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 Hello! Kiah here. Welcome to Fintech Takes Banking, my weekly newsletter where I highlight things I think are interesting or important for bankers and the surrounding environs. Happy Belated Mother’s Day to my readers and friends who are mothers. I hope you had a joyous weekend! And Happy Asian American and Pacific Islander Heritage Month! Was this email forwarded to you? Sponsored by Prism Data Banks possess a powerful but underutilized asset: their own deposit account transaction data. Cash flow data is a leading indicator that financial institutions can use to detect changes in their customers’ financial health earlier and act sooner. So why are so many still basing lending and servicing decisions on lagging indicators like bureau credit scores, missed payments or credit inquiries? Big Changes to a Shrinking Regulatory ForceIn the United States, you can become a recreational soccer referee at 11 and receive the full certification at 13, as I did. In my opinion, officiating is a great job for teenagers. They probably like the sport; they may even play it. It pays crazy good: a one-man under-11 game can pay about $60 an hour. There’s so much demand; tournaments every weekend and games during the week, and not every game requires Pierluigi Collina. It’s flexible, social and active. So why does officiating have a huge retention issue? Obviously, you know why. Because it takes years to train officials to become a good referee, never mind a great one. All the while, people will yell at you, or worse. Talent is scarce in officiating, and talent problems are concentrated with the newest officials and the oldest and most experienced, who are retiring. At the top of any officiating or athletics pyramid are the elite referees, who need to pass their institutional knowledge to the next generation of referees. Down the pyramid level, each sport governing body needs to prepare the next generation of referees for the next level of competition, or to move from youth to adult games. And at the bottom of the pyramid, governing bodies and states need to retain their newest officials so they have a chance to develop, while attracting and recruiting others. In Southern California, only two of 10 officials return for their third year. In Arizona, 700 referees quit in 2024 while 1,500 were newly certified. This is not a newsletter about sports officiating. It’s about banking. But there is a parallel I see between the two, and that is supervision. Last week, we talked about how federal banking agency heads have directed supervision focus to shift from process to identifying material risks, and how and where that shows up in public severe enforcement action data. This shift sounds great in theory. And I’m sure examiners, like referees, are no strangers to rules and guidance and points of emphasis that change over time (Ask me to explain offside, I dare you). But over the past year — and at the same time they have announced these changes — the federal banking agency heads have also taken other actions that may complicate or hinder these efforts. Namely, they’ve been busy laying off employees, including their examination staff, and I have no idea what the long-term consequences of that will be. Theory and PracticeExaminers are made and maintained, not born. And it’s safe to assume there are fewer working at federal banking agencies in 2026 than there were at the end of 2024, thanks to mass federal layoffs. The agency with the best public information in this area is the Federal Deposit Insurance Corp., whose Office of the Inspector General releases annual reports on its operational challenges. It takes about three years of training for new examiners to earn an examination commission from the FDIC, according to a 2025 OIG report. That long of a lead time means the agency has a hard time retaining these trainees, even before the installation of the new federal banking agency heads. Early career FDIC examiners with two years of training had a 15.4% turnover rate, compared to a turnover rate 4.3% for non-examiner FDIC employees with similar tenure, according to the FDIC OIG in a 2024 report. Mass layoffs last year only exacerbated these talent and retention problems. Head count fell 20%, from over 6,400 employees at the end of 2024 to just over 5,000 at the start of 2026, according to a report published this year. “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 2025 OIG report stated. “As a result, the FDIC may need to adjust its current examination processes based on the outflow of skills.” The number of supervised banks is indeed falling every year. But how will the FDIC address the gap if the rate of examiners falls faster than the rate of supervised banks? (Sounds like a messed-up algebra question.) The OIG reported that one adjustment the FDIC made is shifting its examination schedule. It changed its Continuous Examination Program, “which will involve fewer targeted reviews and fewer dedicated examiners” at banks with $10 billion and $30 billion in assets, according to the March 2026 report. It also reduced examination frequency for consumer compliance supervision at most institutions with assets between $350 million and $3 billion. If you are not running as many exams, you don’t need as many examiners — but that’s probably not how it’s marketed. Are We Losing Recipes?The spring banking stress of 2023 required the FDIC’s resolutions and receiverships division to handle three large and somewhat complicated failures, after a spate of relatively calm years. This division lost 22% of its staff in 2025, according to the OIG. Within the remaining staffers, another 28% are eligible to retire this year. The Division of Complex Institution Supervision and Resolution lost 20% of its staff in 2025, “with significant losses in its Resolution Readiness Branch,” the OIG report stated. Other functions like information technology, contracting, financial and legal — which all play roles in failures — also faced reductions. Banking is famously cyclical; even as technology, delivery and products change, it does reward students of its history. The FDIC OIG is concerned about effective knowledge transfer from its most senior staff to more junior staffers. It’s one thing to lose bodies that can work these failures — coordinate potential buyers, upload information, calculate bids. It’s another thing to lose people who know what it’s like to work a failure, or work many of them at the same time. “The impact of staff attrition extends beyond numbers; it can affect institutional knowledge, readiness for resolution and receivership activity, and the ability to respond to crises,” the