FDIC's preparedness deemed 'insufficiently developed' in the hypothetical banking crisis of 2023, according to the Office of Inspector General.
The Federal Deposit Insurance Corporation (FDIC) faced criticism for its handling of the regional bank failures in 2023, particularly the collapses of Signature Bank and First Republic Bank. The criticism stems from the perception that the FDIC's traditional resolution methods may not have fully adapted to the systemic risks and complexities posed by these large, rapidly growing banks[1].
In response to these failures, the Office of Inspector General (OIG) has made a series of recommendations aimed at refining bank liquidation and resolution plans to better address the challenges revealed by the 2023 failures[1]. The OIG's recommendations are intended to address weaknesses in the FDIC's readiness activities for planning, training, exercises, evaluation, and monitoring[2].
The OIG's suggestions include enhancing the resolution frameworks to handle large, systemically important, or fast-growing regional banks more effectively[1]. Additionally, the OIG recommends reforming the assessment and insurance fund contribution system to create a more balanced financial playing field among banks of different sizes, considering the unique risks posed by large banks[2].
The OIG also suggested that the FDIC implement changes to how it levies fees and recovers costs from banks after failures, such as moving towards more ex ante risk-based assessments on larger banks to prevent the asymmetry where large banks pay only after crises occur[5].
These recommendations collectively aim to improve the FDIC’s responsiveness, financial sustainability, and ability to preemptively manage bank risks to reduce the impact of future failures on the deposit insurance fund and financial stability.
The OIG made 11 recommendations in total, including improving coordination of human and IT resources, coming up with a plan to periodically assess the FDIC's resolution readiness, and ensuring routine training of key resolution staff[3].
The Government Accountability Office (GAO) also reviewed the FDIC's supervisory practices following the bank failures. The lack of a centralized tracking system at the FDIC limits its ability to flag emerging risks at supervised banks[6].
The FDIC plans to complete all corrective actions by June 30, 2026, according to the OIG[7]. The OIG reported that the FDIC's readiness was not sufficiently mature for a crisis failure environment during the regional bank failures of 2023[8].
The criticism and subsequent recommendations come after Senator Elizabeth Warren called for an investigation into the FDIC's readiness to handle large regional bank failures in March 2023[4]. Several lawmakers have been critical of the FDIC's response to these large regional bank failures[9].
[1] https://www.fdic.gov/news/news/press/2023/pr23062.html [2] https://www.fdic.gov/about/offices/oig/docs/reports/2023/23-021.pdf [3] Ibid. [4] https://www.cnbc.com/2023/03/29/elizabeth-warren-calls-for-fdic-inspector-general-to-investigate-bank-failures.html [5] https://www.fdic.gov/about/offices/oig/docs/reports/2023/23-021.pdf [6] https://www.gao.gov/products/gao-23-107883 [7] https://www.fdic.gov/about/offices/oig/docs/reports/2023/23-021.pdf [8] Ibid. [9] https://www.cnn.com/2023/04/05/business/fdic-bank-failures-oversight/index.html
The Office of Inspector General (OIG) recommends reforming the assessment and insurance fund contribution system to create a more balanced financial playing field among banks of different sizes, with a focus on the unique risks posed by large banks for improved business finance. The OIG suggests that the FDIC implement changes to how it levies fees and recovers costs from banks after failures, such as moving towards more ex ante risk-based assessments on larger banks to address potential finance issues and prevent asymmetry.
