U.S. Financial Regulator Chair Resigns Amid Bank Merger Review Spat

January 5, 2022
The chairman of the Federal Deposit Insurance Corporation has announced her resignation after the main federal financial regulators accused each other of a power grab in a debate over bank merger rules.

The chairman of the Federal Deposit Insurance Corporation (FDIC) has announced her resignation after the main federal financial regulators accused each other of a power grab in a debate over bank merger rules.

Jelena McWilliams, chairman of the FDIC, handed in her resignation to President Joe Biden on the last day of 2021, effective from February 4.

The FDIC supervises deposit-taking financial institutions. Although this mostly covers banks, its jurisdiction could be extended to stablecoin issuers, something federal regulators proposed to Congress in their November stablecoin report.

Although McWilliams' letter of resignation does not mention a specific reason, the decision came after a power struggle among the main federal financial regulators over bank merger review rules.

The spat stemmed from the structure of the governing body of the FDIC, which comprises five board members — three FDIC appointees, the head of the Office of the Comptroller of the Currency (OCC), and the director of the Consumer Financial Protection Bureau (CFPB).

In late October, Rohit Chopra, recently approved director of the CFPB, a crusader of consumer protection rights against bigtechs and a protégé of progressive Democratic Senator Elizabeth Warren, submitted a draft request for information (RFI) on financial institution mergers to McWilliams.

Warren has been advocating for a review of bank merger rules for a while now, criticizing federal regulators for allowing the merger review process to become a rubber stamp exercise.

Even though every single bank merger requires affirmative approval from the Department of Justice and a banking regulator, Warren pointed out that the FDIC, the Federal Reserve and the OCC combined have not formally denied a single bank merger in the last 15 years.

To open a discussion over the update of the bank merger rules, three board members, including Chopra, acting comptroller Michael Hsu and FDIC director Martin Gruenberg, voted in favor of a resolution that directed the publication of the RFI.

Throughout the 88-year history of the FDIC, it has always been the role of the chairman, in this case McWilliams, to set the board’s agenda. Ignoring the resolution, McWilliams was able to use her chair position to effectively veto further discussion on this matter at the December board meeting.

Despite her decision to shut down further board discussion on the topic, Chopra published the RFI on the CFPB’s website on December 9, a move that was later criticized and reported as an attempt to grab power and oust McWilliams from her role.

When justifying the publication of the RFI, Chopra referred to information received from the FDIC board’s general counsel, which he argued provided a legal way for any board member to direct any matter circulated for a vote to a board meeting.

“We cannot risk having a paralyzed board, especially if action is urgently needed in times of financial system distress,” Chopra said in support of his decision to publish the RFI.

“[W]e must clearly communicate to [FDIC] management and the public that no individual board member, even the chairperson, can unlawfully veto a supermajority of the board,” he added.

Nonetheless, senior Republican Senator Pat Toomey labeled the effort as an “unprecedented action to undermine the independence and integrity of our financial regulators,” which “leaves a dark mark” on the FDIC.

Since January last year, the Biden administration has appointed numerous leaders known for their assertive approach to head federal regulators.

In addition to Chopra, Gary Gensler, chairman of the Securities and Exchange Commission (SEC), has earned a reputation as a tough watchdog, while Lina Khan, chair of the Federal Trade Commission (FTC), is known for her anti-bigtech stance.

In a very unique U.S. structure, the power of federal agencies typically comes from the leadership at the top, Gene Grant, founder of a U.S-based crypto exchange, explained.

“There is a certain amount of power given to federal regulators by statute and there is a certain amount of power taken by the leader at the top whether it is explicitly given to them or not,” he added.

Following the resignation of McWilliams, we may expect the federal banking agencies to become much more politically motivated, Bob Browne, CEO of Cedar Creek Consulting, told VIXIO.

The agencies will likely push for the adoption of increased social programs and climate change-related activities, and carry out more enforcement actions resulting in increased fines, he added.

It is unlikely, however, that examination efforts will be increased in community banks as examiners continue to work from home, which may cause difficulties in carrying out the process effectively, Browne noted.

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