FDIC Staffing Shortages Could Impact Banks

The Federal Deposit Insurance Corp. is facing a wave of retirements that could impact banks or complicate the agency’s ability to manage future crises, according to a recent report from its auditor.

The FDIC’s Office of the Inspector General flagged the agency’s changing workforce among several issues in its February 2023 report looking at top management and performance challenges the agency faces. More than 21% of the FDIC’s workforce was eligible for retirement in 2022, which is higher than the average eligibility rate of 15% at other government agencies. Within five years, the retirement eligibility rate at the agency will increase to 38%, according to the inspector general’s report.

“Without strategic workforce planning, retirements and resignations could result in the FDIC experiencing mission-critical skills and leadership gaps,” wrote the OIG.

Of course, being eligible for retirement doesn’t mean an employee will retire. Still, it’s an area of strategic concern for the agency. Retirement eligibility was higher among senior FDIC leaders and subject matter experts; within subject matter experts, 31% of employees with advanced IT expertise and 21% for employees with intermediate IT expertise were eligible to retire in 2022. This potential exodus of specialized knowledge “escalates at a time when cyber threats at banks and their [third-party service providers] are increasing,” the OIG wrote.

“Forfeiture of institutional knowledge is always a risk, and it’s especially a risk in a place like [the FDIC] because there are niche focus areas,” says John Popeo, a partner at The Gallatin Group and former FDIC legal division employee who was involved in 40 bank failures during the 2007-09 financial crisis. An exodus or retirement wave could create a knowledge gap among remaining agency staff, but Popeo thinks any dearth in knowledge would be temporary.

The FDIC’s workforce tends to grow and shrink throughout economic cycles, says William Isaac, who was chairman of the FDIC from 1981 to 1985 and is the current chairman of the Secura/Isaac Group. There were more than 12,000 banks when Isaac became chair; the FDIC would go on to close more than 1,300 institutions of financial institutions between 1980 and 1994 as part of the savings and loan crisis. The FDIC went on a hiring binge to deal with the increased resolution activity, Isaac says, expanding from about 3,000 when he joined in 1978 to a peak of 21,000 under his tenure.

In addition to the wave of the retirements, the FDIC is also facing a question of who will replace them. The OIG also flagged in the report a potentially alarming trend that could have implications down the road: resignations among examiners-in-training. The four-year program that trains the next generation of examiners has seen “a substantial number” of resignations, above pre-pandemic levels. This brain drain could have a number of consequences for the agency: “Examiners play key roles in assessing the safety and soundness of banks, and it is costly for the FDIC to hire and train replacement examiners,” the report read. The FDIC invests about $400,000 to train each examiner. The OIG has previously identified a lack of clear goals to manage and track employee retention and made three recommendations to the agency; one recommendation remains unimplemented.

Having too fewer examiners across too many banks can quickly create safety and soundness concerns. A 2020 paper from researchers at the Federal Reserve Board studied what happened when the ninth district of the Federal Home Loan Bank lost all but two field agents in the early 1980s who became responsible for oversight of almost 500 savings and loan institutions. The researchers found that it took the FHLB at least two years to build back up its supervision expertise, and that unsupervised S&Ls increased their risk-taking behaviors compared to institutions that received regular exams. Supervision gaps during this time led to about 24 additional failures, which cost the insurance fund about $5.4 billion – over $10 billion in 2018 dollars.

Inexperienced examiners may also provide less effective oversight and may need to work alongside regulators with more tenure. The U.S. Department of the Treasury’s OIG flagged examiner inexperience in a 2018 material loss review concerning the 2017 failure of Chicago-based Washington Federal Bank for Savings. The bank was closed after the OCC was informed of, and subsequently confirmed, pervasive fraudulent activity. The OIG found supervision weaknesses in the OCC’s examination teams, including relying on inexperienced examiners and those in training to conduct exams on an institution that was deemed to be low risk.

Of course, the FDIC isn’t alone in its workforce management challenges, and it’s by no means an emergent issue. And in this regard, the FDIC shares a problem with banks, which also struggle to attract and retain talent.

Seventy-eight percent of respondents to Bank Director’s 2022 Compensation Survey said it was harder in 2021 to attract and/or retain talent than in previous years. About three quarters of bankers and directors said they couldn’t find a sufficient number of qualified candidates, 68% cited rising wages in their markets and 43% were feeling the pressure from rising pay for key positions.

Todd Phillips, principal at Phillips Policy Consulting and former senior attorney at the FDIC, points out that federal law requires that all banks be examined on-site every 18 months. “If there aren’t enough examiners because they have retired, the government has a difficult time meeting that requirement [and] … it’s going to be a whole lot more stressful on the bankers themselves,” he says. “As older hands retire, you’re going to have newer, less experienced examiners coming in, and they may be a lot slower.”

Isaac believes technology will be part of how the agency fulfills its safety and soundness oversight mandate, especially if workforce challenges persist.

“I’m a firm believer that we cannot have a modern economy without a properly supervised and regulated banking system,” he says. “There’s going to have to be an examination force that’s highly effective, coupled with modern technology, to stay on top of banks. [They’ll] figure out how to do that – I don’t have any doubt of that.”