The Banking Revolution - A Conversation w. Travis Hill, Acting Chairman, FDIC | DC Fintech Week 2025

I would like to welcome FDIC Chairman Travis Hill. Welcome back. Uh uh last time I I saw you uh you were you were the vice chair. So So now congratulations to you. Um I I know uh your life has your is is it busier?

Is it is it different? Any any major change in

I would say it's substantially busier.

I I I I can imagine. Um I guess one of the things that's probably kept you busy uh a couple of changes in policy. Um, one has been the genius act which is uh uh and by the way for all the people in the back there are these wonder I feel like now I'm the professor talking to my students there are lots of uh chairs here right in the middle if if you would like to to sit down um but when it comes to the Genius Act it's not just legislation it requires lots of implementation that does keep you busy um where does that implementation stand now what does it process even even look like uh for you

sure um well hi everyone great to be here Um so in in terms of the Genius Act um so we have we have a number of responsibilities that Congress assigned to us at the FDIC. Um the the our primary responsibility is that we will be the supervisor of stable coin issuers that are subsidiaries of state non-member banks. So essentially if FDSC supervised institutions want to issue stable coins they would have to set up a subsidiary get approved by the FDIC and then supervised by the FDIC. The OC has the primary responsibility in the sense of um licensing and supervising non-bank stable coin issuers. Um but we would oversee our supervised institutions.

And so from a from a rulemaking perspective, we need to issue um credential standards. So capital liquidity um reserve diversification, interest rate risk management. there's a list of credential standards that the statute requires us to to issue and promulgate. Um, so that's one piece of what we're working on. And then there's also an application and licensing framework which again would would for us would only be for for our supervised institutions.

We also have um some responsibilities that would apply to the entire stable coin industry. So, um, establishing limits on IDI's ability to hold stable coin reserves, um, restrictions on misrepresentations related to deposit insurance. Again, these are other things that were specifically given to the FDIC in the statute. And then the one other big piece is we have a seat on the stable coin certification review committee, which is which is chaired by the the Treasury Secretary. Um, and that certification review committee has several responsibilities.

One is um if there are large publicly traded non-financial companies that want to issue stable coins. Um a second is looking at state regimes to see if they're if they're substantially similar to the federal regime. Um and then a third is looking at foreign stable coin regimes to see again if it um has comparability to the to the domestic framework.

Super interesting. just as a sorry uh if I'm not keeping up in to all the day-to-day by this but in terms of that one Treasury committee is that has that started or is it like are people still organizing and getting the infrastructure to support that that

the the latter um so we're we're in the process of working with with so the the the three seats are for Treasury Federal Reserve and FDIC um and so we're working right now on kind of gettingus in place um and starting to get all that work up and running.

Got it. Um so you you named uh a very you know uh a vast array of things involved in the implementation of Genius. You had also named okay we have to figure out the capital, we have to figure out um you know deposit risk um and the like. Is there something that's technically easier to do in terms of that list? Are there sort of harder and easier things for the FDIC when they try to tackle that that particular list?

Yeah, I mean I think um I think the application and licensing piece I think for us is going to be pretty straightforward. Um again given that the potential applicants would all be institutions that we already supervised. Um, you know, I would anticipate that being a a relatively streamlined process and I think the sort of setting up that process is not going to be particularly difficult. Um, I think the pieces that are probably going to be more interesting with sort of uh deeper policy issues is is some of the issues that will come through the certification review committee. Um, again, looking at non-financial companies that potentially want to become issuers, looking at state-based regimes, how to kind of compare those to the federal regime.

Um, you know, I think those are areas where again there's there's probably more complicated policy issues at play.

Yeah. You know, it's it's just interesting the your earlier comment about um getting anou sort of situated between all the different um banking regulators and and interest. I I assume that's also as much to streamline policies so that everyone is literally working from the same page as it is just just getting the the work streams um up which is super super interesting. Um uh I'll I'll circle back I I guess a little bit later to some of the stable coin and the Genius um act issues, but obviously when you when you came um into your new role, there were a variety of of other concerns even outside of um the Genius Act. U one was the question of debanking.

Um what have you uh you know you've you've obviously had a seat in those conversations before. Has your thinking evolved? Um, are there any more solid conclusions that you've been able to to reach when you think about debanking? Now, you know, obviously there was something a criticism and a concern coming from the crypto industry, but it's it's it's also a larger larger meta issue as to uh the role of banking regulators and and and access to to deposit taking um and banking services.

Yeah. Yeah. So, I mean, I think uh I think as a general matter, um you know, I think we we want to have a banking system that that serves all of America that that serves all law-abiding customers and and businesses. Um you know, from the FDIC's perspective, we've done a lot of work on kind of studying unbanked, you know, the unbanked population and and ways to try to promote more financial inclusion. Um, so you know, I think the the efforts to address debanking fit into that that broader conversation.

