FDIC Regains Backup AuthorityRegulator Can Now Examine Banks Supervised by Other Agencies
The agency had been given this power back in 1983, following some costly failures of banks that the FDIC had little or no prior knowledge of, says former FDIC chairman William Isaac. This power remained in place until 1993, when the board tempered the FDIC's backup supervisory program by requiring prior board approval before FDIC examiners could exam a national bank or thrift, says Isaac.
The revised Memorandum of Understanding gives the FDIC backup supervision authority under an expanded list of circumstances. "This move creates another layer or supervision and regulatory scrutiny for banks, since the FDIC will be onsite along with the prudential regulator at a bank to monitor risk posed to the insurance fund," says Sai Huda, CEO of Compliance Coach, a banking industry compliance service provider.
The MOU's coverage gives the FDIC oversight of four different groups of insured depository institutions:
- Problem banks with a composite rating of "3," "4" or "5" or are undercapitalized as defined under Prompt Corrective Action;
- Banks with "Heightened Insurance Risk" where the insurance pricing system suggests higher risk;
- Large banks defined as mandatory Basel II "Advanced Approach" institutions, subsidiaries of any non-bank financial company or large interconnected bank holding company recommended for heightened prudential standards under the regulatory reform bill;
- Banks affiliated with entities that have had greater than $5 billion of borrowings under the FDIC's Temporary Liquidity Guarantee Program.
This move to strengthen the agency's supervision is seen as one to avoid legislation that would push for stronger oversight or even a new regulator. "This move to give power back to the FDIC was coming one way or the other," says former FDIC supervisory division head Christie Sciacca, currently a managing director at LECG Global Financial Services. The other reason to give the FDIC back its power of oversight is the Washington Mutual failure, for which by Sciacca's estimate the FDIC was brought in too late to do anything for the failing giant. "The FDIC said it wasn't able to do anything for WaMu because it wasn't the primary regulator."
Now the FDIC will have the power and the presence at the 19 biggest banks, alongside the primary regulator. If they disagree with a rating, FDIC examiners will be given full address to all the information they need to make a determination, without having to wait for board approval, Sciacca says.
"It is good for the system, good for the supervisory system and good for the FDIC. Somebody needs to be the check on these banks, and the FDIC is best suited for that role," Sciacca says. On the flipside, the FDIC will now have to face strong questions if there is another giant bank failure such as WaMu or Countrywide.
For those who think the FDIC will come out guns blazing and rush in and begin exams of the 19 biggest banks, Sciacca says that isn't likely to happen. But since the FDIC has a reputation of being the most stringent and harsh among the regulators when it comes to ratings and actions taken against banks, there may be a change of tone from the FDIC. "They will take a more active role, but I do think they have to be careful," he says. "There is a different tipping point when you're talking about the largest 19 banks, as compared to the smaller banks the FDIC normally oversees."
At least one regulator says he is basically in agreement with the approach the FDIC will take. In a prepared statement issued by John Dugan, out-going Comptroller at the OCC, he says is "very leery" of creating a de facto system of "supervision by committee," where what "begins and is intended to be a targeted gathering of information to perform different regulatory functions, morphs over time into duplicative examination and supervision of primary supervisory functions."
Dugan says it is important that regulators don't duplicate each other's work. "In our still somewhat confusing system of multiple regulators, it will be very important to work hard to carry out our respective responsibilities coordinating with each other," he says. What matters most is the implementation of the different roles and responsibilities.
Overall, the banking system will be stronger and the FDIC will be able to do its important job more effectively with the new backup supervisory program in place, says Isaac.
As for the impact on the other regulators' exam processes and supervision, Sciacca says, "A healthy tension between the regulators is a good thing."