FDIC's Hill defends supervision and merger reforms

• Key insight: The Federal Deposit Insurance Corp. has overhauled the bank exam process and CAMELS rating system to focus on fundamental financial risks rather than administrative policies.
• What's at stake: The proposed rules to fast-track merger approvals will factor credit unions and fintechs into competitive market analysis. 
• Forward look: New rules for stablecoin issuers require 1:1 asset reserves, two-day redemptions, and 12 months of liquid expense backstops — while explicitly excluding stablecoins from pass-through deposit insurance. 

Federal Deposit Insurance Corp. Chair Travis Hill defended the agency's deregulatory actions over the past 18 months, claiming that revisions to banks' ratings and a focus on practices that cause material financial harm will not water down safety and soundness. 

Speaking at the Federal Reserve Bank of St. Louis' annual community banking conference Tuesday, Hill addressed concerns about proposed revisions to the Uniform Financial Institutions Rating System, commonly known as CAMELs, and the Trump administration's efforts to reduce compliance burdens on small banks. He also spoke about stablecoins, which a majority of community bankers say will cause deposits to flee small banks and impact lending. 

In a question-and-answer session, Hill responded to questions from Mississippi Banking Commissioner Rhoshunda Kelly, who asked if the FDIC's new rules will provide greater clarity and certainty for banks and state regulators. 

On Nov. 2, a final rule goes into effect that sets new parameters around when examiners may issue so-called "matters requiring attention." The joint rule from the FDIC and the Office of the Comptroller of the Currency restricts the use of so-called MRAs to major issues such as operational weaknesses, risk management failures or severe consumer harm that requires immediate board intervention rather than minor procedural or compliance issues, he said. The joint rule raises the bar for examiners to flag important issues of noncompliance.

"Some of the criticisms have this perception that supervisors will have their hands tied until there are actual losses on the balance sheet," Hill said, emphasizing that the rule clearly distinguishes between actual financial harm and the risk of harm. "The intent ... is really to focus supervision. It's not to eliminate supervision or water it down such that examiners are no longer able to identify true safety and soundness."

Under the Trump administration, federal regulators have overhauled the CAMELS rating system to reduce the weight and subjectivity of the management component, which banks have lobbied heavily for. The FDIC, as part of the Federal Financial Institutions Examination Council, issued a proposal in May to revise the CAMELS ratings. CAMELS stands for six core bank issues: capital, asset quality, management, earnings, liquidity and sensitivity to market risks such as interest rate changes. 

The revisions are designed to refocus the system on factors that materially impact an institution's financial condition and risk profile, Hill said. The effort is meant to reduce double-counting, he said, because the management component had become a catch-all of sorts.

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"The way that CAMELS ratings are currently defined is you have the M rating, which is sort of a catch-all for a lot of different potential issues, and then there are within the other components, elements of how banks are managing those factors," Hill said. "What often ends up happening is a bank has an issue that is reflected in one component, but then it also gets downgraded in the management rating. It shifts the emphasis in the direction of fundamental risks." 

The FDIC also has proposed streamlined bank merger reviews to prevent merger applications from languishing. Under the new process, routine or "de minimis" applications can receive automatic approvals in as little as five business days. The FDIC will grant applicants contingent authorization within 120 days if they satisfy certain requirements, and provide a final approval decision within a year.

Hill also described how the FDIC is implementing the so-called GENIUS Act, which was signed into law in July as the first comprehensive federal framework for stablecoins — digital tokens pegged to a fixed monetary value such as the U.S. dollar. 

Kelly asked how coordination with state regulators will support the new framework for both banks and bank holding companies. The FDIC has several proposals and rulemakings outstanding that are under consideration related to GENIUS Act implementation, Hill said. 

"The proposal that we issued lays out a series of standards and expectations," Hill said. "It talks about reserve assets, how reserve assets will be defined, the general requirements around maintaining a one-to-one-reserve asset so the reserve assets are always in excess of the outstanding stablecoin issuance."

Hill also described provisions around capital requirements, redemptions, pass-through insurance and a proposed operational backstop whereby an issuer would have to maintain highly liquid assets, separate from its reserve assets. 

An annual survey of community bankers released Tuesday by the Conference of State Bank Supervisors found that bankers are concerned that stablecoin adoption will lead to siphoned deposits and reduced lending capacity. Community banks are concerned that the GENIUS Act creates regulatory "loopholes" that allow nonbank financial institutions to offer competitive yields and rewards on stablecoins, potentially triggering a significant deposit flight from traditional bank accounts. By legitimizing digital assets as a substitute for traditional deposits, banks fear they will lose low-cost deposits as a source of funding and be forced to raise interest rates to compete. 

In addition, Hill described efforts to address the dual banking system and reasons for updating rules under the Riegle-Neal Amendments Act to give state-chartered, out-of-state banks parity with national banks regardless of whether they operate physical branches.

"Of course, when the Riegle-Neal Amendments Act was passed 30 years ago it was a lot less common that banks operated without branches, as is the case today," Hill said. "Technology has changed significantly in recent decades, where branchless banking is far more common than it used to be. This is really an effort to modernize our rule to reflect the change in technology communications and provide that same parity regardless of whether an out-of-state bank is providing services through a branch or without a branch."