And again, whether it's debanking of crypto companies or conservatives or people from certain religious backgrounds or socioeconomic backgrounds, I think whatever it is, again, I think the sort of high level goal is a banking system that's going to serve that's going to serve all of America. Um obviously there was the executive order um over the summer which we are we are working to to be responsive to. Um so we have a number of things that we're we're reviewing. Um we did send some request lists to some of our largest institutions. We've been looking at policies and procedures of institutions.

We've been looking at complaint data that we have. Um there are several other things we're also looking at again. So, I think right now we're still in the process of kind of conducting these these reviews. Um, and then from a from a policy perspective, there's there's various things we're we're doing or considering. Um, we just jointly with the OC issued a proposed rule on on reputational risk and the the objective there is it would prohibit examiners from criticizing institutions on the basis of reputational risk.

Um and it would also um prohibit encouraging banks to um to not serve customers on the basis of political or social or religious religious views etc. Um and in that respect when we talk about reputational risk we're talking about the risk of changing public perception for reasons unrelated to the financial condition of the bank. So, you know, if there's something that happens that causes a loss of confidence in the bank, then of course that's something that is fundamental to banking and and bank supervision. Um, but reputational risk, we're talking about something different, which is, you know, sort of more subjective impressions of of reputation. Well, let's maybe uh dig a little bit deeper into the the question of sort of threats and opportunities uh uh to the bank.

um this question uh and the issue of of of custodying of crypto assets has been around actually for several administrations and and and there's been a little bit of of of back and forth, but there's been some real uh movement now. Um practically speaking, uh maybe we can talk about what just custody means for you, but also uh more in a in a technical measure. when a bank custodies crypto assets, what what kinds of of considerations do you think about from a regulatory standpoint that or what kind of expectations do you have from a regulatory standpoint about how that's supposed to be facilitated?

Um yeah, so so prior to this year, um there were there were major obstacles to banks being able to engage in custody of of crypto assets. Um, part of it was the prior notification guidance that the agencies had put out which basically required institutions to get essentially pre-approval from from the regulators before they could engage in activities related to crypto assets which um made participation in these activities more difficult. And then there was SAB 121 which imposed accounting treatment that made it very challenging for banks to to to provide crypto services. Um obviously those things have changed now. We've we've rescended those prior notification requirements.

The SEC rescended SAP 121. Um so now we do have banks that are engaging in in providing crypto or custody services for for digital assets. Um, you know, custody is a is a long-standing permissible activities for banks to engage in. It's a core function of the of the banking system. Um, so now we do have banks that are providing that service.

Um, that includes things like um custody for collateral for that digital assets that's pledged as collateral. Um, you know, I think from from our perspective, if banks want to engage in this, they do need to have the technical competency to be able to kind of safeguard crypto keys and and things like that. Um, we did issue we did issue along with the OC and the Federal Reserve over the summer guidance on on safekeep safekeeping, which is which addresses a piece of sort of the

I thought that was actually quite interesting uh reading. Um, and I, you know,

interesting as a

No, I mean, okay, that's true. I'm boring, but it really was, uh, quite interesting and and and, uh, I actually thought it was under appreciated that the document went out. It was, oh, okay. Well, there's risk management, but it was it was it was quite interesting and it went into a lot of detail on some of those technical areas.

Yeah. So, you know, I think other areas things like um, obviously cyber security is a is a big piece of it. um AML and sanctions compliance. Um so again I mean I think from from our perspective as the regulators you know obviously an institution needs to have the sort of compet competency and and infrastructure in place to be able to engage in that type of activity. Um but but I think the I you know the notion of we want to push all of this outside of the banking sector you know I think that's that's that's an ill-advised approach.

And so again, custody is a is a a core function that the banking ser the banking industry has long provided. Yeah. Well, you know that that that banking industry as as uh we were talking about with with Elis is is evolving. Um you know, and while the FinTex may have been at the forefront of using and deploying AI and generative AI, they they are starting to catch up and and trying to adapt to a world in which it is ubiquitous. um from a regulatory standpoint for your priorities uh what's your what's your take on Gen AI uh you know what kinds of um transformations are you seeing but also what what which of those transformations are the ones that are most relevant to to your role um so uh so obviously AI generative AI I mean these are technologies that are potentially revolutionary to many aspects of of daily life of societ society and and how our economies function.

