FDIC’s Hill Warns of ‘Overreaction’ to Spring Bank Failures

A top official at the Federal Deposit Insurance Corp. said his agency and other federal regulators are trying to do too much to shore up the banking system following a string of failures this year.

FDIC Vice Chairman Travis Hill said a slate of new capital and resolution proposals, a review of bank merger policy, and a host of other rules in development threaten to hike costs for banks and their customers.

“While I think that some response to the bank failures is warranted, I fear that an overreaction is underway,” Hill, a Republican who served as a policy deputy to former FDIC Chairman Jelena McWilliams, said in a Thursday appearance at the Cato Institute.

The FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency already had a packed regulatory agenda, including a pending rewrite of the Community Reinvestment Act, prior to the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank beginning in March.

But once the initial crisis spurred by those failures passed, the agencies added even more to their agendas, including a proposal to eliminate some tailoring of rules for large regional banks put in place through a 2018 bipartisan banking law, Hill said.

“I think the agencies are trying to do too much at the same time,” he said.

Tailored Bank Rules

The FDIC vice chairman said that regulators’ proposed capital rules unveiled in July would undo the lighter touch to capital and liquidity regulations called for in the 2018 banking law. Doing so would make it harder for big regional banks to operate and could lead to more homogenization within the banking system, Hill said.

Big banks that aren’t as large or complex as the top global giants like JPMorgan Chase & Co. or Bank of America Corp. should have different regulatory requirements, Hill said.

“Undoing the tailoring of our rules would be a mistake,” he said.

There’s also a “compelling case” for the agencies to hold off on their ambitious rulemaking agenda until after the current interest rate cycle is complete, Hill added.

Merger Reviews

Hill also raised concerns about federal regulators’ renewed focus on bank mergers. The Fed, the FDIC, and the US Department of Justice’s Antitrust Division are all reviewing their merger policies, with some officials calling for tighter reviews.

Hill said some of those efforts may be misplaced.

US banks already have to compete with fintechs, nonbank mortgage lenders, private credit providers, and other nonbank firms, he noted. Rather than making it harder for banks to merge, regulators should try to speed up merger reviews and encourage the creation of new banks, Hill said.

In the aftermath of this year’s bank failures, the FDIC and other regulators also should make it easier for struggling banks to be acquired by healthier banks, Hill said, pointing to the recent Banc of California Inc. takeover of PacWest Bancorp.

“It is much, much better for a struggling bank to be purchased in an open-bank merger than” from the FDIC after it fails, he said.