BPInsights: May 11, 2024

Independent Report on FDIC Culture Review

“Sexual harassment, bullying and discrimination have long pervaded the Federal Deposit Insurance Corp., with perpetrators often receiving reassignments and even promotions, according to a blistering report on the agency’s culture that calls into question the leadership of Chairman Martin Gruenberg,” the Wall Street Journal reported this week.

  • Toxic culture unveiled: report by law firm Cleary Gottlieb Steen & Hamilton laid bare the pervasive problems within the FDIC. The report was the culmination of an independent review of the agency in the wake of Wall Street Journal investigative articles alleging widespread sexual harassment, misconduct and toxic workplace practices. Acts of misconduct include supervisors commenting on subordinates’ breasts, legs and sex life, the distribution of sexually explicit photos, rampant ableist, homophobic slurs made against colleagues and abusive managerial styles leading to “deep-seated and credible fear of retaliation” that prevented employees from reporting additional incidents.
  • No consequences: According to the report, the wrongdoers were “moved around, even promoted, and not disciplined in any meaningful or perceivable way.”
  • ‘Starts at the top’: The Cleary report observed that culture “starts at the top” of an institution – in this case, with the Chairman, Martin Gruenberg, whose explosive anger toward staff is a key element of the litany of FDIC workplace issues. The report noted that Gruenberg’s long tenure atop the agency and his reputed sharp temper “may hinder his ability to establish trust and confidence in leading meaningful culture change, and so too may his apparent inability or unwillingness to recognize how others experience certain difficult interactions with him.”
  • Reactions: After the report’s release, many Republican members of Congress, including House Financial Services Chairman Patrick McHenry (R-NC) and Senate Banking Committee Ranking Member Tim Scott (R-SC), sought Gruenberg’s resignation. Several members of the House Oversight Committee sent a letter to President Biden pointing to a commitment that the President made to “fire on the spot” any employee who failed to treat others with dignity. To date, only one Democratic Congressman, Rep. Bill Foster (D-IL), called for Gruenberg to resign, though Rep. Gregory Meeks (D-NY), according to Punchbowl News, observed, “I just gotta be honest about it. I just don’t see how he can lead anymore.” House Financial Services Committee Ranking Member Maxine Waters attacked the report and the law firm that prepared it and, despite acknowledging the longstanding criticisms about management, when asked whether Chairman Gruenberg should resign, she responded, “Oh no. No, no, no.” Senate Banking Committee Chairman Brown expressed confidence in Chairman Gruenberg. Many members, including most Congressional Democrats, were mum ahead of a hearing next week that will include Chairman Gruenberg, with many observers noting that his performance will determine his future at the agency.
  • The political balance: Suggestions that the political balance of power at the FDIC are at play are overstating the situation. President Biden would nominate any potential replacement and the Democratic-controlled Senate could quickly confirm the President’s nominee.
  • Recommendations: The report recommended many steps, such as enhanced accountability for leadership, more transparency and new policies on sexual harassment, discrimination and other topics, to address the FDIC’s “long-standing and deeply ingrained” issues.

Media roundup:

Senate Banking Committee Chairman Sherrod Brown in a statement endorsed Gruenberg as the person to lead a necessary cultural change at the FDIC.

Five Key Things

1. BPI Responds to Incentive Compensation Proposal

BPI President and CEO Greg Baer issued the following statement on this week’s OCC and FDIC proposal on bank incentive compensation:

“This action by the FDIC and OCC is purely political. They have agreed on a proposal, which they acknowledge is legally ineffective, to send a political message. As with its 2016 ancestor, the proposal is inconsistent with the statute they purport to be implementing, and an attempt to govern how financial services sector employees are paid, rather than a fact-based determination that certain pay practices are risky and should be prohibited, consistent with the statute. A statutorily compliant rule would not have been hard to write: it would have required an analysis of past pay practices, with a narrow prohibition of a few of them. As Chair Powell said recently at a Congressional hearing, ‘I would like to understand the problem we’re solving and then I would like to see a proposal that addresses that problem.’ But statutory compliance and safety and soundness did not appear to be on the agenda for these agencies. Indeed, the meeting itself was not on the agenda, as the FDIC acted by notational vote.”

2. America’s Banks and Credit Unions Unanimously Oppose Regulation II Proposal

America’s banks and credit unions urged the Federal Reserve to rescind its proposal to update Regulation II in a comment letter submitted this week. The joint letter was submitted by the Bank Policy Institute, American Bankers Association, America’s Credit Unions, Consumer Bankers Association, Independent Community Bankers of America, Electronic Payments Coalition, Mid-Size Bank Coalition of America, National Bankers Association and The Clearing House Association.

The associations argue the proposal would harm consumers, banks and credit unions and would violate the law by prohibiting banks from recovering the costs they incur in providing affordable, safe debit card programs and a reasonable return on that business. The proposal would benefit large retailers like Walmart and Amazon at the expense of consumers and financial institutions of all sizes.

3. ‘Junk Fees’ Rhetoric Leads to Junk Policymaking

CFPB rulemaking efforts based on political rhetoric about “junk fees” are ignoring economic necessities and ultimately harming consumers, BPI said in a statement for the record ahead of a Thursday Senate Banking Committee hearing on fees. “Banks provide a variety of products and services that help consumers meet their financial needs. They frequently offer these products and services, from mortgages to payment services, at a more affordable and transparent price point than less regulated competitors like payday lenders and fintechs,” the statement said. “But banks’ products and services are made possible only by covering the costs of providing those products and services.”

