The last time you walked into a branch of your bank, you might have noticed a sign bearing the official seal of the Federal Deposit Insurance Corporation, the government agency that regulates and insures thousands of depository institutions. What you may have not realized, however, is that there is a bitter partisan battle brewing for control of the F.D.I.C. that may determine whether your bank survives, whether a financial crisis wipes out your savings and whether presidential elections matter for financial policymaking.
The fracas erupted last week when the three Democratic members of the F.D.I.C.’s five-member board of directors voted to request public feedback on the agency’s approach to analyzing bank mergers. The F.D.I.C. chairwoman, Jelena McWilliams — the lone Republican on the board and an opponent of stronger merger oversight — objected that the vote was invalid and refused to recognize the majority’s action. (One of the board’s five seats is temporarily empty.)
On its surface, this fight is ostensibly about bank consolidation. On this score, the Democratic directors have a strong case. The mission of the F.D.I.C. since its founding in 1933 has been to protect American communities and taxpayers from the risks of concentrated power and financial instability inherent in the business of banking. Robust antimonopoly rules were embedded in the F.D.I.C.’s founding legislation and acts of Congress passed in the 1950s and 1960s.
For a time, these laws succeeded in creating a safe and profitable banking system. But they were so successful that policymakers largely stopped worrying about the risks of behemoth banks and welcomed dozens of megamergers in the 1990s and early 2000s.
The 2008 financial crisis was a vivid reminder that excessive concentration in the banking sector can lead to financial ruin. Perversely, the “too big to fail” banks that helped cause the crisis emerged from it even larger and more interconnected than before.
The decades-long trend toward consolidation only accelerated after the crisis. Today, just six bank holding companies control more than 52 percent of the assets in the U.S. banking system. As a result of so many banks disappearing, nearly 80 percent of local banking markets are now considered uncompetitive by the Department of Justice.
This drastic consolidation of the banking sector harms American consumers. When a bank merges with a competitor, it becomes harder for customers to obtain mortgages or car loans. Consumers also earn less interest in their savings accounts and pay higher transaction fees after banks consolidate. At the same time, mergers frequently lead to branch closures, especially in low- and moderate-income communities. That is why the F.D.I.C.’s Democratic board members want to strengthen bank merger oversight, which is consistent with President Biden’s executive order in July urging government agencies to crack down on consolidation throughout the economy.
Beneath the surface, however, this battle is about much more than bank mergers: It is actually a fight over the White House’s entire economic agenda.
The White House and its financial regulatory appointees have laid out ambitious goals. They want to write new rules to protect the financial system from the economic risks posed by climate change. They plan to intensify oversight of cryptocurrencies and financial technologies. And they aim to complete a long-overdue rewrite of rules requiring banks to lend in underserved communities.
The problem is that Ms. McWilliams’s term as the F.D.I.C. chairwoman extends until June 2023. If she is able to unilaterally block initiatives by the three Democratic board members, the F.D.I.C. is likely to grind to a halt for the next 18 months. Given that the process of adopting rules often takes a year or more, she could effectively run out the clock on Mr. Biden’s first term.
Fortunately, the law is on the Democrats’ side. The Federal Deposit Insurance Act vests the management of the F.D.I.C. in its board of directors, not its chair. The F.D.I.C.’s bylaws liken the chair’s role to that of a corporation’s chief executive — someone who manages the organization’s day-to-day operations but cannot override or block an order of the board of directors.
As for Ms. McWilliams’s claim that the Democrats’ bank merger vote was invalid? The bylaws expressly authorize a majority of the board of directors to circulate and vote on a proposal in writing — a standard practice that the Democrats used in this case. So her attempt to stymie the three Democratic board members is not only undemocratic but also unlawful.
With the F.D.I.C. board at loggerheads, what happens next? We suggest one of two paths forward. First, the Democratic directors could sue Ms. McWilliams, seeking a court order compelling her to recognize the Democrats’ bank merger initiative as a valid act of the F.D.I.C. Alternatively, Mr. Biden could remove her from the chair position for cause.
But we hope that it does not come to this. We urge Ms. McWilliams to reconsider her position and defer to the F.D.I.C.’s Democratic majority. If she does not back down, however, the Democrats must continue to fight. The fate of President Biden’s economic agenda depends on it.
Mehrsa Baradaran (@MehrsaBaradaran) is a law professor at the University of California, Irvine. Jeremy Kress (@Jeremy_Kress) is an assistant professor of business law at the University of Michigan’s Ross School of Business and a former lawyer at the Federal Reserve Board of Governors.
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