By Richard Berner
On February 19, the Stern Center for Global Economy and Business and the Stern Volatility and Risk Institute hosted an NYU Stern Fireside chat with Jelena McWilliams, Chairman of the Federal Deposit Insurance Corporation, one of America’s critical financial regulators.
Stern’s Fireside Chats give faculty and students an opportunity to interact and engage with leaders in business and government. This event did not disappoint: Chairman McWilliams is the third woman to fill the leading role at the FDIC and the interview revealed clearly why she is a role model for all of us.
We began the discussion by exploring Chairman McWilliams’ background and her passion for her work as a financial regulator. She described herself as “an accidental regulator.” Born in Belgrade, Serbia, she aspired to change the world as a wartime correspondent or an astrophysicist. However, at Berkeley she studied law and economics and went to work as a lawyer in Silicon Valley, hustling to do IPOs and learning about the intersection of business and law and regulations. That led her to a job at a law firm in Washington, DC doing securities law (and seeing many sunrises on the job), but then, to learn more, she sought a job in regulation. She chose the Fed over the SEC because she saw an opportunity to learn. She was baptized under fire at the start of the crisis looking at subprime mortgages. She then went to a job on the Senate Banking Committee. Seeking to learn how banks work, she sought employment at a bank. And ultimately, that led to her current role, capping a journey that is a true American story.
The lesson: She advised students “never be afraid to make a change” in your career. Take risks. Learn from your work, even if it means lower pay.
To outline her vision for the FDIC, she reviewed its history through the lens of financial crises. Starting with the impetus for deposit insurance to prevent bank runs, she noted the expansion to resolution authority and then to backup supervision authority. That authority creates great leverage and incentives to cooperate with the other regulators. The FDIC has to work to promote both financial innovation, as well as, safety and resilience. She affirmed that “We are constantly looking for ways to improve.”
On resilience, she agreed that the banking system is safer than before the crisis but there is more to do for institutions that are increasingly complex. She said that we have to understand how that complexity affects risk. In financial regulation, she said that we must work harder to balance resilience and safety with efficiency and appropriate tailoring for risk.
Diversity can be beneficial. When asked does our system of multiple regulators make our regulatory system stronger or weaker, she argued that our system design was not ideal, but that the checks and balances it affords discourage groupthink and encourage healthy debate.
Recognizing that rapid innovation and new data are changing financial firms and their business models and also promoting financial inclusion, she recognized that there are also risks. She argued that we need to improve the way that innovation can help us speed the regulatory process with more timely information and more effective risk assessment. FDiTech at the FDIC was designed to create a platform for exchanging ideas with banks about new ways to deliver and produce services and what risks they carry, and to bring the agency into the digital world.
The Community Reinvestment Act was aimed at ensuring that banks serve their communities. Chairman McWilliams recognized that the regulations need to keep up with the footloose nature of modern banking services. What is the area for deposit-taking? She said that they are proposing a new framework, now open for comments, to bring the law into line with today’s reality. Likewise, the criteria for approving banks for deposit insurance vary by their business model and profitability. But the criteria do need to take differences in businesses into account.
Regarding the fees for FDIC insurance, she said that they calibrate them to be sure we have resources to keep the Deposit Insurance Fund stable and resilient. They think the 2% target – one that is risk-based — meets that criterion. In the crisis the DIF lacked resources, so they had to ask the banks to top it up. They understood why. Obviously, the DIF isn’t based on the idea that all deposits are at risk.
On resolution and the orderly liquidation authority (OLA) – the resolution regime for large, complex financial firms that can’t be run through a bankruptcy—she noted that we can strengthen the credibility of the government’s commitment not to bail out failing SIFIs with two types of planning. We need to make banks more resilient by having Insured Depository Institutions (the subsidiary banks) plan effectively and through ensuring that their parents’ (holding companies) resolution planning is effective.
She believes that the requirement of “living wills” – those resolution plans for large. complex banks — has made the large banks’ organizational structures significantly less complex and thereby made the FDIC’s OLA tasks easier. She also believes that the banks themselves have found the living will process has helped the banks improve their structure to be able better to understand and manage the organization.
Financial market utilities, among them Central Counterparties (CCPs), are large complex institutions for which the FDIC has resolution authority, but they are not banks and are regulated by the market-based regulators (the Commodity Futures Trading Commission and the SEC) and by the Federal Reserve. Chairman McWilliams is working with the CFTC and other regulators to define how that would work and what their respective roles should be to promote CCP resilience, recovery and resolution.
Chairman McWilliams outlined the challenges in arranging the sales of a failing or failed bank to another financial institution by starting with the monitoring of “problem banks.” That process enables us to understand the nature of the problems, she noted. If the bank can be sold “openly” – before it fails, so much the better. If it is a “closed bank” sale, the bank and the FDIC will share in the profits or losses from the cleanup process. The process must not involve harm to the depositors.
Chairman McWilliams made a strong case that the FDIC is an independent agency, basing its decisions on its statutory mandate, unaffected by politics. She made it clear that her job was to implement and uphold the law, not change it. So when asked if the (partial) repeal of Glass Steagall was a mistake, she said we now have the law, it would be up to Congress to decide that. Likewise, she argued that the recent money fund reforms were not in the FDIC’s remit, but in the purview of the SEC.
Chairman McWilliams noted that the biggest threat to the system likely would be from a cyber attack that cripples large banks and/or the system. Large institutions have the wherewithal to invest in cyber resilience, but many small banks don’t, so we need to understand how they can survive such threats and make sure that our banking system provides services to all.
Richard Berner is Clinical Professor of Management Practice in the Department of Finance, and, with Professor Robert Engle, is Co-Director of the Stern Volatility and Risk Institute.
Professor Berner served as the first director of the Office of Financial Research (OFR) from 2013 until 2017. He was counselor to the Secretary of the Treasury from April 2011 to 2013. He served as chief or senior economist at Morgan Stanley, Mellon Bank, Salomon Brothers, Morgan Guaranty Trust Company, and the Board of Governors of the Federal Reserve System. He received his BA from Harvard College and his PhD from the University of Pennsylvania.
Berner is a member of the Market Risk Advisory Committee at the Commodity Futures Trading Commission, the Milken Fintech Advisory Committee and the IMF panel of experts for financial stability, and is an advisor to FinRegLab, MacroPolicy Perspectives, HData, Inc., and the Alliance for Innovative Regulation.