FDIC's Hill: Stablecoins ineligible for pass-through insurance

• Key insight: The Federal Deposit Insurance Corp. plans to propose regulation as part of the GENIUS Act excluding stablecoins from pass-through deposit insurance coverage.
• Supporting data: FDIC Chair Travis Hill said failing to exclude stablecoins from pass-through insurance could fundamentally change deposit distribution and shift the risk from issuers to banks.
• Forward look: Regulators will also proceed with a number of other banking reforms, including modifications to bank supervision, capital, liquidity and consumer compliance requirements.

WASHINGTON — Federal Deposit Insurance Corp. Chair Travis Hill on Wednesday said that payment stablecoins will likely not qualify for pass-through deposit insurance in remarks that spanned the agency's approach to simplifying supervision including updating capital rules.

Speaking at the American Bankers Association Washington Summit Wednesday morning, Hill said the FDIC plans to propose that stablecoin arrangements governed by the GENIUS Act will not be eligible for pass-through deposit insurance, pursuant to the law's ban on marketing stablecoins as federally insured. Pass-through insurance is a mechanism by which customer funds deposited at a bank through a third party are insured, and frequently is used by fintechs and their partner banks. 

"It seems hard to rationalize the GENIUS Act's firm prohibition on marketing stablecoins as subject to deposit insurance if stablecoins were intended to serve as an access mechanism for FDIC-insured deposit accounts," Hill said. "As a result, the FDIC is planning to propose that payment stablecoins subject to the GENIUS Act are not eligible for pass-through insurance. … We should answer this question definitively by regulation, rather than waiting until a bank that holds stablecoin reserves fails, when different parties may have different expectations on the availability of FDIC insurance."

If stablecoin arrangements were eligible for pass-through insurance, Hill argued, it could make payment stablecoins more closely compete with bank deposits and could further increase the FDIC's Deposit Insurance Fund's exposure to stablecoin market forces. 

Hill noted this would likely have little effect on aggregate deposits, given that moving funds into stablecoins generally keeps them in the banking system. Even so, banks' increased exposure to stablecoins could substantially change the "nature and distribution" of deposits, a major concern for the nation's primary deposit insurer.

Hill added that the FDIC also plans to seek comment on how deposit insurance rules apply to tokenized deposits, which are distinct from stablecoins and not addressed in last year's GENIUS Act, which laid out core tenets of how stablecloins could be issued and how they must be supported. Hill said that distinction between tokenized deposits and stablecoins would likely make tokenized deposits eligible for similar deposit insurance rights as traditional deposits. 

"It seems clear that a financial product that satisfies the statutory definition of a 'deposit' under the Federal Deposit Insurance Act remains a deposit regardless of the technology or recordkeeping utilized," Hill said. "Thus tokenized deposits should be eligible for the same regulatory and deposit insurance treatment as non-tokenized deposits."

Hill also said that he is focused on making banking regulation more effectively centered on obvious risks and good outcomes rather than procedural box-checking.

Hill reminded the crowd of bankers that the FDIC is shifting its examinations toward material financial risks and clear illegal activity, but added that narrowing the scope of regulation, in his view, does not mean lax supervision. 

"The result of these initiatives is not lenient supervision," Hill said. "It is supervision focused on the things that truly matter."

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Hill also signaled that changes to consumer compliance are at hand in "the coming weeks and months." While he said current exams often concentrate on banks' consumer compliance policies, procedures and training, he would like to focus more on outcomes. 

Hill said the FDIC and other federal prudential regulators plan to refocus examinations on the most concrete examples of consumer harm, narrowing the scope of consumer compliance exams away from "asking institutions a voluminous list of broad, detailed questions," and tailoring regulation with regard to size and business model of individual firms. 

