Dive Brief:

• The Federal Deposit Insurance Corp.’s attrition issues could jeopardize its ability to examine lenders and resolve bank failures, the agency’s Office of Inspector General warned in a report released Thursday.
• In the near term, the FDIC has to ensure it has enough qualified staff to conduct examinations. “With fewer examiners but the same responsibility to conduct statutorily required exams in 2025, it may be difficult for the FDIC to complete these examinations by the end of the year,” the report said. “As a result, the FDIC may need to adjust its current examination processes based on the outflow of skills.”
• Inspector General Jennifer Fain, in the report, noted “significant restructuring and reform” currently occurring within the federal government. Still, given the regulator’s key role in resolving failed banks, “the FDIC must not lose sight of its readiness mission as it undertakes the restructuring and reshaping of its staff and processes,” the report emphasized. 

Dive Insight:

“The pace of change and fluidity regarding the status and composition of the FDIC make it difficult to assess the full impact of these changes on the FDIC and its mission,” the watchdog’s report noted at the outset, in a reference to the Trump administration’s sweeping downsizing of the federal government.

Top challenges the OIG identified at the FDIC are based on the agency’s makeup and processes as of March 14, and “we acknowledge that the FDIC may undergo significant changes that may impact our currently identified Top Challenges.” 

The report seemed to underscore growing concern expressed by agency veterans and industry experts over brain drain, buyouts and the impact of a federal hiring freeze at the already under-staffed agency. 

The FDIC’s workforce has shrunk by about 9% since January, the report noted, going from 6,400 employees to 5,950, due to staffers accepting the deferred resignation program offer, the dismissal of probationary employees, retirements, transfers and resignations. 

An additional 17% of FDIC staff are retirement-eligible, the report said. “This includes several senior leaders who will retire within the year such as the Director of the Division of Risk Management Supervision (RMS) as well as Regional Office Directors in the three largest FDIC Regional Offices: Atlanta, Dallas, and New York,” the report said.

The FDIC should assess attrition’s effect on the agency’s capacity to handle resolutions and receiverships when banks fail, “including how the attrition may impact the need for contractors.” 

As of Feb. 18, the FDIC’s Division of Resolutions and Receiverships has experienced about 20% staff attrition, and about one-quarter of that division’s remaining staff are retirement-eligible within the next year, the report said. And the division handling complex institution supervision and resolution lost about 10% of its staff “with significant losses in its Resolution Readiness Branch,” the report said.

Given those figures, the regulator’s investment in new staff will have to be a consideration over the longer term, the OIG report said. It takes about three years of training for new examiners to earn an examination commission, and employees are required to meet benchmarks, go through training and pass a technical exam. 

Skill loss is a concern, too, as examiners leave the FDIC, “especially those with advanced IT skillsets who examine risks at the most complex banks,” the report noted. Examiners with the skillsets to effectively assess banks’ and third-party operational risks may also be lacking at the agency.

Additionally, the OIG said the FDIC has yet to foster an accountable workplace culture, including establishing a sufficient sexual harassment prevention program, the report said. The OIG in August highlighted the agency’s failures in this area, noting that the FDIC hadn’t acted on previous recommendations the OIG made. 

A December inquiry revealed more than one-third of FDIC employees had witnessed or experienced harassment. The report also indicated the FDIC lacked an agencywide policy concerning penalties or recommended penalty ranges, and senior leaders may have been unaware of the extent or significance of the issue, because it wasn’t required that allegations of harassment or misconduct be reported to the chairman or board.

“With significant staffing changes underway, the FDIC will need to assess its current staff skillsets against its statutory obligations and identify ways to address critical skill gaps,” the report said. “As the FDIC undertakes that assessment, the FDIC should also continue to consider the standards necessary to ensure that the FDIC has an accountable workplace culture.”

The FDIC’s annual report was also released Thursday, with Acting Chairman Travis Hill stressing that the agency is “committed to successfully executing on its cultural transformation.”

“Most fundamentally, we must have a fair, credible, trusted process to hold employees accountable for misconduct,” he wrote. 

The report listed changes the FDIC has implemented, such as creating an independent Office of Professional Conduct; appointing an independent transformation monitor; setting up a 24-hour hotline and offering access to licensed clinical counselors; issuing a directive related to personal relationships among employees and updating a directive related to whistleblower protection rights; and delivering mandatory anti-harassment training to 99% of the agency’s workforce. 

The OIG report highlighted eight main challenges facing the agency: enhancing governance, establishing effective human capital management, ensuring readiness to execute resolution and receivership responsibilities, identifying and addressing emerging financial sector risks, assessing operational resilience in the financial sector, improving contract management, ensuring IT security and scalability, and guarding against harmful scams.

The OIG report noted a lack of agencywide coordination has affected some FDIC functions, as well as goals and metrics around some programs. The watchdog also found some aspects of the FDIC’s readiness efforts, to fulfill its resolutions and receivership duties, “are not sufficiently mature and require improvement” to minimize losses to bank customers and the Deposit Insurance Fund, and costs incurred by other banks through special assessments.

In particular, the FDIC needs to bolster planning for large regional bank resolutions, the report said. And the FDIC hasn’t always taken early action to alleviate safety and soundness risks it’s flagged during bank exams.

The OIG report also noted that FDIC-supervised banks’ increasing use of third-party service providers for compliance with Bank Secrecy Act and anti-money laundering and sanctions requirements “may require different examination processes or examiners with different skillsets.”

Additionally, bank regulatory agencies had identified risks tied to lenders’ involvement in cryptocurrency activities, but the FDIC hadn’t conducted risk assessments to determine the significance of crypto activity risks, the OIG said.