining us today. I really appreciate it.

Jelena McWilliams: (22:09)
Thank you, Penny. And thank you for the opportunity. I'll see you on the other side.

Penny Crosman: (22:14)
Thank you for listening to the American Banker podcast. I produced this episode with audio production by Kelly Malone. Special thanks this week to Jelena McWilliams at the FDIC. Rate us, review us, and subscribe to our content at www.americanbanker.com. For American Banker, I'm Penny Crosman and thanks for listening.