Um we are seeing adoption by banks across a large range of areas. Um fraud detection that's some an area where some of the credit card banks were we're sort of early adopters in but we're seeing it more broadly. um credit underwriting. Obviously, banks have been using machine learning and other types of AI for a number of years, but as the AI tools become more sophisticated, you know, that's an opportunity to get more insights into, you know, evaluating creditworthiness and potentially also to um be able to kind of underwrite uh as you know, components of the of the population that that maybe wouldn't be wouldn't have access under more traditional underwriting meth methodology. technologies um AML compliance, transaction monitoring, things like that.

Um also just sort of the you know things like content generation, marketing, customer service. I mean those are things that again companies across all industries are are starting to utilize and we're seeing it in the in the banking industry too. Um being able to to process and glean insights from large data sets. um you know that's that's an area where AI has tremendous potential. Um so I think from our perspective we're we're kind of seeing adoption across a lot of different areas.

Um there's a there's a huge amount of promise there. Um I think from a regulatory standpoint we want to foster an environment where innovation is encouraged and and possible. Um obviously we want to make sure banks are doing it in a responsible and and safe and sound way. Um but to the extent that these technologies are being developed in in society um you know we want banks to be to be part of that. I think from from our perspective at at the FDI I think over the longer term there are there are there's a lot of promise for ways that it can um revolutionize how we supervise banks when it comes to things like reviewing loan files, things like that.

Um I think those are not things we're going to be ready to do in the short term. Um but they're things we are thinking about over the over the longer term

as as a kind of supervisory technology and and and and upgrades. Very interesting. Well uh uh the last time we we talked uh as as well last year um licensing was a big issue and uh when you look at the rate of sort of new bank creation and licensing it was uh remarkably small. I can't remember all all of the data that you provided, but I the audience was a little bit left a gasast. Um I'm going to guess that that's been something that you've been thinking about.

Maybe you can you can share what what your priorities are and and what you've been working on.

Sure. Yeah. So um trying to encourage denovo activity is a is a big priority that we are thinking a lot about at the FDSC. Um, as you noted, the the amount of new banks has has really fallen off a cliff since the financial crisis. Um, from 1995 to 2007, the lowest amount of denovos in a single year was 93.

Um, virtually all of those years had tripledigit new banks. Um, since 2010, the total number of denovos over 15 years is less than 93. So we had, you know, the the amount in the lowest year in the kind of decade leading up to the crisis is more than the total number we've had since then. Um, you know, I think it's

maybe something.

It's um it's it's probably not realistic to to to think we're we're going to get back to sort of the pre the pre-crisis numbers. Um, but I think trying to turn on turn on a pipeline is is critical. Um when we look at consolidation across the across the banking agency um you know people often point to you know M&A and and mergers um but the truth is that the merger rate has been relatively consistent. It's kind of noisy yeartoear but over the you know over the longer spans of time it's it's been pretty consistent for for several decades. Um whereas again the the denovo activity is what has really from a stat statistical standpoint it's the fact that there's so little new entrance coming into the system is what's causing the the number of IDI to to fall so so precipitously.

Um so from our perspective again I think we're still we're still sort of in the the policy development phase u but we are looking at at capital expectations. That's one of the big the big challenges and obstacles is um institutions struggling to raise the amount of capital needed to to form a to form a denovo bank. We're we're continuing to think about our process. So, you know, whether we should have like a a conditional approval process, something where institutions could get a conditional approval, use that as a mechanism to then have some time to to try to raise capital. Um again, there's sort of pros and cons to different ways of doing things.

And then, you know, we're sort of looking at at a at a plethora of other just sort of granular things about our analytical framework. Things like how we analyze managerial resources, which is one of the one of the statutory factors. Um, you know, are there ways that we can be more flexible in what type of experience we're looking for in in management teams? Again, we want to still um recognize that a a deposit insurance is something that um you know, there should be a a a high bar to meet, but at the same time, in order to have a meaningful pipeline, we we do need to have just some more flexibility in trying to encourage more more interest in activity. you know, just just listening to you and and later we'll have uh uh you know, Paul Atkins uh coming by as well and and I was at a an event uh with him in New York uh where he spoke uh last last week.

But just just even listening to these there are certain kinds of symmetries that you hear across finance, right? you know, the decline of IPOs, the decline of denovo banking, you know, what does this mean in terms of and they're and they're weird, you know, sort of a spectrum somewhere between sort of the capital access to financial inclusion sort of spectrum where you sort of see this question about what do you do? How do you address it? Um, what are the new kinds of policy approaches? Uh, even though you have 15 seconds, being a regulator is hard.

Like you get blamed when things go bad and you never get credit when things go well. How do you deal with that? Uh, hope things don't go bad. And

well, well, that sounds like being a law professor.

I don't know. Ben Bernani won a Nobel Prize, so uh

Yeah, that's true. That's true. Good luck.

Hey, thank you so much, man.

Appreciate it.

I really appreciate it.