- Key insight: FDIC Chair Travis Hill wants to move away from lengthy resolution planning for banks, and instead use technology to build rails along which the agency can gather relevant data when banks fail to help resolve them quickly and reduce banks' compliance costs.
- Supporting data: The chair says the agency is aiming to reduce small bank assessments by two basis points and provide large banks a comparable assessment discount if they give the FDIC access to their systems ahead of time.
- Forward look: The chair says many of these reforms are progressing, and is working to open a "pre-qualification-process" to allow nonbanks to be poised to bid on failed banks later this year.
Federal Deposit Insurance Corp. Chair Travis Hill on Tuesday proposed overhauling the agency's approach to bank-failure planning by shifting the focus away from long resolution plans and toward creating rails on which the FDIC can quickly access operational data if an institution looks to be failing.
Hill, in a speech delivered to the Chamber of Commerce, said the agency is considering narrowing the scope of the insured depository institution, or IDI, resolution-planning rule to emphasize information that would be useful during an actual resolution. The FDIC is also exploring a framework under which larger banks could receive lower deposit-insurance assessments if they demonstrate an ability to rapidly establish a virtual data room and provide the agency with advance access to key internal systems and third-party service providers.
"The FDIC would establish a new 'resolution readiness adjustment' to our deposit-insurance assessment framework for larger banks, which would allow any bank subject to the large-bank scorecard to qualify for a downward adjustment to its quarterly assessment if the bank demonstrates its ability to populate a virtual data room in a short period of time and/or provides the FDIC with temporary access to the bank's third-party service provider and/or internal systems to enable the FDIC to build IT infrastructure to quickly access data in the event of failure," Hill said. "Fundamentally, an ability to quickly populate a VDR and/or providing the FDIC with advance systems access is likely to lower the cost of a bank's failure, and therefore should result in a lower deposit insurance assessment."
The proposals reflect Hill's
He noted that in most bank failures, which are usually small firms of which the agency is well aware, the agency has plenty of time to prepare an institution for sale before it closes. Large bank failures, however, often play out rapidly and are far more complex to wind down.
"Larger institutions are more likely to fail with shorter runways, given greater public scrutiny and a higher likelihood of liquidity-induced failures," Hill said. "In these cases, analyzing and understanding a bank's systems, infrastructure and data in order to market and sell the institution is very difficult in a short period of time, given the volume and complexity of data sets and IT systems."
One of Hill's most significant proposals would overhaul the FDIC's resolution-planning requirements for the largest firms: those over $100 billion in assets and in some cases, those with over $50 billion, with the latter already subject to slightly less failure-planning regulation.
He questioned the value of requiring banks to prepare detailed narrative plans outlining theoretical failure game plans. Instead, he suggested focusing on operational information that would help the FDIC execute an orderly resolution if needed.
"The FDIC's historical approach to resolution planning for large insured depository institutions needs to be fundamentally reexamined, reoriented and rationalized," Hill said. "As I have described in the past, I am skeptical of the value of requiring institutions to prepare lengthy narrative plans … our focus should be on maximizing an optimal resolution outcome while being prepared in the event that option proves unavailable."
Hill also said he's considering lowering assessment rates overall: by a full two basis points for small banks and by a smaller amount for larger banks, though he added the readiness adjustment could produce comparable discounts across firm categories.
He also says he expects to increase the asset threshold at which institutions become subject to the agency's large-bank scorecard above its current $10 billion level.
"On the one hand, we want to build up the DIF to minimize the likelihood of needing to procyclically raise assessments during a crisis, as occurred during both the 1980s crises and the 2008 financial crisis," Hill said. "On the other hand, we are mindful of the costs of assessments, which, among other costs, effectively take funds away from lending and investing in the real economy and divert them to financing the federal government."
Hill separately proposed revisiting an FDIC rule known as Part 370, which requires very large banks to maintain systems that independently calculate deposit insurance coverage. He argued that advances in the agency's own technological capabilities have diminished the need for banks to maintain duplicate systems.
"A key motivation behind Part 370 was that, at the time, there were significant concerns about the FDIC's capability to process very large volumes of deposit account records quickly enough after a bank failure to support timely deposit insurance determinations," Hill said. "Improvements in our internal capacity raise the question of whether the FDIC should continue to require large institutions to build and maintain separate insurance determination systems."
Hill also called for scaling back the FDIC's qualified financial contracts, or QFC, recordkeeping requirements under Part 371. The requirement directs banks in shaky condition — defined as a CAMELS rating of 3 or worse — to maintain data related to qualified financial contracts within 270 days. He said the regulation imposes more cost on firms than it's worth. Hill suggested the agency is mulling narrowing the requirement to compel banks only to produce a smaller set of easier to retrieve data, which he says could help "inform our decisionmaking."
"Firms have generally struggled to come into compliance within this timeframe, and many have taken well over a year," Hill said. "The purpose of the rule is to equip the FDIC with information to decide whether to terminate a bank's QFC positions in the first 24 hours following a failure. But the data provided does not yield that type of insight; for example, it fails to provide insight into the impact of terminating positions on the value of associated assets or the bank's franchise value, or any broader knock-on effects."
Hill also argued that the agency's current process for contracting private sector expertise during resolution should be liberalized, arguing the current standards prevent it from obtaining specialized private-sector expertise quickly enough during a crisis.
"Many procurement efforts take far too long, and top firms either are excluded from participating due to inflexible FDIC policies or choose not to participate because the process is too difficult, rigid, lengthy or opaque," Hill said. "We have been working on a modified procurement process … to increase competition, reduce timelines and allow for greater flexibility in the overall process, so that we can contract with top industry participants and reduce overall costs to the DIF."
Hill also urged Congress to consider establishing a de minimis exception to the least cost resolution requirement, which he says could allow the FDIC to protect uninsured depositors in cases where the additional cost to the fund is negligible.Such a change would "help mitigate the perception of a two-tier deposit insurance regime, where uninsured depositors take losses at small banks but not large banks."
Hill also said the agency plans to open a pre-qualification process to allow nonbanks to bid on failed bank assets later this year. The announcement comes after the agency's board
