Remarks by Vice Chairman Travis Hill at the American Bar Association “Charting a New Course: Preliminary Thoughts on FDIC Policy Issues”
Introduction
In ten days, there will be a change in leadership at the FDIC. The agency needs a new direction, and – one way or another – I expect that work to begin on January 20th. Today, I will discuss a few issues I expect the agency to begin addressing in the coming weeks and months, though there are many others that deserve (and I anticipate in the future will receive) attention. The views I express today are my own as Vice Chairman of the FDIC, and not necessarily those of the FDIC or other members of the Board.
Supervision
I’ll start with bank supervision. Bank regulators have been tasked by Congress with an important mission: to promote the safety and soundness of banks. To achieve this objective, we promulgate rules that banks must follow, and supervise banks through on-site examinations.
Following the regional bank failures in 2023, the public release of the Silicon Valley Bank (SVB) exam reports and supervisory findings drew attention to bank regulators’ emphasis on process rather than core financial risks. At the time of failure, SVB was subject to a long list of supervisory criticisms, but most were unrelated to financial risks, and the one criticism related to interest rate risk was focused on the bank’s modeling, not on the actual hole in the bank’s balance sheet.
There are times when institutions have obvious, well-known management, governance, or control issues that can potentially threaten the safety and soundness of the institution. But today, these are outlier cases. What is far more common is for examiners to focus on a litany of process-related issues that have little bearing on a bank’s core financial condition or solvency.
One example is our approach to “sensitivity to market risk,” the “S” prong of the CAMELS rating system. Recently, some banks have experienced downgrades of the S rating despite being relatively resilient to interest rate shocks. These downgrades can occur for a variety of process-related reasons, ranging from inadequate documentation, to an inability to explain assumptions in models used by outside vendors, to insufficient focus in minutes at Board of Directors meetings. Meanwhile, leading up to the Federal Reserve’s interest rate increases, some banks that were relatively vulnerable to interest rate shocks nonetheless maintained a satisfactory S rating because they had checked all the process-related boxes. These are opposite sides of the same coin.
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