"For smaller banks, we will look at doing more to risk-focus our exams, which will include focusing more on products that are material to an institution's business [and] we plan to explore guardrails around the use of 'visitations' outside of the specified examination cycle, so that they are only used in rare circumstances," Hill said. "Additionally, we clearly need to increase the dollar thresholds that dictate the severity of violations. … [Today], the most severe violations are those that result in aggregate 'harm' to consumers of more than $10,000."

The agency also plans to avoid requiring banks to retroactively pay damages to consumers for conduct that occurred before new policy guidance takes effect.

Hill also previewed changes to capital regulation, as regulators like FDIC, the Office of the Comptroller of the Currency and the Federal Reserve are poised to issue a re-proposed Basel endgame proposal in the next few weeks. Federal Reserve Vice Chair for Supervision Michelle Bowman said at the conference earlier in the day that she would offer more details about the proposal at an event scheduled for Thursday morning.   

Hill said the forthcoming Basel proposal would replace the complicated "dual stack" capital proposal floated under the previous administration with a simpler "single stack" approach. The proposal would also remove what Hill described as "gold-plating" risk weights for some mortgage and retail lending exposures, whereby the U.S. rules have more stringent requirements than those laid out in the international Basel standard. Regulators will also reconsider certain operational and market-risk requirements, Hill said.

A second, separate proposal would adjust capital standards at all banks to soften risk sensitivity in areas such as mortgage, consumer and corporate lending, in an effort to "balance driving economic growth with ensuring safety, soundness, and resilience to shocks." 

"The intended result is more lending and a more level regulatory playing field between the largest and smaller institutions," Hill said. "Proposed enhancements to the securitization framework and recognition of collateral are consistent across both proposals."

Regulators have signaled that they are reexamining liquidity rules after the 2023 bank failures, as Hill said that the current 30-day liquidity coverage ratio, or LCR, understates the speed of modern runs like those seen in 2023 bank failures. The agencies are weighing allowing banks to count their Federal Reserve borrowing capacity in calculating liquidity buffers, reflecting real-world stress and readiness. 

"Incorporating borrowing capacity at the Federal Reserve into the LCR would have a range of benefits, including incentivizing operational readiness to borrow; reversing the trend of large banks shifting their balance sheets towards large quantities of ultra-safe securities, rather than loans in the real economy; and, perhaps, reducing discount window stigma," Hill said. "At the same time, this change would reflect the reality that if a large bank faces a true stress event, the central bank is likely to be the only viable option for meeting redemptions, as only the central bank can produce liquidity at large scale in any economic environment."

Hill said the agency also plans to rescind a 2009 policy that banned private equity firms seeking to acquire failed banks, an effort he's previewed before and he says will expand the pool of potential buyers during bank failures. Regulators are also exploring an emergency "shelf charter" process that would allow nonbank investors to quickly obtain an interim bank charter and enable them to efficiently bid on a failed institution.

During the question-and-answer session with the American Bankers Association President Rob Nichols, Hill also addressed the ongoing debate in Congress over whether to raise some deposit insurance limits following the regional bank failures of 2023.

The $250,000 deposit insurance cap is set by statute, he noted, saying, "we don't have any discretion there."

"There's value in thinking about potential options for deposit insurance expansion," he added, citing ongoing debate in Congress about offering higher coverage for business or transaction accounts.

Hill also said in addition to deposit insurance reform, policymakers may want to consider changes to the systemic risk exception, the emergency authority the White House can invoke to protect uninsured depositors during bank failures.

One possibility, he suggested, would be a temporary system-wide guarantee during moments of financial stress. 

"I think in a lot of cases [this] could be advantageous over the way the systemic risk exception currently works, because the current setup entrenches this problematic perception that depositors or creditors may get protected if they're in the largest institutions, but not the smallest institutions," Hill said. "So if, instead of having the authority to protect stakeholders of the institution that failed, that was converted to a time-limited, system-wide guarantee that had proper guardrails in place, that could be a mechanism to restore confidence across the system without perpetuating this two-tier framework."

John Heltman contributed to this report.