By Evan SparksOn New Year’s Eve, Jelena McWilliams made a surprise announcement: she would resign as FDIC chairman on Feb. 4, a year and half before the end of her five-year term.
The abrupt news came after conflict erupted on the FDIC board over who—the presidentially appointed, Senate-confirmed chairman or a majority of its statutory board members—is authorized to set the agency’s agenda. Rather than pressing the matter in litigation, as many observers expected to happen, McWilliams chose to step down—an action that left these questions about the bylaws unanswered but that seemed to spare the FDIC and its staff a prolonged political standoff.
As McWilliams prepared for her departure, she sat down with the ABA Banking Journal in her Washington office for a conversation on her tenure at the agency. While 2018 wasn’t that long ago, it feels worlds away—in terms of the time-is-a-flat-circle nature of the pandemic, but also in the landscape of bank innovation and racial justice.
Facing the pandemic
McWilliams’ chairmanship has been dominated by the COVID-19 pandemic and the response to it. For her, its early days in 2020 reminded her of her job as a Federal Reserve attorney during the financial crisis, when she would get calls from consumers to the Fed wondering how to get loan modifications and facing foreclosure amid falling home values. “I had a not-on-my-watch reaction in early March of 2020,” she reflects.
She responded by calling up CEOs of FDIC-supervised banks and asking what regulatory obstacles she could clear to keep Americans in their homes and working with their customers. The banks were already ahead of her, she reports, modifying and restructuring loans for clients whose business was affected by the lockdowns—but having to report all these loans as troubled debt restructurings under accounting rules would have been damaging to banks’ balance sheets at a time when policymakers wanted banks to help their clients. “So we started thinking, ‘Well, how can we allow them to modify loans without having this negative treatment accounting treatment?’” The FDIC contacted the Financial Accounting Standards Board and asked for their cooperation in clarifying that FASB and the regulators would not look upon these loan modifications as TDRs if the loans were performing.
“That one sentence allowed bank CEOs to go more aggressively on loan modifications before the CARES Act passed,” she says. “We had that stretch 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 that that they’re doing the business of banking and serving their communities.
“There’s almost this silver lining in an otherwise very tragic event that has been the pandemic . . . is that banks had to adjust—just like we had to adjust—very quickly and adopt new technologies in order for us to be able to do our work and the business of banking, in their case,” McWilliams says.
As with many banks, the FDIC switched to remote work—and that meant a big shift from the longstanding practice of on-site exams. While regulators had been shifting data collection to remote processes, much of the exam work had remained in-person. So what’s the future for examinations?
“What I did hear from bankers is that they still want to see our people in person and have that human contact,” she added, noting that off-site exams did reduce burden on banks and increased retention and satisfaction for examiners. “I see the future as a hybrid—more stuff being done off-site, some presence in the banks, but not nearly as much as we had in the past because we’ve proven that we can have good quality exam.”
One promising improvement in remote supervision is an initiative that came out of FDITech, an innovation lab that McWilliams launched inside the FDIC. As part of FDITech’s “rapid phased prototyping” program, the agency worked with private-sector companies to test an idea that would replace the quarterly production of Call Report data—a laborious process for banks that means examiners never have real-time data on the condition of a bank.
“What if we could on a voluntary basis get banks to report that data almost instantaneously?” she muses. “Basically, banks would allow us to access a portion of their system where they would store that information,” which in turn would enable examiners to “instantly have a sense of how is that bank doing on that day and not have to wait for either the exam or the call report data.”
After 30 competitors entered the RPP competition, FDITech is down to four winners who can jointly or separately develop the final phase of reporting. “The idea was in the next six months to roll it out to nine entities on a voluntary basis and see what happens, so we’ll see if that survives,” she adds.
McWilliams recognizes that banks’ ability to innovate depends on their relationships with their core providers and their connectivity to a wide range of tech vendors. One challenge that came up is the due diligence requirements for new vendor relationships. After meeting with tech providers in Silicon Valley, McWilliams set out to create a way for third-party service providers to be thoroughly vetted by one organization and receive what she calls a “Good Housekeeping seal of approval,” that would then help speed up onboarding processes at individual banks.
To that end, the FDIC is in the process of launching a standard-setting organization as a public-private partnership to provide this centralized due diligence. “It’s something that we’re going to socialize with the other regulators more intimately over the next week, and hopefully they can take the mantle and figure out if there’s an opportunity here to make the system more efficient.”
Both initiatives—collecting timely data and managing third-party due diligence—draw in the issue of core platforms, and both “were meant as a way of also challenging core processors to be better, to produce a new technology, to be more agile,” says McWilliams. “Every commitment on the part of the bank to sign up with a core processor—once they are in that system and they are under the contract, it’s almost impossible for them to break out in an efficient way. So the idea here was to give core processors a little bit of a run for their money.”
And while McWilliams does “think the core processors are getting more agile, they are getting better, I’m not sure it’s enough. This is where I actually wish we had a little bit more time on the job to attack that issue a little bit more diligently—because in the end, we all want community banks to survive.”
McWilliams has also prioritized partnerships across the agencies and a consensus approach to bank regulation. While she declined to comment on the conflict among FDIC board members that preceded her resignation, she says that her overall approach to rulemaking has been to try “hard over the years to work on that consensus building.”
For example, when former Comptroller of the Currency Joseph Otting initiated an interagency process to revise Community Investment Act rules, the FDIC board voted to join the OCC in issuing a proposal. “I thought it was important to solicit comment.” But when Otting was ready to finalize the rule—since rescinded by subsequent OCC leadership—just two months into the pandemic, McWilliams recognized the burdens banks were bearing.
“I didn’t think it was the right time to re-engage on the CRA, certainly to finalize the rule,” she explains. “We have been engaged with both the Fed and the OCC on this next stage of the rulemaking. The more the three agencies can go together, the better. And it is my hope that as they move together on a number of rulemakings, they do are they are able to find consensus on just making the right policy.”
McWilliams says she is “probably proudest to talk about” the work the FDIC has done to support America’s nearly 150 minority depository institutions. Well before the protest movement triggered by the murder of George Floyd brought a wave of publicity and commitments to Black banks, McWilliams says she reached out to MDI leaders to be educated on their challenges. “I realized that they need a little bit more regulatory care as we talk about their supervisory models and how they function,” she says. “It became very clear to me that MDIs needed most was patient capital that’s basically going to allow them to invest in their communities.”
To that end—and with some inspiration from an airline seatback viewing of Shark Tank—McWilliams led the FDIC to launch the Mission-Driven Bank Fund last fall. Designed by the agency and capitalized by $120 million from banks, private investors and philanthropies—including Truist Financial, Microsoft and Discovery—the fund will provide capital in the form of common or perpetual preferred shares for MDIs and community development financial institutions, allowing a 10x multiplier in terms of new lending in disadvantaged and minority communities. “It’s just going to open up a whole new source of patient capital for them, and we’re just very proud of this effort,” says McWilliams. “We hope the fund only grows and grows and grows, and that every next chairman at the FDIC keeps on adding more value to the fund and 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 have been providing consistent interagency clarity about small-dollar lending that has provided banks confidence to re-enter this line of business. And “we thank you for, through ABA, quadrupling the number of banks that offer Bank On accounts, which are low and no-cost accounts and great for consumers who otherwise don’t have a checking 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 mattered so much. “I’ve gone around talking about my experience, why it mattered to me to open up that account, and how it allowed me to become a part of the system and succeed within the system,” she reflects. “It is something that’s near and dear to my heart, and whether I am the FDIC chairman or not, I will continue to advocate for something along those lines.”