Screenshot/Philadelphia Fed
Acting Comptroller of the Currency Michael J. Hsu
At the end of a strained board meeting of the Federal Deposit Insurance Corporation on Tuesday, hints of a battle over control of the agency pushed to the surface.
Democrats, who hold a 3-1 majority on the board, voted in writing last week to approve a request for information (RFI) on bank mergers, as part of a review of concentration in the financial industry. In what quickly became a public spat, the Trump-appointed Republican chair, Jelena McWilliams, insisted that the vote was not valid, because she didn’t bring it forward in a formal session. No action has yet been taken to execute the request, which is caught in limbo as it awaits submission to the Federal Register.
Both sides have dug in over the past several days, with Democrats arguing that the RFI vote was perfectly legal, while Republicans say it was inappropriate and illegal to circumvent the chair. The FDIC Act, for what it’s worth, is fairly unambiguous that a majority of the board has authority to bring items for a vote, not solely its chair.
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About an hour into the public meeting, Consumer Financial Protection Bureau director Rohit Chopra, a board member, asked McWilliams to include the results of the RFI in the summary agenda of the meeting. “These actions did not constitute a valid circulation,” McWilliams maintained, “therefore the document cannot be updated.”
“Are you ruling my motion out of order?” Chopra asked. McWilliams said she was. When FDIC director Martin Gruenberg seconded Chopra’s motion, McWilliams said, “That motion was inappropriate, so I thank you for your comments.”
Following the meeting, Chopra immediately released a statement on the matter, accusing McWilliams of committing “an attack on the rule of law” by overruling the majority of the FDIC board. But the controversy over the RFI didn’t have to play out this way.
THE FDIC IS NOT the only federal bank regulator with the authority to make a request for public information on bank mergers. The Office of the Comptroller of the Currency, as the main regulator of nationally chartered banks, could also seek this information. And the current comptroller, Michael Hsu, voted in favor of the RFI in his role as a member of the FDIC board, suggesting that he supports the move.
So why didn’t Hsu issue that request directly, at the same time that his Democratic colleagues Chopra and Gruenberg announced the FDIC’s approval? That would have rendered this back-and-forth moot, and accomplished the task of gathering data to review the Bank Merger Act.
In fact, that was the initial plan, sources have indicated to the Prospect: The OCC would jointly issue the RFI alongside the request posted at the CFPB website. That would have lent more credibility to the controversial move, which was seen as bypassing McWilliams. Chopra alluded to this arrangement in his statement. “In late October, my fellow Directors and I circulated a draft Request for Information on the Bank Merger Act with the intention of releasing it jointly with the Office of the Comptroller of the Currency,” Chopra wrote.
But instead of moving forward with the plan, the OCC went silent. The OCC didn’t respond to questions from the Prospect about why Hsu didn’t issue his own request.
Hsu has been extremely reticent to say anything publicly about the situation since voting. He did not sign on to Chopra and Gruenberg’s announcement, nor has he made any statement on his own about the RFI. During the minor dustup at the meeting on Tuesday, Hsu did not say a word.
Hsu’s role going forward is critical, regardless of how the bank merger RFI resolves itself. Democrats on the board have a number of priorities they would like to get past McWilliams, from tougher regulations on depository institutions, to a rewrite of enforcement of the Community Reinvestment Act, to incorporating climate risk into capital requirements. The Democrats will need Hsu’s backing for any of those initiatives to succeed. Whether they’ll have it remains a mystery.
The dispute stems from a deeper split among financial regulators in the Biden administration. The president’s choices to run agencies like CFPB and the Securities and Exchange Commission have largely been aggressive reformers who want to break with the industry-friendly agenda of the past. Yet below the chair level, staff positions have been filled by a number of expats from the Federal Reserve. The independent central bank has a reputation for being more risk-averse and reluctant to govern.
The dispute stems from a deeper split among financial regulators in the Biden administration.
Hsu sits squarely in between these worlds. He is running the OCC on an acting basis, and may be angling for a full-time job. He was appointed by Treasury Secretary Janet Yellen, herself a former Fed chair. Yellen plucked Hsu out of the Fed, where he was a mid-level director in the Division of Supervision and Regulation. He has no experience running a federal agency or negotiating the thorny political challenges that job brings.
