FDIC Publishes 2023 Risk Review

August 14, 2023 — The Federal Deposit Insurance Corporation (FDIC) today published its 2023 Risk Review. The report summarizes conditions in the U.S. economy, financial markets, and banking industry.

The 2023 Risk Review provides a comprehensive summary of key developments and risks in the U.S. banking system, as in prior reports, and includes a new section focused on crypto-asset risk. The report focuses on the effects of key risks on community banks in particular, as the FDIC is the primary federal regulator for the majority of community banks in the U.S. banking system.

The FDIC’s Risk Review is an annual publication and based on year-end banking data from the prior year. This year’s expanded report incorporates data and insights related to the recent stress to the banking sector through first quarter 2023. FDIC intends to publish its next Risk Review in the spring of 2024.

FDIC: PR-61-2023

Read the FDIC’s 2023 Risk Review

On May 1st, the FDIC released a report titled “Comprehensive Overview of Deposit Insurance System, Including Options for Deposit Insurance Reform” along with a statement from FDIC Chairman Martin J. Gruenberg.  The Report, the related press release and Chair Gruenberg’s statement can be found at the links provided.

The report provides a history of bank deposit insurance in the United States, outlines objectives of and possible consequences of bank related deposit insurance, tools utilized to support those objectives and address possible consequences of the three main options to consider for future deposit insurance including limited coverage, unlimited coverage and targeted coverage.  Finally, the report discusses the implication of excess deposit insurance coverage and some additional options that may be meaningful.

In reviewing the three options of deposit insurance coverage, the FDIC considered the following:

  • Limited Coverage or maintaining the current system of deposit insurance with the possibility of increasing the deposit insurance limit.
  • Unlimited coverage or fully insuring all deposits, or
  • Targeted Coverage or providing substantial additional coverage to business payment accounts without extending the same insurance to all deposits.

The report generally found that the limited coverage option does not adequately address the run risk associated with high concentrations of uninsured deposits, a trend that increased significantly since the inception of deposit insurance.  Further, the review indicates that unlimited coverage would effectively remove run risk, however, its impact on bank risk-taking and earnings due to substantial assessment increases would be detrimental to the broader financial market.

While no specific insurance threshold was provided in the report, the FDIC suggests that the targeted coverage option would provide substantial additional coverage to business payment system accounts without extending similar insurance to all deposits and would provide the most effective financial stability relative to its costs. This option would present challenges related to defining the types of non-investment accounts deposit insurance should apply and could potentially decrease transparency to consumers due to increased complexity.  To be effective, complimentary tools necessary to ensure effectiveness of this option would need to be implemented including:

  • Considering interest rate restrictions on accounts for which additional coverage is extended;
  • Consider simplification of ownership categories to decrease complexity;
  • If large accounts remain partially insured require that large deposits are secured; and
  • If large accounts remain partially insured, place limits on convertibility for large deposits.

The FDIC also briefly discussed excess deposit insurance coverage that could address different aspects of the current deposit insurance system and warranted consideration. While considering this parallel option, the FDIC determined that its voluntary nature was unlikely to have notable broader market effects as those institutions most needing coverage would likely be the most likely to opt out of such coverage.

NASCUS staff are currently reviewing the report and will provide updates on the issue as its progresses.

The FDIC is issuing supervisory guidance to its supervised institutions to ensure that supervised institutions are aware of the consumer compliance risks associated with assessing overdraft fees on a transaction that was authorized against a positive balance but settled against a negative balance (APSN).

Statement of Applicability: The contents of, and material referenced in, this FIL apply to all FDIC-supervised financial institutions.

Highlights:

  • The guidance expands on an FDIC 2019 Supervisory Highlights article titled “Overdraft Programs:  Debit Card Holds and Transaction Processing” by discussing the FDIC’s concerns with both the available and ledger balance methods used by institutions when assessing overdraft fees.
  • FDIC supervised institutions should be aware of heightened risks of violations of Section 1036(a)(1)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and Section 5 of the Federal Trade Commission (FTC) Act when assessing overdraft-related fees on APSN transactions.
  • Unanticipated and unavoidable overdraft fees can cause substantial injury to consumers. Due to the complicated nature of overdraft processing systems and payment system complexities outside the consumer’s control, consumers may be unable to avoid injury.
  • Institutions are encouraged to review their practices regarding the charging of overdraft fees on APSN transactions to ensure customers are not charged overdraft fees for transactions consumers may not anticipate or avoid.
  • Institutions should ensure overdraft programs provided by third parties are compliant with all applicable laws and regulations.
Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative Transactions

Related Resources:

Courtesy of Candice Choi, Wall Street Journal (click here to listen to the story)

John Bovenzi is part of the small club of people who have run a failed U.S. bank, a group whose membership expanded by two this month when regulators swooped in to take over Silicon Valley Bank and Signature Bank.

