In prepared remarks at the American Bankers Association’s (ABA’s) Washington Summit this week, FDIC Chair Travis Hill said banks should be harnessing the capabilities of AI and other new technologies to identify suspicious activity with the speed and precision that older, “rules-based” systems cannot match.
And he said the FDIC will soon propose excluding payment stablecoins from pass-through insurance coverage, doing so through the forthcoming rulemaking expected under the GENIUS Act.
Hill said that extending such coverage to payment stablecoins “seems inconsistent” with language in the law that says tokens are not to be “subject to deposit insurance” or marketed as guaranteed by the US government.
Using tech to spot suspicious activity
Hill mentioned the Anti-Money Laundering Act of 2020, explaining that the law is designed to streamline suspicious activity reporting, encourage greater information sharing and was crafted with the idea that “technology must play a central role in modernizing compliance.”
He touted the great usefulness of innovation in improving Bank Secrecy Act compliance.
He said of such tools: “These tools can elevate real risk signals and reduce false positives, allowing investigators to focus on what truly matters. I have heard of some reluctance to adopt these technologies because of fear that examiners will require parallel technology runs, play ‘gotcha’ for past failures that new technologies reveal or impose costly proofs of performance. At the FDIC, we want banks to innovate in this space, and we will ensure our supervisory approach encourages it.”
Touting AI tools for aiding in customer identification, Hill quoted Sam Altman, CEO of OpenAI, as saying: “AI has defeated most of the ways that people authenticate currently, other than passwords.”
Stablecoins
Hill also said his agency plans to propose rules saying that stablecoins are not eligible for FDIC pass-through insurance.
Normally, when it comes to pass-through insurance, deposits placed at a bank by a third party on behalf of a depositor are insured as if they were deposited directly by the end customer.
But the GENIUS Act says payment stablecoins are not eligible for deposit insurance. The law is actually silent about whether pass-through insurance for these payment stablecoins is permitted. But Hill says he believes that his agency’s proposal of making them ineligible for this kind of insurance aligns with the ban on deposit insurance.
The proposed ban on insurance for stablecoins means that stablecoin issuers or holders are not eligible for the up to $250,000 insurance guarantee that the FDIC provides for covered bank deposits, clearly distinguishing stablecoins from such deposits. And it’s not a surprising interpretation, as the bank lobby has been raising concerns about deposit flight risk, fearing that customers will move money into stablecoins and away from traditional deposit accounts.
(Recall that this is playing out in a related way in the conflict between the cryptocurrency industry and banks over the payment of stablecoin rewards, which is partly a reason behind the delays in Congress passing the CLARITY Act.)
Hill took care to add that the FDIC plans to seek comment on the applicability of deposit insurance rules to tokenized deposits, so the financial services and fintech sectors and trade groups will be weighing in on this topic soon.
Also speaking at the ABA’s event was Federal Reserve Governor Michelle Bowman, who said the Fed is working with other banking regulators to develop regulations that include capital and liquidity for stablecoin issuers as required by the GENIUS Act.
Supervision reform
Hill also touched on the FDIC’s efforts to reform its supervisory approach, taking care to focus on material financial risks.
He said the agency has done the following:
- issued a joint proposal with the OCC defining “unsafe or unsound practices” and “matters requiring attention;”
- issued instructions to examiners about focusing on material financial risks and violations of laws and regulations in their examinations; the exam manual will be updated once the rulemaking with the OCC is finalized;
- ordered a “lookback” of all outstanding supervisory recommendations for consistency with the new supervisory approach; and
- “made significant progress on interagency reforms to the CAMELS rating system, which the agency hopes to propose in the coming weeks.”
Beyond the safety and soundness exams, the FDIC’s consumer compliance exams “continue to be highly-process driven,” he said. “Our goal is to reorient our focus more towards noncompliance with laws and regulations, and actual harm to consumers, as opposed to policies and procedures, training, and other process-related considerations.”
Hill also said the agency is exploring guardrails around the use of “visitations” outside specified examination cycles, so they are only used in rare circumstances. And he said “we clearly need to increase the dollar thresholds that dictate the severity of violations, which trigger meaningful consequences.”
Right now, the most severe violations are those resulting in aggregate harm to consumers of more than $10,000.
Capital, liquidity and self-charters
Hill touched on how his agency was bettering aligning its capital standards with risks, saying a proposal being considered now “would generally implement the 2017 Basel agreement, while deviating in certain areas in which the international agreement does not work for the US economy.”
Referring to the Liquidity Coverage Ratio, Hill said the FDIC is “working with our fellow regulators to explore improvements to the LCR to improve banks’ resilience to acute, short-term stress events.”
He mentioned this after noting that, based on what happened to several mid-sized banks in 2023, a significant deposit run can occur over an extremely short time horizon at a bank, so the idea of holding enough “unencumbered high-quality liquid assets” to meet the demands of a 30-day stress period needs to be revisited.
And in terms of the FDIC’s ability to resolve failed banks, he said the agency was “exploring with the other banking agencies the possibility of establishing an emergency exception that would enable a nonbank to rapidly set up a shelf charter to bid on a failed institution following a sudden failure.”