Now, he’s being assailed from both sides: His Democratic colleagues are seeking to challenge the Trump holdover chair and assert their majority at the FDIC, while his former Fed colleagues are warning him to remain apolitical and conciliatory.
“This is a shot across the bow to tell McWilliams that they mean business,” Todd Phillips, an advocate at the Center for American Progress who previously worked as an attorney at the FDIC, said of Chopra and Gruenberg’s move. Hsu’s silence through this fight, which could set the tone for the remainder of McWilliams’s term (which doesn’t end until mid-2023), suggests that the Fed officials’ cautions are winning the argument.
Given that, it’s hard to see how willing Hsu would be to go around McWilliams on future votes. That would keep the agenda at the FDIC in the hands of the Republican chair, despite the Democratic majority.
With the withdrawal of Cornell Law professor Saule Omarova as nominee for comptroller, Hsu sees a path to take over on a permanent basis. A report in The Washington Post indicated that Hsu was a “leading candidate” to become the nominee; it appears that may have been leaked by Hsu himself. Treasury was lobbying for Hsu over Omarova during the initial nominee selection process.
During the nomination process, Omarova was condemned as a danger to the banking industry by Republicans and Wall Street–friendly Democrats. Hsu may be thinking that keeping his head down and avoiding controversy would make him more attractive to the White House as a replacement nominee. But given that the same White House selected reformers like Chopra and Gary Gensler, the idea that it would look kindly on a regulator shrinking from a fight over using the Democratic majority on the FDIC in a legal manner seems spurious.
For their part, Senate Banking Committee Republicans, having collected a win on Omarova, have been emboldened, characterizing the mere majority vote on the bank merger RFI as a “coup” at the agency. This is a direct result of Democrats like Sens. Mark Warner (D-VA) and Jon Tester (D-MT) agreeing with Republicans to block Omarova, implicitly warning regulators to step back from aggressive measures.
INDUSTRY GROUPS HAVE raised similar concerns to Senate Republicans over the FDIC rift. But Chopra paints a picture of extreme control by the chair, in ways that are out of step with the clear governing rules of the agency.
President Biden’s executive order on competition, Chopra noted, specifically urged regulators to review the Bank Merger Act and adopt a plan to revitalize bank merger enforcement by January 5, 2022. The RFI seeks to gather information from the public about that plan.
Chopra explained that his fellow board members circulated a draft RFI in October, which received no feedback from McWilliams. The executive secretary of the FDIC refused to send the draft RFI within the agency for a technical and legal review, and direct appeals to staff went unheeded.
Chopra then moved for a “notational” (written) vote on November 26. There was no effort to shift the vote to the next public board meeting. Democrats on the board only heard from McWilliams hours before the vote closed on December 6, when she offered an alternative version of the RFI. “It was wholly unacceptable and was clearly a tactic to delay action on anything related to President Biden’s request,” Chopra wrote.
The general counsel ultimately ruled the vote out of order, despite voluminous legal justification, Chopra stated. “This approach to governance is unsafe and unsound,” he wrote. “No individual board member, even the Chairperson, can unlawfully veto a supermajority of the board.” Chopra hinted at “further steps” to assert majority control on the board if no action is taken.
But those further steps will only be effective if Hsu agrees with his colleagues on the path forward.
UPDATE: On Tuesday afternoon, Hsu issued a short and tepid statement, his first on the FDIC issue. Here it is in full:
I support the view of the majority of the FDIC Board members that the Bank Merger Act (BMA) guidelines are ripe for review. I am particularly focused on the financial stability prong, given large bank merger trends and my experience in the 2008 financial crisis with too-big-to-fail firms.
I voted for the Request for Information (RFI) on the BMA due to the inability to reach compromise and urgency on the financial stability issue, which I care deeply about. However, I am concerned that legal or procedural quicksand may ultimately limit our ability to act on this issue in a timely manner.
I believe the views of the majority of the FDIC Board members should influence the Agency’s agenda and actions. As a Director on the FDIC Board, I will continue to consider each issue on its merits.