In 2008, Mr. Bovenzi, a longtime Federal Deposit Insurance Corp. staffer, took the helm at the failed mortgage lender IndyMac. What he discovered, and what likely faces executives running the latest failed banks: Deposits flood out, but few come in. The employees who haven’t left are looking for other jobs. It is possible some of the remaining higher-ups are responsible for what went wrong—and might even be questioned by law-enforcement officials.

“So that’s a little twist—you’re relying on people, but at the same time, investigators want to talk to everybody,” Mr. Bovenzi said.

Until the failures of SVB and Signature, IndyMac was the second-biggest bank failure in U.S. history, behind Washington Mutual. Now the two recent collapses have bumped IndyMac into fourth place.

Like IndyMac, both SVB and Signature were taken over by the FDIC. Unlike with IndyMac, the FDIC was able to draw on a roster of seasoned banking executives it had assembled in recent years for such emergencies. Tim Mayopoulos, former chief executive officer at Fannie Mae and a former top executive at Bank of America Corp., jumped in at SVB. Greg Carmichael, a former Fifth Third Bancorp chief, parachuted into Signature.

When IndyMac failed as its home loans soured, the FDIC didn’t have a reserve corps of bank executives. It fell to Mr. Bovenzi, the agency’s chief operating officer, to take over.

Mr. Bovenzi and a team from the FDIC flew to IndyMac’s headquarters in Pasadena, Calif., on a Thursday, fanning out to different hotels and avoiding use of government-issued identification. “We didn’t want the whole town to know it was filled with people from the FDIC the night before [the bank] was going to close,” he said.

When the FDIC team arrived at IndyMac’s offices the next day, Mr. Bovenzi said IndyMac’s management didn’t seem surprised—the CEO had already cleaned out his office.

The FDIC shut down the bank’s branches soon after, which was before the end of the business day on the West Coast. That caused a headache when newspapers carried photos of customers banging on the doors of bank branches, desperate to get their money out.

On the first weekend after seizing the bank, the FDIC team’s priority was to separate insured and uninsured deposits in advance of an expected influx of customers on Monday morning. Unlike with Silicon Valley Bank and Signature, regulators only backed insured deposits, which at the time were capped at $100,000. (Later, the FDIC raised the limit to $250,000.)

Mr. Bovenzi’s other pressing goal: telegraphing to the public through media interviews that insured deposits were safe. It was a tough sell given the public angst over IndyMac.

“The only story that drew more attention that weekend was the birth of twins to Angelina Jolie and Brad Pitt,” Mr. Bovenzi wrote in a book about his experiences at the FDIC.

Another challenge: Mr. Bovenzi, who was then 55, had never worked at an actual bank, having started at the FDIC after graduate school. He said his deep knowledge of deposit insurance made him believe he could stabilize a chaotic situation.

“He just exuded so much confidence,” said Arleas Upton Kea, the FDIC’s head of internal operations at the time and one of the agency staffers who flew out to IndyMac. “And having people keep their money in financial institutions is all about maintaining confidence.”

Even so, Mr. Bovenzi’s reassurances didn’t initially work.

“When we opened Monday morning, there was a bank run,” Mr. Bovenzi said. “There were lines at all the branches of IndyMac.”

It was hot in Pasadena that July, but Mr. Bovenzi still looked the part of a government official in suit and tie when he went outside to try to convince people that they didn’t need to stand in line. People were mostly calm, but refused to budge.

The bank eventually handed out numbers to customers giving them a time when they could return to withdraw money. That thinned the lines but didn’t slow withdrawals. Over the first few weeks, customers drained about $3 billion in deposits, Mr. Bovenzi said.

At the same time, regulators were trying to keep employees and put together retention packages for those who stuck it out. Not everyone was asked to stay. The loan-origination offices were shut down as the lender’s focus shifted to servicing existing mortgages.

“We weren’t interested in making new loans,” Mr. Bovenzi said. “That’s what got the bank in trouble in the first place—all the subprime mortgages.”

