By Evan Sparks
OOn New Year’s Eve, Jelena McWilliams made a surprise announcement that she would be stepping down as FDIC chairperson on Feb. 4, a year and a half before the end of her five-year term.
The stark news came after a dispute erupted within the FDIC’s board of directors over who — the chairman appointed by the president and confirmed by the Senate or a majority of its statutory members — is allowed to set the agency agenda. Rather than push the case to court, as many observers expected, McWilliams chose to walk away — a move that left those bylaw questions unanswered but appeared to spare the FDIC and its staff a prolonged political stalemate.
As McWilliams prepared for her departure, she sat down with the ABA Banking Journal in her Washington office for a conversation about her tenure at the agency. While 2018 was not so far away, it seems there are worlds apart – in terms of the flat circle nature of the pandemic, but also in the landscape of banking innovation and justice. racial.
Faced with the pandemic
McWilliams’ presidency has been dominated by the COVID-19 pandemic and the response to it. For her, her debut in 2020 reminded her of her work as a Federal Reserve lawyer during the financial crisis, when she received calls from consumers at the Fed wondering how to obtain loan modifications and deal with a foreclosure in an environment of falling home values. “I had a no-nonsense reaction in early March 2020,” she recalled.
She responded by calling the CEOs of FDIC-supervised banks and asking them what regulatory hurdles she could remove to keep Americans at home and working with their customers. Banks were already ahead of her, she reports, modifying and restructuring loans for customers whose businesses have been affected by the lockdowns – but having to report all those loans as distressed debt restructurings under accounting rules would have hurt banks’ balance sheets at some point. when policy makers wanted banks to help their customers. “So we started thinking, ‘Well, how do we allow them to modify the loans without having this negative accounting treatment? on these loan modifications in the form of TDRs if the loans were performing.
“That single sentence allowed bank CEOs to go more aggressively on loan modifications before the CARES Act passed,” she says. “We had this period of about three months where they were able and willing to very aggressively modify loans, allow people to stay in their homes and make sure they are banking and serving their communities.
Accelerate innovation
“There is almost this silver lining in an otherwise very tragic event that was the pandemic. . . is that banks have had to adapt, just as we have had to adapt, very quickly and adopt new technologies in order for us to do our job and banking business, in their case,” McWilliams says.
As with many banks, the FDIC moved to working remotely, which meant a big change from the longstanding practice of on-site examinations. While regulators had moved data collection to remote processes, much of the review work had remained in person. What future for exams?
“What I’ve heard from bankers is that they always want to see our people in person and have that human touch,” she added, noting that offsite reviews reduced the load on banks and increased reviewer retention and satisfaction. “I see the future as a hybrid – more things being done off-site, some presence in banks, but not as much as we had in the past because we have proven that we can have good quality review. “
One promising enhancement to remote monitoring is an initiative that spun out of FDITech, an innovation lab that McWilliams launched within the FDIC. As part of FDITech’s “phased rapid prototyping” program, the agency worked with private sector firms to test an idea that would replace the quarterly production of call report data – a laborious process for banks that means that examiners never have real-time data on a bank’s situation.
“What if we could, on a voluntary basis, force banks to report this data almost instantly? she reflects. “Basically, the banks would allow us access to a part of their system where they would store this information,” allowing reviewers “to instantly get an idea of how that bank is performing that day and not not having to wait for either the review or the call report data.”
After 30 competitors registered in the RPP competition, FDITech remains only four winners who can jointly or separately develop the final phase of the reporting. “The idea was in the next six months to roll it out to 99 entities on a voluntary basis and see what happens, so we’ll see if it survives,” she adds.
Promote partnerships
McWilliams recognizes that banks’ ability to innovate depends on their relationships with their key vendors and their connectivity to a wide range of technology providers. One challenge that has arisen relates to due diligence requirements for new supplier relationships. After meeting with technology providers in Silicon Valley, McWilliams set out to create a way for third-party service providers to be carefully vetted by an organization and receive what it calls a “Good Housekeeping stamp of approval,” which would then help speed up onboarding processes at individual banks.
