‘The General is in Danger’: FDIC Controversy Threatens Wall Street Control Plans

POLITICO spoke with several banking industry lobbyists, consultants and Capitol Hill aides from both sides of the aisle for this story. Although some were cautious about the idea that Gruenberg’s situation could be a game-changer, many saw the prospect of drastic consequences. A leading financial services industry lobbyist said it was a “brutal moment” for the administration’s financial regulatory agenda.

“There was a very strong Democratic front line there,” said Michele Alt, a veteran banking regulator who is now a partner at Klaros Group. “Suddenly the general is in danger.”

Gruenberg’s departure would leave Republican FDIC Vice Chairman Travis Hill as head of the agency’s board, which could be hamstrung by a 2-2 partisan divide. Hill and fellow GOP board member Jonathan McKernan recently opposed Gruenberg’s efforts to impose tougher rules on big banks, including an increase in capital requirements developed in tandem with other bank branches.

“Nothing will be done,” Alt said.

While the bankers aren’t making noise publicly, it comes as lobbyists have been pleasantly surprised by the traction they’ve gotten in convincing lawmakers on both sides of the aisle to push back on the big banks’ impending rules.

“The proposal shows very significant vulnerabilities,” Karen Petrou, managing partner of Federal Financial Analytics, said of the planned increase in bank capital.

Given the political context, it’s unclear how a potential Biden nominee to replace Gruenberg would fare in the Senate. It would take months to get there.

Beyond FDIC board politics, policymakers say the scandal — along with multiple and potentially lengthy investigations — could hamper the agency’s day-to-day work of ensuring that banks operate safely. security of American deposits. House Financial Services Chairman Patrick McHenry said the FDIC “is at best concerned about this sideshow and at worst compromised.”

The big questions, according to Isaac Boltansky, BTIG’s director of policy research, are whether Democrats support Gruenberg and whether Washington’s interest in the FDIC drama survives the time it takes for the outside law firm to of the agency to complete the scheduled review.

“On the first question, Democrats are aware that the entire banking regulatory agenda would be undermined if the president leaves and that this would almost certainly impact their political calculus,” Boltansky said. “Perhaps the serious issues at hand would foster a rare moment of bipartisanship to confirm a new president, but that makes me deeply skeptical. On the second question, only time will tell.