Mr. Bovenzi, now 70, recalls that as the new chief he moved into the ousted CEO’s corner office, which was on the sixth floor, with expensive art and floor-to-ceiling windows looking out to the San Gabriel Mountains. The former CEO’s company car, a Mercedes, was still in the parking lot. Mr. Bovenzi said he refrained from driving it. The car became one of the first IndyMac items the government sold.

Down the hallway, Mr. Bovenzi passed a man sitting in an office. “At one point, I went over and asked him, ‘Well what do you do?’ And he says, ‘Well I’ve got a gun, I’m here to guard the office and the CEO,’” said Mr. Bovenzi, citing threats the company had been getting.

Like the Mercedes, that employee was soon gone.

Over time, the situation stabilized. Mr. Bovenzi was able to fly home more to see his wife, Erica, more often. At first, he told her that IndyMac would be a short-term assignment. “He comes home and he says he’s going to California for a couple of weeks, and that wasn’t true,” said Ms. Bovenzi, who was a deputy general counsel at the FDIC at the time.

It wasn’t until March 2009 that regulators sold IndyMac. Mr. Bovenzi left the FDIC soon after, joining Oliver Wyman, a management-consulting firm.

Today, the Bovenzis run a financial-services consulting firm in Alexandria, Va. Mr. Bovenzi expects Silicon Valley Bank’s eventual sale to be much quicker than that of IndyMac. Already, the FDIC announced that New York Community Bancorp’s Flagstar Bank would take on most of Signature’s deposits.

Still, Mr. Bovenzi warned of unexpected twists. At IndyMac, Lehman Brothers was hired to advise on the sale of the lender. Soon after, the investment bank itself collapsed in dramatic fashion.

“It was one more thing that can go wrong,” Mr. Bovenzi said.

November 29, 2022 — The Conference of State Bank Supervisors is complaining that none of the nominees for the Federal Deposit Insurance Corp. board has state regulatory experience on the eve of their Senate confirmation hearing.

The Senate Banking Committee is scheduled to consider Wednesday the nominations of Martin Gruenberg for permanent chair of the agency, Travis Hill for vice chair and Jonathan McKernan for an open seat on the board. Gruenberg is a Democrat, and Hill and McKernan are Republicans.

CSBS has repeatedly urged Congress to abide by a 1996 amendment to the Federal Deposit Insurance Act that says at least one of the FDIC’s five board members must have experience as a state banking regulator. None of President Biden’s three picks, nor the two other members of the board, meet that requirement, CSBS said in a letter Tuesday to committee Chairman Sherrod Brown, D-Ohio, and Sen. Pat Toomey of Pennsylvania, the panel’s top Republican.

“The nominees before the Senate may otherwise be qualified for the positions to which they have been nominated,” the letter said. “However, they do not possess the perspective that only an individual with state bank supervisory experience can bring to meet this fundamental statutory obligation.”

The last director with state experience, the CSBS has said, was former Comptroller of the Currency Thomas Curry, who left in 2012.

The FDIC nomination process has been fraught since the beginning, with the White House announcing its two Republican choices before settling on Gruenberg — the acting chair — as its choice to hold the permanent job. The move by the White House stunned observers, who noted that without a confirmed chair, Hill would be in line to become acting chairman of the agency.

Courtesy of Claire Williams, American Banker

One of the FDIC’s most important responsibilities is to prudently manage the Deposit Insurance Fund. The FDIC’s ability to credibly guarantee our nation’s insured deposits is vital for the stability of the banking system. The Deposit Insurance Fund has gone broke twice in the last 30 years.1 Just as large financial institutions should not expect a bailout from taxpayers, neither should the FDIC.

The law requires the FDIC’s Board to establish and implement a restoration plan when the Deposit Insurance Fund’s reserve ratio falls below 1.35%.2 The plan must bring the reserve ratio back above the statutory floor within eight years. The fund’s reserve ratio breached the statutory floor on June 30, 2020. In the last six months, the situation has worsened, with the reserve ratio falling from 1.27% to 1.23%. The Deposit Insurance Fund is currently about $12 billion below the minimum prescribed by law. Given the serious risk of missing the statutory deadline, it is critical that the Board take steps now, while banking industry profits are robust. Otherwise, the Board may be forced to impose a larger rate hike later when economic conditions may be different.

I am voting in favor of shoring up the Deposit Insurance Fund by amending the restoration plan required by law and by proposing a small premium increase. These are important short-term actions.

