What the FDIC resignation means for banking policy
The big winner in all of these agency shake-ups is Senator Elizabeth Warren.
The Federal Deposit Insurance Corporation was created in 1933 in the early days of the Franklin Delano Roosevelt administration in an effort to bring stability to the banking system in the aftermath of bank runs. It became one of the many independent agencies in the executive branch that was designed not to be dominated by one party or one administration. The FDIC Board of five, including the chair, cannot have more than three members from a single political party. The Senate-confirmed chair has a five year term. For the last 88 years it has functioned independently with the chair setting the agenda for each meeting.
That has all changed. We are now in the Biden era of progressive and aggressive banking regulation.
Jelena McWilliams was the Trump appointed chair with a term set to expire in June of 2023. The other four board seats include one vacancy as vice-chair, CFPB Director Rohit Chopra, acting Comptroller of the Currency Michael Hsu and Martin Gruenberg, the former FDIC chair as a Democrat appointee. Once Chopra was confirmed at the CFPB, he immediately pushed for a change in how the agency reviews potential mergers. McWilliams indicated she needed to have staff review the request before placing it on the FDIC agenda. Chopra then asked for a legal opinion from the Justice Department on the chair’s power to set the agenda. Chopra then went around the FDIC administrative process by publishing the merger evaluation proposal in a CFPB publication. He was joined by Hsu and Gruenberg.
McWilliams fired back with some public statements and an op-ed but she could read the handwriting on the wall. It is speculated that the next step would have been that the insurgents, led by Chopra, would use their three FDIC Board seats to change the bylaws to allow for FDIC agendas that were more in line with Biden administration priorities. McWilliams probably acted to protect the FDIC as an institution and to avoid the inevitable infighting that would go on for the next 18 months. Gruenberg has been appointed as acting chair, but it is Chopra who will be running the show.
The bank merger issue that started the FDIC dispute was about applying more antitrust scrutiny to potential mergers. It is aimed at pending mergers that will result in institutions that will end up having $50 to $100 billion in assets. (If the aim is to look at concentration and market power the administration might be better advised to look at the five entities that control over 50% of deposits and assets.) An unstated reason may be that holding up mergers could benefit self-styled community reinvestment groups in order to extract more dollars and loan commitments from the merged banks.
From an industry perspective, the loss of McWilliams means the loss of a conservative voice in banking regulatory policy. For example, she abstained from voting on the climate change policy statement issued by the Financial Stability Oversight Council last year. Her involvement will also be missed as the agencies start implementing fair lending regulations reminiscent of the Obama years. The recently proposed Section 1071 small business loan reporting edict will now apply to FDIC regulated banks in the same time frame that it applies to OCC and Fed-regulated banks.
The big winner in all of these agency shake-ups is Senator Elizabeth Warren. She may have lost the Democratic nomination to Joe Biden but she has been ceded the authority to put her hand-picked minions in several regulatory agencies. Chopra helped her set up the CFPB. She has two more of her acolytes in the Treasury Department and another at the FTC.
Welcome to the brave new world of banking supervision.