Where FDIC, OCC chiefs differ on post-pandemic banking
WASHINGTON — Two banking agency heads weighed in Friday on how to increase financial inclusion, illuminating key differences in how they may approach challenges left in the wake of the coronavirus pandemic.
The panel, featuring Federal Deposit Insurance Corp. Chairman Jelena McWilliams, acting Comptroller of the Currency Brian Brooks and hosted by Financial Health Network CEO Jennifer Tescher, focused on the question of how financial regulatory policy might — or might not — help shore up Americans' financial well-being once the pandemic subsides.
“The one-two punch of the pandemic and the resulting financial fallout has created significant uncertainty about the overall health of the economy, especially since we just don't have a good sense yet of how long it will take us to get back to quote-unquote, ‘normal,’ ” Tescher said as she introduced the panelists.
Given the strength of the economic shock and the number of temporary government relief measures, such as bolstered unemployment benefits, that could expire as soon as next month, “this really is creating a perfect storm, certainly for consumers and potentially for the banks that serve them,” Tescher said.
What follows is a summary of highlights from the discussion, which was conducted by videoconference.
In the early days of the pandemic, U.S. financial regulators had a loud-and-clear message for their supervised banks: Sit down with impacted customers and make it work, whether that means deploying temporary forbearance measures, restructuring loans, or even emphasizing small dollar lending.
Five months into the pandemic, that is still the approach being taken by both the FDIC and OCC. But the remarks of McWilliams and Brooks revealed significant differences in their oulooks.
Asked how the FDIC is advising its banks to weather the possibility of a perfect economic storm, McWilliams pointed to the agency’s early steps to grant relief to both consumers and banks.
“Early on, we had issued a statement encouraging banks to proactively modify these loans — to go out and call their customers. Literally, we said, call your small-business customers, call your individual customers [and ask]: Did you lose a job?” McWilliams said.
McWilliams did not weigh in on the overall health of the economy during the panel. But she emphasized that the FDIC will continue to encourage relief to borrowers as long as the pandemic remains a factor in American public life.
“How long are we willing to go? However long is necessary,” McWilliams said. “We will do what it takes to make sure that the consumers are not disproportionately impacted above and beyond, already, the shock to the economy that they're experiencing with the loss of wages.”
Brooks said he would echo McWilliams’ remarks on regulatory relief. But he also struck an optimistic tone about the economic outlook for the country, suggesting that he is hopeful that emergency relief measures will not need to remain in place for too much longer.
“The economic impact of the last three months, I’d emphasize, was human-caused,” Brooks said. “We were confronting an unknown disease of unknown magnitude. And so we made the collective decision to turn off the economy.”
Today, Brooks said, policymakers have a much clearer idea what the health risks of the disease are. “And thus we've, in many states, narrowed the scope of those orders and had more targeted responses with the result that the economic data now looks very, very positive if it can be sustained.”
“I think the issue for consumers is, can we get to a place where the economy's turned back on?” Brooks continued. “If we can, then I think the need for these extraordinary interventions will over time go away. And if not, then they won't.”
The two regulators also commented on the potential reintroduction of postal banking, an idea that has gained steam in recent months in some left-leaning circles as one solution to the high cost of small-dollar lending for distressed consumers.
Brooks was not smitten by the idea, arguing that private-sector banking would be a more efficient and successful way to address the lack of access to the mainstream financial sector among low- to moderate-income Americans.
“I think anybody who's been in the Apple Store recently, and also been in the post office recently, knows that we do an amazing job in this country of harnessing market forces and bringing beautiful private-sector experiences to people who can afford it and have access,” Brooks said. “Everybody wants to go to the Apple Store. Nobody wants to go to the post office.”
“I would say if the most aspirational we can be is to consign lower income people to banking at the post office, that’s a bad [idea], and I think we can do better than that,” he said.
McWilliams appeared more open to the idea, depending on how a postal banking system is designed.
“I don’t have enough information to tell you, oh, this would be great, or this would not be good at all,” she said in an interview with American Banker after the panel, adding that the FDIC was responsible for implementing directives from Congress.
“In general, I think more competition is good. I do believe it's actually private-sector property [that] provides more agility in terms of competing than the government itself,” she said. “But again, you know, we have real communities where a postal office may be the only thing there in a little town. So to the extent that that’s the only way for them to access banking services, I would be open to it, but I would have to figure out what that looks like.”
The future of artificial intelligence
The role of artificial intelligence across the financial system, whether in loan underwriting, regulatory compliance, supervisory work or beyond, has been debated fiercely for years. The limitations of the technology have made banks and regulators alike wary, given the potential for a biased algorithm or system to run afoul of fair- lending laws.
Still, both McWilliams and Brooks have emphasized the importance of technology and innovation in the banking sector, and they’ve both acknowledged the potential good that could come of widespread, well-regulated AI use in credit underwriting.
“There is a huge potential, with respect to artificial intelligence, to actually bring into the fold people who are not in the fold right now,” McWilliams said during the panel on Friday, referring to the 45 million or so Americans without credit scores. “I think it's something that regulatory agencies have a lot more work to do in this space.”
The FDIC chair also emphasized the difficulties of monitoring AI for signs of bias. “We’re struggling with exactly how to supervise for AI biases,” she said. “A lot of these companies are on the cutting edge of the technology, and our examiners need to develop skill sets to catch up in some cases.”
Brooks, on the other hand, suggested that the potential for bias should not stop innovators from developing technology to improve existing credit underwriting infrastructure, or prevent policymakers from debating the potential tradeoffs of AI.
“Right now, the credit underwriting systems we have in this country — the very best of them — only capture about 60% of credit performance, meaning that 40% of the time, they're either approving loans that are going to default, or they've denied loans that wouldn't have defaulted,” Brooks said. “So they're both overinclusive and underinclusive. They're highly, highly flawed.”
Brooks predicted that if banks began deploying AI in underwriting today, two things would occur: More loans would be made to minority borrowers, and the disparity in loan approval rates between racial groups would grow.
“What I believe would occur when we start unleashing AI on underwriting is something that we need to debate as a society,” Brooks said during the panel. “I believe we would significantly increase the number of minority loans, compared to the status quo. And I also believe that it is possible we will increase the statistical disparity between minorities and nonminorities.”
Brooks suggested that the gap in approval rates would necessarily increase as more people entered the credit system, as many of those outside it today are disproportionately poor. “Those people do not get considered for loans today, so they're not in the statistics,” he said.
“Once we bring them in, imagine a world where we could make a million new African American mortgages that currently don't get made,” he said. “But imagine that the approve-deny statistical disparity goes up by 30 basis points. Is that a good thing or a bad thing?”
Brooks emphasized the need for a policy debate on the topic, but said that he would likely come out on the side of giving more credit to more people. “I would rather see more people getting credit, even if it means that there's a statistical artifact that makes it look unfair, than to consign those million people to a life of renting because I don't want a statistical disparity,” he said.