The recent corporate governance breakdown at the board of directors of the Federal Deposit Insurance Corp. is not an ordinary bureaucratic squabble. It raises significant questions about how the board would operate in times of crisis.
On its face, the dispute is about how the board handled a request for information on Bank Merger Act policy. But it raises broader concerns about whether the political divisions on the board would inhibit an effective response to the sort of banking crisis the agency was designed to address.
In the publication “Crisis and Response: An FDIC History 2008-2013,” the FDIC chronicles its experience during a period in which the agency was confronted with two interconnected and overlapping crises — first, the financial crisis in 2008 and 2009, and second, a banking crisis that began in 2008 and continued until 2013. It is required reading for anyone who wants a firsthand account of the critical role that the FDIC played in responding to the crises and “serves as a guidepost for future policymakers who will someday be called upon to respond to the next period of financial instability.”
In 2021, in addition to helping to navigate the banking industry through the global pandemic, the FDIC now faces a new type of internal crisis and response. At its core, it is a procedural disagreement between the Republican-appointed Chairman Jelena McWilliams and three Democratic-appointed board members.
As reported by American Banker, the board’s conflict came to light Dec. 9, when Consumer Financial Protection Bureau Director Rohit Chopra and fellow FDIC board member Martin Gruenberg announced the board’s approval of a request for information on bank merger reviews. (Acting Comptroller of the Currency Michael Hsu also voted in favor of the request.) But McWilliams, the only Republican on the board, opposed the measure and has deemed it invalid. She argues that longstanding agency practice grants the chair of the board — who is, in effect, the FDIC’s CEO — sole authority to bring an item up for a vote.
Although this internal crisis is procedural in nature, it nonetheless puts the effective functioning of the board at risk now and possibly for some time to come. And rather than a crisis involving external forces that the FDIC was designed to address — like the catastrophic impacts to U.S. financial stability associated with the disorderly failure of a global systemically important financial institution — the agency is confronting an internal crisis with no plan for how to resolve it.
While the current internal crisis is different, the stakes are just as high, and potentially higher in the long run. For example, what will be the impact on the public trust? Of particular importance, how can the agency avoid the prospect of contentious litigation where precious taxpayer resources are wasted, and where the attention of the board and the FDIC’s staff is diverted from the mission: maintaining stability and public confidence in the financial system? How does the FDIC avoid an outcome where, in the end, everyone loses?
This unprecedented crisis cries out for an innovative constructive, and timely solution: the swift appointment of an independent mediator experienced in resolving conflicts and disputes within boards of directors.
There are countless examples in the corporate sector of full-blown public disputes leading to reputational harm, poor stock performance and corporate paralysis. These impacts are a significant part of the reason why, over the past 30 years, corporate disputes have been increasingly settled outside of courts.
We note the important differences between a publicly owned corporation and one that is government-chartered. With the former, the stakes are typically money or control, and external political forces play at most a minimal role. With the latter, erosion of the public trust is at stake, and external political forces can easily derail the practical and necessary approaches to which the public is entitled. And the situation could rapidly worsen with the introduction of another crisis event, such as a pandemic complication or sudden failure of even a moderately sized depository institution.
Can the FDIC survive this daily test of its operational resilience — the kind that it expects the very institutions it regulates and supervises to be able to endure? While there is not a clear solution, could mediation ever work within a highly charged politicized environment? While it may be viewed as a wildly Pollyanna-ish idea, what is the downside? And what is the endgame of an effective mediation process?
In the short term, mediation could facilitate disarmament and potentially establish a framework for better communications and conflict avoidance and resolution. This means a revised request for information that is technically accurate, the result of compromise and one that serves as a foundation for constructive dialogue on the important topics of Bank Merger Act policy and financial stability.
In the long term, mediation could help to restore order and stability, i.e., “safety and soundness” in the parlance of bank regulators. This means preserving the sanctity and integrity of our governing institutions, restoring public trust and returning to a smoothly functioning board.
We are not experts on the intricacies of FDIC board governance, nor do we see value in taking sides on that question. We are two practically minded former government executives who care, who honor the institutions we served and the taxpayers and depositors we sought to protect.
We hope that “Crisis and Response” continues to be an FDIC guidepost, in its future amended form. May it tell the story of the yet-to-be-explored lessons learned by the FDIC in this new crisis, and may it serve as a blueprint for cooperative and effective problem-solving.
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