Over the long term, I believe the Board should explore a new mechanism to automatically adjust premiums upward and downward based on economic conditions, rather than relying on ad-hoc actions. For example, calibrating assessment rates based on banking sector profitability, or a combination of metrics, is worth exploration. The Board should also evaluate the relative burden of assessments on banks of varying sizes, including whether the largest firms, especially global systemically important banks, should be paying a higher share of the assessments than they do today.

Regulators expect a bank board to actively monitor management’s execution of the bank’s objectives and require adjustments if warranted by changing conditions. That is sound governance. I am pleased we are demonstrating that we will hold ourselves to that same standard.

Link to article. 

1. The Deposit Insurance Fund balance went negative in the early 1990s after the Savings and Loan Crisis and 1990-91 economic recession. The balance again went negative due to the 2008 financial crisis.

2. 12 U.S.C. 1817(b)(3)(B) and (E).

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(Feb. 4, 2022) FDIC Board Chairman Jelena McWilliams is scheduled to step down today (Friday, Feb. 4), following through on the announcement she made late last month.

In her resignation letter submitted to the White House on New Year’s Eve, McWilliams gave no indication why she was resigning, three-and-a-half years into her five-year term (she was nominated by President Donald Trump [R] in December 2017 and confirmed by the Senate in late May 2018).

Since then, the White House has been silent about who will succeed McWilliams, either as a permanent chairman of the agency’s board or as an acting chairman to take over after she leaves today. The only member of the agency’s board who was appointed (and confirmed by the Senate) specifically to serve on the panel is Board Member (and former chairman) Martin Gruenberg, a Democratic appointee. He is serving in a “holdover” capacity since his term expired in December 2018. Unless he resigns, he may remain on the board until a successor is confirmed by the Senate.

Meanwhile, McWilliams received a note of acknowledgement from her regulatory colleagues at NCUA with a joint statement signed by all three board members.

NCUA Chairman Todd M. Harper said he had “seen firsthand the expert knowledge, considerable skill, and strategic insights she provides in issues and making decisions.” Vice Chairman Kyle Hauptman said McWilliams is “an inspiring example of the American dream, an immigrant from a statist regime who then achieved here at the highest levels.” Board Member Hood said she “played a pivotal role in creating an effective regulatory environment for the U.S. banking system.”

LINK:

NCUA’s Harper, Hauptman, and Hood Commend Chairman McWilliams for Her Service to the FDIC

(Jan. 14, 2022) Measuring the effectiveness of digital identity proofing – the process used to collect, validate and verify information about a person – is the aim of a “tech sprint” announced jointly this week by the FDIC and FinCEN.

The two agencies said they have several goals in the effort. Those include: increasing efficiency and account security, reducing fraud and other forms of identity-related crime (including money laundering and terrorist financing), and fostering “customer confidence in the digital banking environment.”

“Digital identity proofing is a foundational element to enable digital financial services to function properly,” the agencies said in their release. “This element is challenged by the proliferation of compromised personally identifiable information (PII), the increasing use of synthetic identities, and the presence of multiple, varied approaches for identity proofing.”

The FDIC and FinCEN said the tech sprint will ask participants to answer the challenge question of: “What is a scalable, cost-efficient, risk-based solution to measure the effectiveness of digital identity proofing to ensure that individuals who remotely (i.e., not in person) present themselves for financial activities are who they claim to be?”

LINK:

Joint Release/FDIC and FinCEN Launch Digital Identity Tech Sprint

 

(Jan. 7, 2022) The leadership of the FDIC will be changing next month following the surprise resignation New Year’s Eve by board Chairman Jelena McWilliams. In a letter to President Joe Biden (D), McWilliams said her resignation would be effective Feb. 4.

In her letter, McWilliams gave no indication why she was resigning now, three-and-a-half years into her five-year term (she was nominated by President Donald Trump (R ) in December 2017 and confirmed by the Senate in late May 2018). She did note that it has been a “a tremendous honor to serve this nation,” and that she “did not take a single day for granted” during her service.

McWilliams’ resignation will leave the FDIC Board with only one appointed member, holdover board member (and former chairman) Martin Gruenberg, a Democratic appointee. His own five-year term on the board expired in December 2018; he has been serving in the absence of a successor being confirmed by the Senate. Neither Biden, nor Trump before him, nominated a successor.

The other appointed seat on the board, that of vice chairman, has been vacant since April 2018. It was filled by Thomas Hoenig, whose term expired; he had served since November 2012.

The other seats on the five-person board are held, by statute, by the leaders of the Consumer Financial Protection Bureau (CFPB), Chairman Rohit Chopra, and the Office of the Comptroller of the Currency (OCC), Acting Comptroller Michael Hsu. Both are Democratic appointees.

