FDIC: How Mistakes Led to Payment Responsibility

The Federal Deposit Insurance Corporation (FDIC) is an independent agency that provides insurance to individuals in the United States. If a bank fails, the FDIC reimburses account holders up to $250,000 of their deposits. However, the FDIC lacks the ability to comprehend the risk of a bank run, nearly putting them in a position to possess a crystal ball of the banking sector.

In 2020, the FDIC initiated a project that aimed to use outside companies to detect risks within banks, much like what happened with Silicon Valley Bank and Signature Bank. The project failed due to skepticism from new leadership and a culture wary of relying on external firms. If revived, this project could appease the FDIC’s commitments, along with saving money, time, and elevating their reputation.

Jelena McWilliams was appointed Chair of the FDIC by then President Donald Trump, and was responsible for starting the rapid phased prototyping project to create data tools to help regulators monitor areas such as credit risks, depositor behaviors, and shifts in interest rates. 33 companies responded to the offer, and four were shortlisted in the middle of 2021, including Palantir Technologies and S&P Global Market Intelligence. However, McWilliams’ term as Chair ended after her Vice Chair, Marty Gruenberg, challenged her in regards to bank mergers, which swiftly ended the project. Gruenberg, a Democrat-affiliated appointee of the FDIC, decided against the initiative due to it being an outsourcing of monitoring.

The lack of technological advancement in the FDIC is a major problem, with costly, ineffective systems that lack any technical sophistication. Risk aversion can be beneficial,yet also very inefficient. It has also been a top priority for the FDIC in order to compete for tech-native talent with tech-startups, Wall Street firms, and other agencies.

The resignation rate from examiners-in-training doubled from 2020 to 2022 and the median length of employment is 26 years, according to the FDIC. Poor storage of passwords and failing to update tech guides were two other concerns raised by the agency’s independent watchdog.

The disastrous collapse of Silicon Valley Bank and Signature Bank had a massive effect on the FDIC, causing them to take the step to reimburse all of the bank’s depositors, including those who had millions in their accounts. This cost the FDIC’s $128 billion deposit fund $22.5 billion. It was also a struggle in finding new owners for the banks and the FDIC had to set up a ‘data room’ which took days to gather the necessary information and models.

Travis Hill, the new Vice Chair of the FDIC, is also a bipartisan pick appointed by the Senate in December. Unlike Gruenberg, Hill served as part of McWilliams’ board and was there for the rapid phased prototyping project. This sets up a potential disagreement which could lead to Hill being an influential factor in the FDIC’s push for a more modern approach.

A reviving of the FDIC’s data project and the modernizing of its agencies would not only restore the FDIC’s stature, but it would also prove invaluable in terms of cost savings, time, and a better overall understanding of banker risks. The reignited project could have a positive effect on the FDIC as they recover from these recent costly losses.