The Federal Deposit Insurance Corp. is navigating its second major political crisis in just under two years. But this time, there’s more at stake than the career of the agency’s Senate-confirmed leader.
As we wrote in the PM edition Thursday night, FDIC Chair Martin Gruenberg has come under heavy political fire this week following a string of investigative reports from the Wall Street Journal. The first, published Monday, disclosed widespread sexual harassment allegations at the agency’s regional offices throughout the country.
Another report, published Wednesday evening, focused on instances in which Gruenberg overlooked purported misconduct in the FDIC’s Washington office.
Banking industry insiders don’t expect Gruenberg to resign in the near term, based on many conversations we’ve had over the past 48 hours with financial lobbyists and others in the industry. Some Senate Republicans have called for Gruenberg’s resignation, but that’s about it.
For now, most lawmakers want to wait for formal investigations to take their course, whether that’s from the FDIC’s inspector general — as Sen. Sherrod Brown (D-Ohio) called for last night — or through more direct congressional oversight, as Rep. Patrick McHenry (R-N.C.) has promised from the House Financial Services Committee.
We’ll also see some older policy proposals get new life with this scandal. We’re told Sen. J.D. Vance (R-Ohio) will revive a legislative push this morning to reduce the number of large banks supervised by the FDIC and Federal Reserve and hand them off to the Office of the Comptroller of the Currency. Vance told us in a statement he had “serious concerns over the FDIC’s ability to effectively supervise and regulate the banking sector.”
But let’s zoom out for a second: Gruenberg’s crisis could pose serious problems for the Biden administration while handing an immense political victory to the U.S. banking sector. The stakes for the future of American economic policy are huge as well.
Within the Byzantine structure of U.S. bank regulation, Gruenberg is one of several officials leading the federal agencies known as prudential bank regulators — the FDIC, Federal Reserve and the OCC. For a major policy to get done, those entities need to agree with each other.
That brings us to the FDIC board of directors, which consists of five officials. Three directors are Democrats, including Gruenberg, acting Comptroller of the Currency Michael Hsu and Consumer Financial Protection Bureau Director Rohit Chopra. The other two are Republican appointees: Directors Jonathan McKernan and Travis Hill.
The structure of the FDIC’s board means that Gruenberg is effectively a deciding vote on any controversial rulemaking, which includes the Biden administration’s Basel III capital proposal. Both McKernan and Hill voted against the proposal, and the banking sector is viciously opposed to the changes.
If the FDIC is left without a fifth board member, a 2-2 vote would stall, and probably doom, politically sensitive banking policy. And that would extend to the other entities responsible for crafting interagency bank regulation — namely the Fed and OCC.
In theory, could the Biden administration put forward a replacement to lead the FDIC as chair? Sure. But with 2024 just weeks away, we’re not bullish Senate confirmation would be a sure thing. And trust us when we say that no one is more excited about that possibility than the U.S. banking sector.
— Brendan Pedersen
