- Key insight: The Government Accountability Office told the Federal Deposit Insurance Corp. to consider rotating case manager examiners across banks to prevent regulatory capture.
- Supporting data: The GAO previously found the Office of the Comptroller of the Currency and Federal Reserve, unlike the FDIC, require case managers to rotate every five years.
- Forward look: The agency also pushed the FDIC to establish more concrete timelines and results in how it addresses blockchain-related risks.
A federal watchdog agency pushed the Federal Deposit Insurance Corp. to show progress on addressing regulatory capture and blockchain-related risks, according to a letter from the Government Accountability Office released publicly on Monday.
In the letter, the GAO's chief acting Comptroller General Orice Williams Brown told FDIC Chair Travis Hill that his agency should consider a system of shuffling bank supervisors from post to post, a method meant to uphold examiners' impartiality, saying "the 2023 bank failures raised questions about whether the federal banking regulators took sufficient action to ensure that financial institutions promptly addressed supervisory concerns, such as weak liquidity and risk management practices."
"In 2024, we found that FDIC did not require periodic rotation of assignments for certain case managers, which could compromise their independence and interfere with supervision outcomes," the official wrote. "By implementing rotation requirements, as we recommended, FDIC could mitigate threats to independence and better ensure that escalation decisions are independent and evidence-based."
The letter raises concerns the GAO flagged in a November 2024 report examining regulators' response to bank failures, particularly with a focus on how effectively supervisors escalated observed weaknesses at the banks they oversaw. The report found that while the FDIC "generally followed guidance for communicating key details of supervisory concerns to selected institutions," certain policies made it more susceptible to "regulatory capture."
The GAO's 2024 report found that examiners in charge of large institutions' safety and soundness examinations were subject to rotation and that examiners in charge of small institutions were prohibited from remaining in the same post for more than two consecutive examinations per bank. However, unlike other prudential regulators like the Federal Reserve or Office of the Comptroller of the Currency, the FDIC did not require case managing supervisors to rotate posts regularly.
This means case managers supervising large banks could remain assigned to the same firm for years on end. The OCC and Federal Reserve were found to have policies that allowed similarly situated case managers to rotate every five years.
"While case managers may not meet all of FDIC's criteria for rotation requirements — specifically, they do not always have an on-site presence — they play a key role in the supervisory process and have important decision-making authority," the 2024
Indeed, the study went on to detail what it described as "biased behavior" reported by examiners, including potentially inappropriate informal meetings between case managers and evidence of "regulatory capture," a risk the FDIC identified itself as a problem in 2019.
"Several examiners also described instances where managers overrode examiner assessments of an institution's condition without consulting with examinations teams or providing adequate support," the 2024 report noted. "As noted earlier, FDIC has rotation policies in place for examiners in charge. Rotation requirements for continuous examination process case managers could also help ensure they maintain their supervisory independence."
In a separate finding, Monday's GAO report also reiterated a 2023 finding about the need for regulators to coordinate with each other to address blockchain-related risks. The 2023 study was concluded before the passage of the GENIUS Act last year or the ensuing implementation guidelines.
Even so, Monday's letter suggests one particular aspect of the 2023 report — regulators' lack of coordination on blockchain risks — remains a concern. That particular recommendation remains open on
In its prior recommendation, the GAO suggested the FDIC work with the leadership of the other financial agencies including the Consumer Financial Protection Bureau, OCC, Fed and market regulators to establish a more binding timeline along which they would agree to deal with blockchain-related risks to the financial system.
"FDIC noted it has coordinated through venues including the Financial Stability Oversight Council, the President's Working Group, and some international organizations,"
The GAO acknowledges the regulators have established a number of working groups to share ideas and concerns about potential risks in the digital asset space, but the GAO's outstanding concerns center on the timely actionability of the current framework.
"To fully implement the recommendation, the agencies should continue to work towards developing processes for responding to those risks and challenges that cross regulatory jurisdictions within agreed-upon timeframes," the GAO's website says.
