The Federal Deposit Insurance Corporation (FDIC or Corporation) has recently made news in typical Washington, DC fashion: a fight over power. A conflict between the FDIC Chairperson, a Trump Administration holdover, and the three members of the FDIC board – appointed by Democratic Administrations – over bank merger review protocols led to the Chairperson’s resignation.[1] Accordingly, the FDIC board will be led by an acting Chairperson until a permanent Chairperson is nominated and confirmed. The position of Vice Chairperson remains vacant as does one other appointed position on the board. As more fully discussed below, the political diversity requirements of the Corporation’s enabling statute requires that the next two nominees to the FDIC board not be of the President’s party, unless the Acting Chairperson resigns. Given the current state of affairs on Capitol Hill, a three-member FDIC board, all appointed by Democratic Administrations, will be in power for the foreseeable future.
A focus on the politics of the FDIC at present obscures a more important question: is the Corporation’s governance structure aligned with its mission? For the reasons set forth below, I respectfully submit that it is not. This post will offer some examples of how my experience as state banking supervisor in North Carolina leads me to that conclusion and will propose some structural reforms to put the Corporation on a more constructive path.
A Little History
During my service as North Carolina Commissioner of Banks, I commissioned a survey to see, among other things, what North Carolinians thought of my agency, the Office of the North Carolina Commissioner of Banks (NCCOB). The results were humbling: a very small percentage of the survey respondents even knew that the agency existed. The only consolation was that NCCOB was in roughly the same neighborhood as the Fed and the OCC. The FDIC was by far the most recognized of the banking agencies and for good reason. People associated it with the safety of their savings.
As Commissioner, the FDIC was my primary partner in bank supervision. A large majority of North Carolina state-chartered banks were community and small regional banks. Most of them had chosen “non-member” status (as distinct from designation as a Federal Reserve member); as a result, the FDIC was their primary federal supervisor and NCCOB their primary state supervisor.[2] While the relationship between the FDIC and NCCOB had some tensions, as do all meaningful relationships, it was healthy and productive overall. It served the public interest by fostering and supporting a diverse and resilient banking system in North Carolina: chartering new banks, strengthening them, and pruning when necessary. Stable and consistent agency leadership over time was key to achieving these objectives.
During my tenure, I had the good fortune, usually in concert with the FDIC, to charter new banks throughout North Carolina. Most were organized by local business and community leaders who felt the need for an institution to serve the economic development needs of their communities. One, Live Oak, was dramatically different; serving the credit needs of small businesses throughout the country in a focused and brilliantly successful way. None of these banks would have existed without the availability of deposit insurance; all were nurtured by robust supervision by the FDIC/NCCOB partnership.
A less happy aspect of my partnership with the FDIC was resolution of failed banks. When all else failed, my NCCOB colleagues closed the bank and turned over the keys to the FDIC. My predecessor Hal Lingerfelt and then-FDIC Regional Director in Atlanta, Nancy Hall, found that a major cause of bank failures was board failure: ignorance or a misunderstanding of the duties and obligations of bank directors. In response, NCCOB and the FDIC established a bank directors’ college, one of the first programs of its kind in the country. Director education was an extension of supervision intended to avoid both failure and undue governmental interference in local banks by strengthening their governance processes.
The foregoing discussion, in addition to being a pleasant stroll down Memory Lane, shows why the fundamental and essential functions of the FDIC – insurance of retail bank deposits and supervision of community and small regional banks – are crucially important to our economy and society. Deposit insurance and robust supervision are cornerstones of financial stability and are essential to the maintenance of a banking system that serves the diverse markets of our very diverse country. Disfunction at the FDIC impedes this important work. As a supporter of the Corporation, I offer below a brief analysis of what I believe to be its structural defects and proposals about how to fix them.
Governance of the FDIC
The FDIC is a corporation established under the Federal Deposit Insurance Act (FDIA). [3] Management is vested in a five-member board of directors. Three board members are appointed by the President, subject to Senate confirmation, for six-year terms. One of these appointed members is separately nominated and confirmed as Chairperson for a five-year term; a second is nominated and confirmed as Vice Chairperson with no term specified. The remaining two members are directors by virtue of their holding office in other agencies: the Comptroller of the Currency and Director of the Consumer Financial Protection Bureau. The FDIA provides that no more than three board members may be of the same political party and that one of the three appointed directors have State bank supervisory experience.
In a well-ordered political universe, the FDIA’s political diversity requirement would be satisfied as follows: the Chairperson, Comptroller, and CFPB Director would be of the President’s party and the Vice Chair and Director would be of the other party. The FDIC’s current travails suggest that we do not live in such a universe and, accordingly, that the political balance sought in the FDIA is unlikely to be fulfilled. This leads to an important question: what does political affiliation have to do with the FDIC’s core functions? Answer: nothing. The really important question is what does political affiliation have to do with membership in the FDIC board? Answer: everything. It is not by accident that the two most recent Chairpersons of the FDIC were previously Senate staffers. Each is intelligent, hard-working, and competent, but it is a stretch to say that either of them had, when appointed, insurance or supervisory experience. The recent dispute is reminiscent less of a functioning federal agency and more of the Chairpersons’ former place of employment.
