FDIC by brauerranch is licensed under CC BY-SA 2.0

President Biden should swiftly nominate individuals to fill all vacancies on the board of directors of the Federal Deposit Insurance Corporation (FDIC). Starting on February 4, two seats out of five will be vacated on the board.

According to FDIC bylaws, these two vacancies must be filled by Republicans because no more than three members may come from the same political party. If President Biden refuses to nominate anyone to fill the vacancies, he would threaten the FDIC’s nearly 90 years of independence from the White House.  

In a surprising turn of events, FDIC Chairman Jelena McWilliams announced her resignation effective February 4. Martin Gruenberg, a current member of the FDIC board of directors, is in line to serve as chairman until President Biden nominates a new chair. 

The FDIC board of directors has five seats. Currently, three Democrats serve on the board: Martin Gruenberg (appointive director), Michael Hsu (Acting Comptroller of the Currency), and Rohit Chopra (Director of the Consumer Financial Protection Bureau). 

With Martin Gruenberg as acting chairman and Democrats in control of the FDIC, banks overseen by the FDIC should brace for impact from an upcoming wave of restrictive regulations. 

Democrats will unjustly target the Bank Merger Act of 1960. Chopra and Gruenberg’s request for information (RFI), which is the source of the interagency skirmish, is likely to be the fountainhead for how the FDIC will handle bank mergers moving forward. 

In the RFI, Chopra and Gruenberg expound upon how bank consolidation has accelerated mainly due to mergers and acquisitions. What they leave out is that expanded federal government restrictions and mandates have forced banks to consolidate.

According to Allison Nicoletti, an assistant professor at the Wharton School of the University of Pennsylvania, increased government regulations, such as the ones enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act, have largely forced banks to consolidate to balance out the increased cost of compliance with government mandates. Nicoletti claims that regulatory costs “may incentivize banks to engage in an acquisition.” Nicoletti goes on to say that: 

Acquisitions are an attractive strategy given that many of the costs associated with the new regulatory requirements are fixed in nature. Therefore, a bank that grows larger will be able to spread the regulatory costs over a larger asset base and better offset the negative effect on financial statement ratios.

Without a bipartisan presence on the FDIC board, the agency could pursue partisan rulemakings that expand costly compliance provisions of Dodd-Frank to apply to banks that have not normally qualified as “global systemically important banks.”

Instead of rewriting regulations to counter market effects that stem from previous government interference, Chopra and Gruenberg would do well not to impose additional restrictions on bank mergers. Banks are facing competition now more than ever and increasing compliance costs will only make banking services more expensive.