So far, the White House has given no indication who it will name as McWilliams’ successor.

LINK:

FDIC Chairman Jelena McWilliams Announces Her Resignation

(Nov. 24, 2021) A final rule requiring banks to notify their federal regulators of certain cyber incidents with potentially systemic effects was approved jointly late last week; it takes effect April 1, with compliance required by May 1. NCUA has not yet adopted a similar rule for credit unions.

Adopted by the Federal Reserve, FDIC, and OCC, the final rule requires a banking organization to notify its primary federal regulator of any “computer-security incident” that rises to the level of a “notification incident” as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred, according to a notice for the Federal Register.

The final rule defines a “notification incident” as a computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, a banking organization’s:

  • ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business;
  • business line (or lines), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value; or
  • operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.

The final rule also requires a bank service provider to notify each affected banking organization customer as soon as possible when the bank service provider determines that it has experienced a computer-security incident that has caused, or is reasonably likely to cause, a material service disruption or degradation for four or more hours, the notice states.

LINK:

Agencies approve final rule requiring computer-security incident notification

(Nov. 5, 2021) Payment stablecoins and their arrangements should be subject to a federal regulatory framework on a consistent and comprehensive basis through an act of Congress – including by requiring that stablecoins may only be issued by federally insured credit unions and banks, according to a report issued this by a presidential working group focusing on the digital currencies.

Issued by the Treasury Department’s “President’s Working Group on Financial Markets,” along with the FDIC and the OCC, the report also said that such federal legislation would complement existing authorities held by federal regulators meant to ensure market integrity, investor protection and prevention of illicit finance.

“Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options,” said Treasury Secretary Janet L. Yellen in a statement. “But the absence of appropriate oversight presents risks to users and the broader system.”

The report’s conclusions are being interpreted by some that stablecoin issuers would have to secure either a bank or credit union charter before participating with the payment method. In any event, a key recommendation is that legislation be enacted that only allows stablecoins to be issued by federally insured financial institutions.

Key concerns that should be addressed in legislation, according to the report, include:

  • Risks to stablecoin users and protection against stablecoin runs, which legislation should address by requiring stablecoin issuers to be insured depository institutions, “which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.”
  • Payment system risk, which legislation should address by requiring custodial wallet providers to be subject to appropriate federal oversight. “Congress should also provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards,” the report stated.
  • Systemic risk and concentration of economic power, which should be addressed by legislation that requires stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. “Supervisors should have authority to implement standards to promote interoperability among stablecoins,” the report asserts. “In addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on use of users’ transaction data.”

In the meantime, the report states, the FDIC and OCC are committed to taking action to address risks falling within their jurisdictions, “including efforts to ensure that stablecoins and related activities comply with existing legal obligations, as well as to continued coordination and collaboration on issues of common interest.”

The report states that while Congressional action is “urgently needed” to address the risks inherent in payment stablecoins, “in the absence of such action, the agencies recommend that the Financial Stability Oversight Council (FSOC) consider steps available to it to address the risks outlined in this report.”

The report also notes that work on digital assets and other payment innovations related to cryptographic and distributed ledger technology is ongoing throughout the Biden Administration. “The administration and the financial regulatory agencies will continue to collaborate closely on ways to foster responsible financial innovation, promote consistent regulatory approaches, and identify and address potential risks that arise from such innovation,” the report stated.

LINK:

President’s Working Group on Financial Markets Releases Report and Recommendations on Stablecoins

(Nov. 5, 2021) Climate change poses “significant challenges” to the safety and soundness of financial institutions and the stability of the financial sector more broadly, the Federal Reserve said in a statement this week. The assertion was issued in the wake of a declaration issued earlier in the week by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), as part of the international conference (the “Conference of Parties 26” or COP26) held in Glasgow, Scotland, about climate change. “A sustained global response by national authorities, the international community, and the private sector can address the financial and economic implications of climate change,” the Fed statement said … A new Office of Minority and Community Development Banking to support the FDIC’s work with minority depository institutions (MDIs), community development financial institutions (CDFIs), and other “mission-driven” banks was announced this week by the agency. The FDIC said the new office “will further promote private sector investments in low- and moderate-income (LMI) communities.”

LINKS:

Federal Reserve Board issues statement in support of the Glasgow Declaration by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS)

FDIC Creates New Office of Minority and Community Development Banking to Support Mission-Driven Banks