A Modest Proposal
To better perform its core functions, the FDIA should be revised to require that FDIC board membership be based on subject matter competence rather than political affiliation. This is not unheard of. For example, the North Carolina statute on Regulation of Banks and Other Financial Services[4] establishes a governance structure that places executive power in a Commissioner, who heads a supervisory and regulatory agency (NCCOB). The Commissioner is appointed for a four-year term, subject to General Assembly approval. The Commissioner and NCCOB are overseen by a 15-member Banking Commission, chaired by the State Treasurer (an elected official), and including five “practical bankers,” one representative of a consumer finance company, one representative of a firm licensed under the NC SAFE Act and seven public members. Twelve members of the Banking Commission are appointed by the Governor and two members (practical bankers) are appointed by the General Assembly for four-year terms, with a limit of two terms per member. This governance structure, which has been in effect for decades under the current statute and its predecessor, has subordinated politics to agency mission and fostered consistent and effective supervision of North Carolina banks. While I don’t claim that it’s perfect, I do know that it works.
If Congress wished to amend the FDIA to align the FDIC with its core functions it could create a governance structure that included:
- A Chairperson nominated and confirmed for a fixed term.
- Two Vice Chairpersons, one designated as Vice Chairperson – Insurance, and the other Vice Chairperson – Supervision and Regulation. Holders of these positions would have administrative responsibility for these areas of operations and would be required to have demonstrated capacity in them.
- Five Directors
- The President or CEO of a bank having no more than $10 billion in assets
- The President or CEO of a community development financial institution
- The President or CEO of a small businesses
- The President or CEO of a consumer advocacy organization
- A State banking commissioner or heads of a state banking department
The proposal outlined above is one of many possible alternatives. Effecting a change of this kind will require, first and foremost, a demand from stakeholders – bankers, community leaders, small businesses, state and local officials – that there be a change. The details don’t matter until then.
Conclusion
It is a commonplace to lament the divisions in our economy and society. Our economy is two-speed: 520 of 3,064 US counties accounted for 70% of US GDP in 2020.[5] That economy is served by a banking industry in which 162 banks (3% of all banks) account for 85% of total assets, deposits, and operating earnings, with 13 institutions accounting for roughly 50% of those totals.[6] It is no surprise to learn that the efforts of the largest banks are focused on the counties where the money is.
But what about the rest of the country? The total number of banks and savings associations is now under 5,000, a fraction of what it was before deregulation and the revolution in technology and information science. There is a technocratic view that concentration is inevitable and that small, local banks were, and are, uncompetitive and anachronistic. Communities that have lost their local banks should forget them, use the local ATM (interchange charges apply), and bone up on cryptocurrency. Or, to paraphrase the wisdom from another age, “Let them eat cake.” If you are looking for sources of our current political and social discontents, this is one.
The United States needs and deserves a diverse and well-supervised and regulated banking system. Reform of the FDIC would be a start in that direction. An agency focused on invigorating community-based institutions could do some good for parts of our country that need help. We the people should demand it.
Joseph A. Smith, Jr. is a senior fellow at the Global Financial Markets Center at Duke Law and the former North Carolina Commissioner of Banks.
The views expressed in this post are those of the author and do not represent the views of the Global Financial Markets Center or Duke Law.
[1] See, e.g, Jelena McWilliams, “A Hostile Takeover of the FDIC,” Wall Street Journal, December 15, 2021. Available at: https://www.wsj.com/articles/hostile-takeover-fdic-board-rohit-chopra-michael-hsu-jelena-mcwilliams-abuse-power-11639432939 ; Adam J. Levitin, “Opinion: It’s Time for Biden to Fire the FDIC Chief,” Politico, December 16, 2021. Available at: https://www.politico.com/news/magazine/2021/12/16/biden-fire-fdic-chief-525140; Andrew Ackerman, “FDIC Chairman Jelena McWilliams Resigns,” Wall Street Journal, December 31, 2021, available at: https://www.wsj.com/articles/fdic-chairman-jelena-mcwilliams-resigns-11640985689?mod=saved_content .
[2] This is not the case in every state. Virginia banks, for example, are predominately member banks, probably reflecting the location of a regional Reserve Bank in Richmond.
[3] 12 USC 1811, et ff.
[4] N.C.G.S.A. §§ 53c-2-1 – 53c-2-7.
[5] The Avenue, “Biden-Voting Counties Equal 70% of the Economy. What Does the Mean for the Nation’s Political-Economic Divide?” Brookings Institution, November 10, 2020. Available at: https://www.brookings.edu/blog/the-avenue/2020/11/09/biden-voting-counties-equal-70-of-americas-economy-what-does-this-mean-for-the-nations-political-economic-divide/
[6] FDIC, Quarterly Banking Profile, 2021, Vol.15, No. 4, p. 7. Available at: https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2021sep/qbp.pdf#page=1 .