OIG wrote in 2026. And it’s not just the FDIC that is experiencing a reduction in force. Federal Reserve Governor Michael Barr shared in a November 2025 speech that the supervision and regulation division in Washington will be reduced by 30% by the end of 2026. This division had spent almost a decade growing after the 2007-09 financial crisis showed that “the Fed's bank supervision had failed to keep up with the growth in the size and complexity of the banking system.” Today, these staffers work with banks that have more than $10 billion in assets and focus on “risk identification, oversight, consistent policy, horizontal reviews, and coordination across the entire banking system,” according to the speech. He said the drastic reduction in supervision staff will “limit supervisory findings and enforcement actions and erode supervisors' ability to be forward-looking” and reduce the institutional knowledge that will diminish the Fed’s “capacity to manage crises when they arise.” He cautioned against a broad release of human capital and institutional knowledge if the stated goal is for more effective supervision. “Effective supervision depends on its human capital. The knowledge necessary to be an effective examiner comes from both formal training and through an accumulation of on-the-ground practical exposure,” Barr said. “They take time to develop and cannot be easily replicated.” Examiner experience may be a relevant concern for banks in their future exams. A third of respondents to Bank Director’s 2026 Risk Survey felt in their most recent regulatory exam that their institution’s examiner was inexperienced compared to previous exams. Just under half of respondents believe their primary regulator is understaffed or otherwise under-resourced. These questions were not part of the 2025 Risk Survey, so it’s tough to draw conclusions from one year. What’s the Worst that Could Happen?We do, weirdly, have an idea of what happens if a regulator loses a lot of its examination and supervision force, thanks to a strange natural experiment in 1984 that was documented in a 2017 paper from the Federal Reserve. The Federal Home Loan Bank system used to supervise savings and loan institutions, and in 1983, the ninth district of the FHLB moved its principal office from Little Rock to Dallas. Many of the staff — including most of the examiners — declined to move, leaving only two supervisory field agents who were responsible for 85 institutions each across five states. This was obviously an untenable situation. By 1986, 10 other FHLB banks sent 250 supervision and examination staffers from their districts to conduct “an intensive six-week examination blitz.” The paper documented that many of the institutions had not had a comprehensive exam in two or three years. Enforcement actions after the blitz grew 76% over the previous year. The dramatic reduction in examiner staffing levels meant fewer exams: the number of exams conducted in the district didn’t return to pre-move levels until 1986. In that two-year gap, the researchers found that these unsupervised institutions “took on much more risk than their counterparts” in other regions that didn’t face interruptions in supervision. There were serious downstream effects in the absence of regular supervision visits, including a higher incidence of bank failures in the district and slower and more expensive resolutions. All that trouble in two years! Because an examiner wasn’t stopping in to conduct an exam — can you believe it? And this is before widespread computer access, digital and faster payments, or really stupid stuff like cryptocurrency. Mostly just hot brokered deposits and commercial real estate in the 1980s. “The effects of weak supervision on risk taking that we document are meaningful,” the researchers wrote. “[O]ur findings underscore the importance of supervision per se as a companion to financial regulation in banking policy. By clearly disentangling the effects of supervision from regulation, we show that the degree of supervisory attention has an important effect on bank behavior.” Maybe that was what Barr was thinking about when he said, “time and again, periods of relative financial calm have led to efforts to weaken regulation and supervision.” Or maybe he was thinking of an FDIC’s 2017 paper that found that about 37% of bank failures over two decades had evidence of material insider abuse and internal fraud, which was detectible one to four years before failure, which I wrote about last year. Maybe it’s something else altogether. Today’s federal banking agencies are a long way from a coverage ratio of one examiner and 85 S&Ls. We are thankfully not there. But still, the question I increasingly have is: What is the minimum number of examiners needed to keep the banking industry safe and sound? And how will we find that out? It’s too soon to tell, but is it too soon to start worrying? BANKS, LOOK UP Commercial clients aren’t waiting around for their banks to add the features and capabilities that make running their enterprises easier. On May 20, I'm hosting a live conversation on what it actually takes to be the operating partner your commercial clients need…before they find one who is. FROM THE VAULT What’s on my mind and filling my time: ♉️ Consulting the stars: There are so many vibes-based things in the world, why not consult the stars to find a destination that might align with your chart for $600? (Fun fact, I’ve been pestering Alex, Jason Henrichs and Jason Mikula about astrology, and worked with Mikula to get his chart read. You know what? Turns out astrology is real — and happy early birthday to Jason!) 📚 NAME THE BANK YOU COWARDS: Former Chicago resident Robert Prevost recently tried to call his bank to update his account with his new address and phone number. The customer service agent told him he would have to complete this transaction in a branch and then hung up the call when he said he is the pope and is in Rome, according to The New York Times. Quick question: Why does someone need to go to a branch for this in the year of our Lord 2026? 🎙️On Bank Nerd Corner: Catherine and I attempt to corner the market on “Trading Places” takes. We’re joined by John Heltman, Washington bureau chief at American Banker, to discuss the 1983 comedy and its financial themes, as well as our favorite commodities. John used to cover the CFTC and shares how the movie inspired a rule in the Dodd-Frank Act. 🛫 Catch Me At: the Open Banker Salon on June 5 in Washington, moderating a DIDMCA debate with a who’s who of bank nerds. Thanks for reading! Let me know your thoughts on this piece. – Kiah | ||||||||||
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