Evaluating The FDIC’s New Direction

In recent speeches and policy statements, Federal Deposit Insurance Corporation Chairman Travis Hill has outlined a significant shift in how the agency approaches resolution planning for large banks. The initiative, he describes as a move toward “rethinking resolution readiness” and “learning from experience,” reflecting lessons drawn from the 2023 banking failures, including the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank.

While the FDIC’s proposal has attracted support from those seeking regulatory efficiency, it has also raised concerns among former regulators and financial stability advocates. The debate centers on a fundamental question: should regulators simplify resolution planning to focus on the most likely resolution outcomes, or should they continue requiring extensive contingency planning for low-probability but potentially catastrophic events?

Background

Since the passage of the Dodd-Frank Act following the 2008 financial crisis, large banking organizations have been required to prepare detailed resolution plans, commonly known as “living wills.” These plans are intended to demonstrate how a failing institution could be resolved without taxpayer bailouts and without causing widespread financial instability.

The FDIC’s recent proposals would reduce some of the existing requirements under the Insured Depository Institution (IDI) Rule. The agency has already waived requirements that banks build plans around bridge-bank strategies and has reduced expectations for speculative scenario analysis and subjective credibility assessments. Instead, the FDIC wants banks to focus on providing operational information that would facilitate a rapid sale or support short-term operations while a sale is pursued.

Potential Advantages

Supporters of the FDIC’s approach argue that the current framework often produces lengthy documents that have limited practical value during an actual crisis. By emphasizing operational readiness, virtual data rooms, bidder engagement, and execution capabilities, regulators may improve their ability to market and sell a failing institution quickly.

The FDIC also believes that bridge banks can be costly and destructive. During the 2023 failures, bridge institutions experienced significant deposit outflows and deterioration in franchise value. The agency argues that successful weekend sales generally produce better outcomes for the Deposit Insurance Fund and reduce uncertainty in the marketplace.

Additionally, streamlined requirements could reduce compliance costs for banks and allow management to focus resources on capabilities that would actually be used during a resolution rather than maintaining extensive documentation.

Major Risks

Reduced Preparedness for Unexpected Crises A primary concern is that reducing scenario analysis may leave banks and regulators less prepared for events that do not follow expected patterns. Financial crises rarely unfold according to plan. Cyberattacks, payment system failures, geopolitical shocks, liquidity freezes, or simultaneous failures across multiple institutions may require solutions that differ substantially from a simple bank sale.

Overreliance on Acquirers The FDIC’s framework increasingly assumes that buyers will be available for failed institutions. However, during systemic crises, healthy buyers may be unwilling or unable to absorb troubled banks. Antitrust concerns may also limit the pool of potential acquirers, particularly if the largest institutions become the default purchasers.

Increased Banking Concentration One consequence of a sale-focused resolution strategy is the potential for greater consolidation. The largest institutions are often the only organizations capable of acquiring large failed banks. Over time, this may increase concentration within the banking system and reinforce concerns regarding institutions that are considered “too big to fail.”

Loss of Valuable Supervisory Information Living wills serve not only as resolution plans but also as supervisory tools. Resolution reviews frequently identify weaknesses in governance, derivatives management, liquidity planning, and operational continuity. In recent years, regulators identified shortcomings in resolution plans submitted by several major banking organizations. Reducing the scope of planning requirements could reduce opportunities to identify these vulnerabilities before a crisis occurs.

Greater Dependence on FDIC Execution The revised framework places greater emphasis on FDIC operational capabilities and less emphasis on detailed bank-generated plans. While this may improve realism, it also increases dependence on regulators’ ability to execute under extreme time pressure. If critical information is unavailable when needed, resolution efforts could become more difficult.

Confidence and Market Perception Risks Resolution planning also serves an important signaling function. Investors, creditors, and depositors take comfort in knowing that large institutions are required to demonstrate their ability to fail safely. If markets perceive that standards are being weakened, confidence could deteriorate during future periods of stress.

The FDIC’s proposed reforms represent one of the most significant shifts in bank resolution planning since the aftermath of the 2008 financial crisis. The agency is attempting to incorporate lessons from the 2023 bank failures by emphasizing execution, operational readiness, and rapid sales rather than extensive theoretical planning.

Whether this approach improves financial stability remains uncertain. Supporters view it as a practical modernization of a burdensome process. Critics worry that regulators may be sacrificing resilience for efficiency and preparing primarily for the last crisis rather than the next one.

Ultimately, the success of the new framework will depend on whether future bank failures resemble those of 2023. If they do, the FDIC’s streamlined approach may prove highly effective. If the next crisis presents different challenges, however, bank regulators may discover that some of the planning requirements being removed today provided invaluable protection against the unexpected.