‘Office of innovation’ absent from FDIC chairman’s litany of initiatives for 2019

Final Volcker Rule exemption for community banks expected this month

An update on various initiatives was provided by the leader of the federal insurer of bank deposits Wednesday – but did not include any new details of an “office of innovation” promised by the agency for 2019.

The leader did say, however, that a new rule to exempt community banks from the Volcker Rule would be finalized this month.

In remarks to the conference sponsored by the Cato Institute in Washington, D.C., Federal Deposit Insurance Corp. (FDIC) Board Chairman Jelena McWilliams said the agency is working to identify and hire subject matter experts to deepen its understanding of technological advancements. However, she gave no timetable for bringing the experts on board, or finding a leader for the group.

In October 2018, McWilliams announced that the agency would establish an “innovation office” to help bankers “stay on the technological forefront.” In February, during a press conference following presentation of year-end 2018 financial statistics for banks, she told reporters that the agency hopes the new office will be “operational in the next few months.”

She indicated then that the agency was still setting up the office, including naming someone to run it (which she also indicated is an initial step in making the office operational). But she also said that the individual overseeing the office, and other staff, will be detailed from existing departments within the agency, at least initially, and likely for a six-month duty detail.

She also suggested then that that approach is being taken so that staff can learn “a new skill set of thinking outside of the box and thinking of innovation” at a regulatory agency, and about setting up the regulatory framework going forward.

In Wednesday’s remarks, however, McWilliams provided no new details about the progress in setting up the innovation unit. In fact, she did not even mention the “office of innovation” (which the agency highlighted in the chairman’s message for the FDIC’s 2019 annual performance plan, released in March).

She did, however, indicate that the agency is gleaning information from banks about how they are innovating. “Too often regulatory agencies play ‘catch up’ with technological advances and their impact on regulated entities and consumers. The goal of our work at the FDIC is to reverse that trend through increased collaboration and partnership with the industry. We will move forward together and help increase the velocity of transformation, while ensuring that banks are safe and sound and consumers sufficiently protected,” she said.

In other remarks about agency initiatives, McWilliams said:

  • FDIC expects to finalize this month a rulemaking to exempt community banks from the Volcker Rule (which imposes restrictions on proprietary trading). “At the same time, we have been hard at work simplifying and rationalizing the Volcker Rule more broadly,” she said. “We hope to be able to finalize changes to the Rule’s proprietary trading restrictions sometime this summer.”
  • The FDIC is dedicating “significant resources” to identify and understand emerging technology changes in financial services delivery. “We are examining trends in retail financial markets, including marketplace and digital lending, machine learning and artificial intelligence, and big data,” she said, “We are also considering developments in the wholesale financial markets, as well as blockchain and distributed ledger technology.”
  • The agency continues to encourage de novo banks. She pointed to what she termed an improved application process to offer prospective organizers the opportunity to submit draft insurance proposals and receive feedback from the FDIC in advance of a formal filing, as well as handbook for de novo organizers. She indicated the actions are paying off, as the agency has “seen signs of increased interest in new bank formation.”

Remarks by Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation, at the CATO Summit on Financial Regulation, “If You Build It, They Will Come”; Washington, D.C.