By Jon Hill

Law360 (July 23, 2020, 6:32 PM EDT) -- The head of the Federal Deposit Insurance Corp. said Wednesday that banks could need regulatory flexibility for months as they contend with the COVID-19 crisis and its impact on customers, cautioning that the pandemic isn't a sprint but a marathon.

Speaking at an Online Lending Policy Institute webinar, FDIC Chair Jelena McWilliams said that even if an effective vaccine against the novel coronavirus is developed and deployed relatively quickly, there could still be a lag of as many as two years before the economy gets back on its feet and banks work through assets distressed by the pandemic. 

"We have to be cognizant that this is not a sprint," McWilliams said. "We're in a marathon, and on the regulatory side, we need to take all the steps we need to take to make sure that banks can [get through] this and, frankly, help the borrowers."

Reflecting on the trajectory of the pandemic so far, McWilliams said the U.S. banking system has managed to weather the initial economic shock of the crisis "rather well" thanks to strong starting levels of capital and liquidity, noting that the agency recorded another near-record low number of problem banks in the first quarter.

But as the pandemic continues to unfold and data comes in on the banking system's performance in the second and third quarters, McWilliams said regulators and policymakers may need to stick with the flexible approach they took when rolling out various relief initiatives at the outset of the crisis, like clarifying banks wouldn't have to automatically treat all pandemic-related loan modifications as troubled debt restructurings.

"That's really where we need to be, helping the borrowers so that loan that can be modified now and not be a TDR, not be impaired, is not the same loan that didn't get modified, and then three months down the road, we have a troubled debt," McWilliams said.

Wednesday's webinar, presented as a conversation between McWilliams and OLPI's Executive Director Cornelius Hurley, came almost a month to the day after the Federal Reserve announced it would temporarily suspend share buybacks and restrict dividend payouts by the nation's biggest banks to help make sure they'd have enough capital to ride out uncertain economic conditions in the months ahead.

Asked if the FDIC might similarly direct banks under its regulatory umbrella to limit buybacks and dividends, McWilliams said the agency has that option if its examiners get nervous about a particular financial institution's resilience, but she said the agency supervises mostly smaller banks with comparatively few or no outside investors and wouldn't "want to do a blunt cut announcement."

"We're handling this on a bank-by-bank basis, depending on the size of the bank, the condition of the bank, and whether or not we have regulatory concerns about that bank preserving capital," McWilliams said.

The chair added that many of these smaller banks have already taken steps "on their own volition" to safeguard their capital positions.

McWilliams also addressed other hot-button issues on the FDIC's policy agenda, including its effort to liberalize longstanding rules restricting banks' use of brokered deposits.

Late last year, the FDIC issued a proposed overhaul of those regulations that would, among other things, refine what counts as a deposit broker to avoid scoping in banks' non-deposit relationships with certain service providers like fintech firms and online advertisers.

Although the pandemic has pushed back the agency's timetable on that rulemaking, McWilliams said Wednesday the FDIC hopes to complete the project and issue a final rule by the end of the year.

The FDIC chair said her agency is additionally planning to follow up on the Office of the Comptroller of the Currency's proposal released this week that lays out a standard for determining who legally qualifies as the "true lender" when a bank partners with a fintech firm or other nonbanks for making loans.

Although the FDIC and OCC recently completed parallel rulemakings responding to another legal issue that's dogged such partnerships — namely, whether nonbanks in those arrangements must comply with state interest-rate caps on loans they take on from their bank partners — McWilliams said her agency will tackle the true lender issue separately.

"The OCC has different authorities than [the FDIC], so we are currently going through the analysis of exactly how to proceed under [our] statutory authorities," McWilliams said. "We'll take a look at the OCC comments … to see what kind of feedback they're getting before we move forward."

McWilliams declined to go into detail about how an FDIC true lender proposal might differ from the OCC's draft, saying only that "we will have to see where we end up." But she stressed that she sees the stability and healthy functioning of banks at stake.

"This goes above and beyond just clarifying the uncertainty," McWilliams said. "From the safety and soundness perspective, we need to have a viable secondary market for these loans, and we can't do that unless we provide a roadmap."

--Editing by Amy Rowe.

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