  • Banks must meet legal requirements to account for the risk that some borrowers will default. Fulfilling this obligation ensures banks remain safe and the overall financial system is stable.
  • Banks offer free and low-cost accounts through the Bank On program to serve the needs of lower-income consumers.
  • The politicization of fees for banking services ignores not just economic reality, but also the benefits that banking relationships confer.

Bottom line: The ultimate price of the CFPB’s “junk fee” campaign is paid by the consumer, particularly those with lower incomes and credit scores. Lower caps on late fees, for example, will result in more people paying late, doing long-term damage to their credit, and will force banks to revamp their pricing so that fewer credit cards are available for customers with higher credit risk.

4. Federal Reserve Considers Extending Fedwire Days of Operation

The Federal Reserve proposed late last week to expand the operations of its Fedwire payments system and National Settlement Service to every day of the year. Currently, these services are only open Monday through Friday, excluding holidays.

Context: This change would enhance efficiency and operational resilience in the payments system. It could also improve the resolution process in a crisis. Fedwire’s limited operating hours were likely an exacerbating factor in the chaotic failure of Silicon Valley Bank.

5. Congressional Agriculture Leaders Raise Concerns on Basel Costs for Farmers

Senior members of the agriculture committees in the House and Senate, Sen. John Boozman (R-MT) and Rep. GT Thompson (R-PA), expressed concerns that the Basel capital proposal would raise hedging costs for farmers, ranchers and American businesses. They flagged changes to the credit valuation adjustment and market risk frameworks that could increase hedging costs for the end users of derivatives. Derivatives are often used to hedge the fluctuating costs of crops or other farming products. The Basel proposal’s higher capital charge for transactions involving privately held investment-grade companies would also raise costs for farmers, they said. “We are concerned this disproportionate capital treatment may contribute to banks deciding to reduce counterparty exposure to private agriculture companies and rural cooperatives, hurting their ability to hedge,” the lawmakers wrote. They asked the U.S. agencies to exempt end-user transactions from the CVA requirement and eliminate the penalty on investment-grade privately held companies. In addition, the letter also expressed concerns regarding the potential impact of the treatment of client clearing services in both the Basel III and GSIB surcharge proposals on centrally cleared derivatives markets.

In Case You Missed It

Bank Supervisors Sending Mixed Message on Discount Window Borrowing

Bank supervisors contribute to discount window stigma, a new Congressional Research Service report details. The report reviews some of the shortcomings of discount window operations revealed during the bank failures in spring 2023. The report noted survey data, conducted by the Federal Reserve, that found supervisory disapproval was discouraging banks from borrowing from the discount window.  Almost 40% of surveyed domestic banks said supervisory disapproval made them reluctant to use the discount window, despite the Fed’s official policy stating that the discount window can be used to obtain primary credit, “no questions asked,” for any purpose. The same survey also found three-quarters of banks stated the disclosure of discount window borrowing required by the Dodd-Frank Act was another reason for discount window stigma. It also notes that the spring 2023 runs called into question “the adequacy and effectiveness of existing liquidity requirements” but that simply requiring banks to hold more liquid assets could increase the cost of credit. The CRS suggests that an alternative would be giving banks credit toward liquidity requirements for discount window borrowing capacity.

FT: Private Equity Firms Step Up Plans to Edge Banks Out of Low-Risk Lending

Private equity firms are accelerating their attempts to take over banks’ market share in low-risk lending, according to the Financial Times. Firms including Apollo, KKR, Blackstone and Brookfield are “encroaching on territory dominated by banks and public debt markets,” the article said. Apollo said it expects to originate more than $200 billion a year in new loans, up from $150 billion previously. Volumes reached a record $40 billion in the first quarter of 2024, it said.

The Crypto Ledger

Here’s the latest in crypto and digital assets.

  • House votes to overturn SEC’s SAB 121: The Congressional Review Act passed in the House 228-182, with 21 Democrats voting with Republicans in support of the resolution. The vote in the Senate is expected next week.
  • Digital assets custody: BPI and a group of financial trades urged House lawmakers in a letter to support a Congressional Review Act bill invalidating the SEC’s Staff Accounting Bulletin 121. The measure imposes disproportionate restrictions on banks’ ability to provide custody services for digital assets. “SAB 121 represents a significant departure from longstanding accounting treatment for custodial assets and threatens the industry’s ability to provide its customers with safe and sound custody of digital assets,” the letter said. “Other, non-bank digital asset platforms subject to SAB 121 are not required to meet the same capital, liquidity, or other prudential standards as banks and therefore do not face the economically prohibitive implications of SAB 121. Limiting banks’ ability to offer these services leaves customers with few well-regulated, trusted options for safeguarding their digital asset portfolios and ultimately exposes them to increased risk.”
  • Floor votes on crypto bills: Key crypto legislation may head to the House floor in May, according to a POLITICO report. These measures include a bill from House Financial Services Committee Chairman Patrick McHenry (R-NC) that would divide crypto oversight between the SEC and CFTC, and a bill from Rep. Tom Emmer (R-MN) to block the Federal Reserve from issuing a retail central bank digital currency.
  • FTX customers made whole: Failed crypto exchange FTX has amassed more than enough money to cover customers’ losses in its collapse, according to Bloomberg. This marks a rare outcome in U.S. bankruptcy cases. FTX founder Sam Bankman-Fried was recently sentenced to 25 years in prison.

BPI Members Among Companies Exploring Ledger Technology Settlement Network

Citi and JPMorgan, along with Mastercard, Swift, Deloitte and other major companies, are exploring sharing ledger technology by simulating multiasset transactions in U.S. dollars. The project, known as the Regulated Settlement Network, is exploring the possibility of bringing commercial bank money, wholesale central bank money and securities to a common regulated venue.

Next Post: BPInsights: May 25, 2024 View Next Post


Disclaimer:

The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.