Originally published by Open Banker
The FDIC has been criticized over the past year for the behavior of its employees,[1] its Chairman,[2] and its culture more broadly.[3] Those are important concerns, but they obscure another chronic and now quite pressing matter: the agency’s performance of its mission. Since the 2008 financial crisis, the FDIC has taken on new responsibilities while continuing to execute its traditional functions. And 16 years in, the agency clearly appears to be failing on multiple fronts. A fundamental rethinking of its mission is overdue. New leadership at the agency and the next Congress should consider broad FDIC reform.
Inventory
The FDIC is an agency with multiple different functions: it serves as
- An insurance company that collects premiums and pays out claims;
- A bankruptcy court that resolves failed banks;
- An investment bank that, incidental to its bankruptcy court role, in many cases must sell the assets and liabilities of failed or failing banks;
- An examiner of thousands of banks, albeit only one of the 10 largest U.S. banks, and two of the largest 25;
- A regulator, not only for the community banks that it examines but, because banking agency rules are generally uniform by law or practice, also for the largest U.S. banks – think Volcker Rule, Basel capital and liquidity requirements;
- Given the Dodd-Frank Act requirements for the largest banks to maintain a “living will,” a co-writer, along with the Federal Reserve, of secret liquidity regulations for the largest U.S. banks; and
- An arbiter for M&A transactions, not just for the banks it examines and banks seeking to merge with uninsured institutions but increasingly, at least according to its own (debatable) reading of the law, banks wishing to buy assets from an uninsured institution in a transaction that would not be considered a “merger” under the laws of any state.
Performance
So, how is the FDIC performing its functions, and how could it improve?
The Core Functions
The FDIC appears to collect premiums and pay out deposit insurance claims efficiently. This is its core function and expertise. Similarly, the FDIC has demonstrated expertise in resolving small banks, where the bank or its assets are generally sold to a single bidder. In nearly all cases, the depositors and other creditors of the bank are protected in a relatively simple proceeding orchestrated by the FDIC, using powers conferred on it by the Federal Deposit Insurance Act.
The examination function of all the federal banking agencies appears to have reached a crisis point, with a focus on the immaterial and counterproductive mandates.[4] The FDIC’s own report assessing its supervision of Signature Bank paints a picture of major staffing issues, management lapses, slow communications and poor work quality. That said, there is no reason to believe that the FDIC is performing any better or worse than the other agencies, and any reform in this area would need to be deep and broad-based, not FDIC-specific.
