The Public Deserves to Know More About the FDIC’s Actions Following 2023 Bank Failures

Washington. D.C. – The FDIC has provided minimal transparency about its financial management choices and decision to levy a special assessment on large banks to recoup the costs of invoking the systemic risk exception following the spring 2023 bank failures. The public deserves answers about the FDIC’s choices, especially those that resulted in needlessly higher costs, BPI said in a letter sent today. The FDIC’s Office of Inspector General should provide these answers by investigating the agency’s decision-making surrounding the bank failures and the related assessment to recover costs.

“By all accounts, the resolutions of SVB and Signature Bank went very badly, but at this point we have only partial accounts. If future resolutions are to be handled competently, the public needs to know what happened in these cases, and a better process needs to be found. The banking industry has a vested interest in the outcome, as it pays the bills for the FDIC’s shortcomings, but the public too should know what happened.” – Greg Baer, BPI President and CEO

Context: The FDIC invoked the “systemic risk exception” in the wake of the spring 2023 failures of SVB and Signature Bank, enabling regulators to intervene to prevent systemwide contagion. As a result, billions of dollars in costs to the Deposit Insurance Fund must be recouped with a special assessment on banks.

  • Despite the stability of the largest U.S. banks during last year’s turmoil, these banks have borne the brunt of the FDIC assessment, which the agency finalized prematurely without sufficient explanation of their policy choices. The estimated amount of the assessment continues to change following a 25 percent upwards adjustment in the quarter after adoption.
  • The special assessment rule sets an arbitrary threshold of $5 billion for exempting banks from paying any assessment. This has no sound rationale.
  • The FDIC’s explanation of its policy choices in the final rule imposing a special assessment on large banks does not satisfy the agency’s fundamental procedural obligations under the Administrative Procedure Act.
  • The OIG should investigate the agency’s unexplained decisions in its approach to both the special assessment and the failed banks’ resolutions – for example, a failure to differentiate different types of uninsured deposits when imposing costs based on banks’ uninsured deposit bases, and a reliance on expensive, penalty-rate discount window loans.
  • Non-disclosure agreements and general lack of transparency and public explanation are barriers to public scrutiny, so the full extent of potential mismanagement is unknown. This is unacceptable in public policymaking.

Why it matters: The FDIC’s unexplained decisions may have unnecessarily increased costs, potentially by billions of dollars. The lack of transparency into such policy decisions is a failure of good governance.

What BPI is asking: The FDIC’s Office of Inspector General should investigate concerns about the FDIC’s choices following the spring 2023 bank failures—specifically its administration of the special assessment and ongoing management of the bank receiverships—and make its findings public. In this way, a future FDIC can respond to any future systemic risk event with a better, more transparent approach.

  • The lack of transparency in the failed-bank resolutions raises the question of whether the FDIC conformed to its requirement to act in a cost-efficient way. The approach to the resolutions appears to have generated potentially avoidable losses to the Deposit Insurance Fund. To help avoid such problems in the future, the FDIC should consider the benefits of leveraging risk management expertise within the banking industry through a standing industry advisory panel.
  • The FDIC should prepare in advance to ensure a fairer and more predictable outcome in any future systemic risk event and related assessment. The FDIC should also be open to additional reform proposals that may emerge from a thorough investigation of the resolutions.

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About Bank Policy Institute.

The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.

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