FDIC gets more heft amid crisis fallout

The messy fallout from the financial crisis has transformed the Federal Deposit Insurance Corporation into one of the most powerful and closely watched regulators in Washington.

The FDIC, best known for insuring bank accounts, is involved in a number of contentious policy disputes facing the Obama administration. 

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FDIC officials are writing rules to implement some of the biggest pieces of the Dodd-Frank financial reform law even as they sift through the wreckage of the nation’s housing market.

“In the past two years, they’ve turned from probably being at the back of the pack to being in the front,” said Chris Cole, senior vice president at the Independent Community Bankers of America. “They’ve got a big job on their plate.”

“The FDIC is playing a higher-profile role right now; that’s to be expected when you go through a time like we went through,” said Bill Isaac, a former FDIC chairman who is now the global head of financial institutions for FTI Consulting. “Once the crisis broke out again, the FDIC’s role increased very significantly.”

Even the FDIC’s core mission — stepping in to protect depositors when a bank fails — has grown more demanding in recent years. 

From 2000 through 2007, the FDIC had to deal with 26 failed banks. Since 2008, 350 banks have failed, according to the FDIC’s website.

“For a very long period of time, there were very few failures, so they were not front and center in any policy debate,” said James Chessen, the chief economist for the American Bankers Association (ABA). “Obviously, with the financial crisis, that changed.”

Andrew Gray, the FDIC’s public affairs director, said the agency has been gearing up since the financial crisis to handle new responsibilities.

“We’ve been in growth mode over the course of the last couple of years,” he said, adding that the FDIC typically adopts a bigger role after a downturn. 

The agency is taking the lead or otherwise leaving an imprint on a slew of controversial financial topics, many stemming from the implementation of the Dodd-Frank reform law.

In March, the FDIC approved a “too big to fail” proposal that is aimed at avoiding a repeat of the financial crisis. The rule would allow the FDIC to step in and wind down large financial firms that are failing, 

At the end of March, the FDIC co-authored rules with the Federal Reserve that would establish “living wills” for firms. Those blueprints would establish how to dismantle financial firms in the event of a failure. 

The FDIC board also unanimously approved proposed rules that would set new risk-retention standards for financial firms that create securities backed by mortgages .

The expanded role of the FDIC was evident at a March meeting of the ABA. Bair heard complaints from bankers in attendance about the new burdens being imposed by Dodd-Frank. The bankers groaned audibly when Bair tried to make the case that some of the law’s elements are good for banks, according to media reports.

At one point, Bair suggested financial firms should be more grateful for what the government did to help firms weather the financial crisis.

“Is there ever times when you can acknowledge what regulators have done to help the stability of the industry? What the FDIC has done? What, frankly, Dodd-Frank did? I think there needs to be some acknowledgment of that,” she said, according to a Reuters report.

Isaac said industry pushback is a sign the FDIC is making its presence known.

“If it’s doing it correctly, the FDIC should kind of be a pain in people’s sides,” he said.

Beyond the implementation of Dodd-Frank, the FDIC and Bair are at the center of another major issue — the ongoing struggles of the housing market.

Bair is pushing for banks to pay into a new fund that would be used to deal with the legal problems emerging from missing, inconsistent or incorrect mortgage documentation.

Chessen said he is worried that as the FDIC takes on new responsibilities from Dodd-Frank, it could lose sight of its core mission of protecting depositors. But for Isaac, the danger rests in future pushes to reduce the FDIC’s imprint once memories of the crisis have faded.

“Congress has once again in Dodd-Frank made very clear it wants the FDIC involved,” he said. “What I worry about is once things get back to normal again … that there will be pressure to go back to the old ways.”