To that end, the FDIC is launching a standards organization as a public-private partnership to provide this centralized due diligence. “It’s something we’ll be socializing more intimately with other regulators over the next week, and hopefully they can pick up the slack and figure out if there’s an opportunity here to make the system more efficient. .”
Both initiatives – Timely Data Collection and Third-Party Due Diligence Management – draw on the issue of core platforms, and both “were designed as a way as well to incentivize core processors to to be better, to produce new technology, to be more nimble,” McWilliams says. “Every commitment from the bank to register with a central processor – once they are in that system and “They’re under contract, it’s almost impossible for them to get out of it effectively. So the idea here was to give the main processors a bit of a hard time.”
And while McWilliams “thinks the core processors are getting more nimble, they’re getting better, I’m not sure that’s enough. This is where I actually wish we had a little more time at work to attack this problem a little more diligently, because at the end of the day, we all want community banks to survive.
Regulatory cooperation
McWilliams also prioritized agency partnerships and a consensus-based approach to banking regulation. While she declined to comment on the dispute among FDIC board members that preceded her resignation, she says her overall approach to rulemaking has been to strive “over the years to work towards a consensus”.
For example, when former Comptroller of the Currency Joseph Otting initiated an interagency process to revise the rules of the Community Investment Act, the FDIC board voted to join the OCC in issuing a proposal. “I thought it was important to solicit feedback.” But when Otting was set to finalize the rule — since overturned by subsequent OCC leaders — just two months into the pandemic, McWilliams acknowledged the burden the banks were bearing.
“I didn’t think it was the right time to recommit to the CRA, certainly to finalize the rule,” she explains. “We have been working with the Fed and the OCC on this next stage of rulemaking. The more the three agencies can work together, the better. progress together on a number of rule developments, they will be able to find consensus on developing the right policy.
Financial inclusion
McWilliams says she is “probably the most proud to speak” about the work the FDIC has done to support nearly 150 minority depository institutions in the United States. Long before the protest movement sparked by the killing of George Floyd brought a wave of publicity and pledges to black banks, McWilliams says she reached out to MDI leaders to be educated on their challenges. “I realized they needed a little more regulatory care as we talked about their oversight models and how they work,” she says. “It became very clear to me that MDIs most needed patient capital that would essentially allow them to invest in their communities. »
To this end, and drawing inspiration from a view of the back of an airplane seat shark tank—McWilliams led the FDIC to launch the Mission-Driven Bank Fund last fall. Managed by the agency and capitalized by $120 million from banks, private investors and philanthropic organizations, including Truist Financial, Microsoft and Discovery, the fund will provide capital in the form of common or perpetual preferred shares for MDI and Community Development Financial Institutions, enabling a 10x multiplier in terms of new loans in disadvantaged and minority communities. “It’s just going to open up a whole new source of patient capital for them, and we’re very proud of that effort,” McWilliams says. “We hope the fund will only grow and grow and grow, and that each future FDIC chair will continue to add more value to the fund and place more emphasis on minority depository institutions because they matter. .
Patient capital for MDIs and CDFIs is just one aspect of financial inclusion that McWilliams has championed. Among the FDIC’s inclusion initiatives was consistent interagency clarity on small dollar lending that gave banks the confidence to re-enter this line of business. And “thank you for having, thanks to the ABA, quadrupled the number of banks that offer Bank On accounts, which are low-cost, no-fee accounts and perfect for consumers who otherwise do not have current account.”
McWilliams often cites her personal story as an 18-year-old immigrant arriving with just $500 to her name and why opening a checking account was so important. “I talked about my experience, why it was important for me to open this account and how it allowed me to be part of the system and succeed within the system,” she recalls. “This is something that is close to my heart, and whether I am FDIC chairman or not, I will continue to advocate for something along these lines.”
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