Gruenberg’s departure weakens the administration’s regulatory hand

WASHINGTON – Statement from the president of Federal Deposit Insurance Corp. Martin Gruenberg that he will step down once a successor is confirmed will likely weaken the hands of regulators in pushing for capital increases under the final Basel III proposal, and could also give the Federal Reserve a stronger hand as experts say it will have no impact on other joint rulemaking.

Just hours after Senate Banking Committee Chairman Sherrod Brown, D-Ohio, called for new leadership at the FDIC, Gruenberg signaled will leave the agency once his successor is confirmed, which will be a tall order for an almost evenly divided and busy Senate to accomplish in an election year.

Although the bypass has already started playing who could replace Gruenberg and Brian Gardner, chief Washington policy strategist at Stifel, said you only have to look at the legislative calendar to see that confirming a new FDIC chairman before the election is a difficult task – if it’s even possible.

“Anyway, it’s June,” Gardner said. “We’re going into Memorial Day weekend and the (Congressional) recess. The best thing you can do in the next few weeks is to announce your candidate. They’re going to have to pass a (Federal Bureau of Investigation) review, get a confirmation hearing from the Senate Banking Committee… Around July 4th, you’re going to have another break – so you’re going to have another break in July for the Republican National Convention, and August is off, now we have September and Senate session time is very valuable.”

Gardner added that there is also a very real chance that Gruenberg’s potential successor will be ousted within months of confirmation if Trump wins. Gruenberg’s predecessor as chairman, Jelena McWilliams, resigned from her position in February 2022 after Democratic board members used their authority to set a regulatory agenda without her consent.

“If you’re (Senate Majority Leader) Schumer and you’re the White House, are you prioritizing service time for judicial nominees who are lifetime appointees, or for the chairman of the FDIC — who could be retrenched in January?” Gardner said. “Republicans – if they take power in January 2025 – will be able to do to Marty Gruenberg exactly what Democrats did to McWilliams.”

Isaac Boltansky, an analyst at BTIG, said that while political attention has focused on Gruenberg’s political future and eventual departure, his role at the top of the agency is mainly to disrupt bankers and financial markets who are focused on one principle in particular: the endgame in Basel great proposition.

“This is the most important issue for bankers and markets,” he said. “I don’t think they’re following the drama around Gruenberg as closely as everyone in the Beltway because they’re now certain that the rules will be dramatically relaxed.”

One aspect lengthy The most interesting proposal from Basel involves requiring the largest banks – about three dozen companies with assets of more than $100 billion – to hold on average 16% more equity capital than they currently require. But Gruenberg’s new lame-duck status will likely shift more decision-making power over Basel and other interagency rules to the Fed and, in particular, Fed Chairman Jerome Powell.

Joseph Lynyak, a partner at the law firm Dorsey & Whitney, says the FDIC already has less influence in setting capital raises for the largest banks, given that its statutory role is primarily to regulate state-law banks, which are typically smaller and categorically unaffected by the upcoming capital reforms. Meanwhile, the Fed oversees bank holding companies and, by extension, the largest and most complex banks.

“They would certainly have input,” he said. “However, the FDIC would likely not take a leadership role in considering the effects of the proposed Basel rules.”

Members of the Fed’s Board of Governors have had mixed feelings about the Basel proposal since it was first released last July. Fed heads. Christopher Waller and Michelle Bowman voted against this measure in July and have been criticizing the proposal ever since, calling for significant changes. Meanwhile, Powell and Fed Governor Philip Jefferson voted for the proposal but expressed reservations about some aspects of the rule, and Powell because he indicated that he expected to make “wide-ranging and significant” changes before the final adoption of the rule.

Gardner says he thinks the chances of Basel finishing by the end of the year are less than 50%, but the inevitable change in administration could speed things up.

“Regulators can read the pulse, right? Everyone knows what the political situation is, especially the heads of the agencies,” he said. “So there will come a time when they decide that – in their opinion – the risk of a Trump victory is so high that they will have to swallow hard, compromise on many issues and quickly end the matter before the end of the year.”

That’s largely because, Gardner argues, failing to finalize something before Trump’s theoretical victory in the short term would all but doom the proposal.

“If they miscalculate or are just not willing to compromise and Trump wins, I think there will probably be a slowdown in work,” Gardner said. “At this point, it is unrealistic that this will be done by the end of the year or the inauguration.”

He also notes – as evidence provided by the architect of Endgame, Fed Vice Chairman for Supervision, and Michael Barr’s testimony at recent congressional hearings – regulators have yet to even agree on what the rule will include, let alone whether to propose this rule again.

Experts are divided on what the schedule will look like. Boltansky says he sees agencies accelerating the rule and making significant changes to achieve it.

“The most likely outcome is that they will make a number of changes to the regulations and try to finalize them this year,” he said. “(While) I fully acknowledge that a re-proposal is still possible, I simply believe that the most likely outcome is finalization before the election.”

Boltassky notes that, overall, making “substantial changes to the rule” requires a full reissue of the rule for comment, but this is still under discussion. However, in the interests of time, he said regulators could get creative.

“We continue to expect at least targeted improvements to the way the proposal deals with mortgage loans, environmental tax credit investments, fee-based revenues such as swipe fees, business loans and

commercial activities,” Boltansky said. “I have also heard some suggestions that they may take an alternative course and finalize part of it by proposing another part again – something that (FDIC board member Jonathan) McKernnan talked about“

Lynyak is quite confident that the rule is headed for re-proposal, especially given the importance and impact of the proposed reforms on large banks.

“I think Chairman Powell has signaled very clearly that a re-proposal with further amendments to the proposal is being considered, and I think that’s probably the approach they would take, rather than just issuing an amended rule,” he said. “When you look at these kinds of issues, you’re introducing (that) changes) once a decade, so you need to get it right. Giving banks the opportunity to review the reproposal and get public comment… is critical to the operational goals and business plans of larger banks.”