Don’t hand a blank check to a troubled FDIC 

When shocking reports surfaced recently of discrimination, harassment and a toxic workplace culture at the Federal Deposit Insurance Corporation, members of both parties in Congress called for holding FDIC leadership accountable. Yet even before the investigations are complete and any disciplinary measures have been taken, some are pushing to ram through legislation giving the FDIC massive new powers without a scintilla of accountability. 

Senate Banking Committee Chairman Sherrod Brown (D-Ohio) led a letter with Senate Democrats calling for the FDIC to investigate and remove wrongdoers within the agency. The letter states that “allowing employees that have engaged in misconduct to stay on the job … compromises public trust in the FDIC.” Yet in his opening statement this month at a committee hearing, Brown still pushed the Senate to pass a bill that would boost the FDIC’s powers while the alleged FDIC miscreants are still on the job and the investigation is unfinished. 

In July, in response to high-profile failures at Silicon Valley Bank and First Republic Bank, the Senate Banking Committee approved the RECOUP (Recovering Executive Compensation Obtained from Unaccountable Practices) Act in a bipartisan vote. The bill massively increases the FDIC’s powers to remove the leadership of any U.S. bank it supervises, and it does so even if the agency doesn’t deem a bank at risk of failure. 

Progressive activist groups are pushing Congress to pass the measure, and there may be efforts to add it to must-pass bills during budget negotiations in the final days of December and into early next year. Brown declared at the hearing that “we need to pass the bipartisan RECOUP Act, to hold failed bank executives accountable for driving their banks into the ground.” 

Supporters of the RECOUP Act such as Brown argue it is needed to hold executives accountable at large banks and rein in risky practices that may lead to a bank’s failure. Yet while the clawbacks for executives at banks with assets of more than $10 billion have gotten the most attention, the bill massively increases the FDIC’s powers to remove the leadership of any U.S. bank it supervises — and it does so even if the agency doesn’t deem a bank at risk of failure. 

The bill allows for FDIC removal of bank executives — powers currently reserved to the government only in cases of gross negligence — any time the agency deems the executives have failed “to appropriately implement financial, risk, or supervisory reporting or information system or controls.” As an analysis by the law firm Davis Polk notes, this broad authority conferred by the bill would hand the FDIC “an unprecedented degree of discretion.” 

Yet recent reporting by the Wall Street Journal and others show that the FDIC isn’t exactly the best government agency when it comes to exercising discretion.  

As reported by Rebecca Ballhous in a WSJ story headlined “Sex, Booze, and Bank Regulation,” FDIC employees have for years engaged in practices that contributed to “a sexualized boys’ club environment.” These actions, both alleged and proven, ranged from a male supervisor having an employees’ outing at a strip club (a fact the supervisor in question confirmed to the Journal was true) to senior male bank examiners allegedly sending lewd photos to unconsenting female colleagues. 

Scores of former and current female FDIC employees told the Journal they were unfairly denied opportunities because of sexism in this toxic culture. A follow-up article by Ballhous detailed similar allegations of discrimination and harassment of black FDIC employees. 

It’s not a stretch to imagine that this toxic behavior from FDIC employees toward their colleagues could manifest itself in abuses directed toward the personnel at the banks under their supervision. An FDIC examiner who is disrespectful of his minority and female coworkers could show conscious or unconscious bias toward the significant number of female and minority executives at all sizes of banks. 

Yet the RECOUP Act would give such FDIC examiners the power to remove these executives, and the individuals and institutions affected would have little recourse against these decisions. Bank officials penalized under the RECOUP Act will not have much ground to challenge the FDIC decisions, no matter how flimsy the agency’s reasoning. As the Davis Polk analysis explains, “It is important to keep in mind that there is no judicial review of these determinations until after years of proceedings before an administrative law judge.” 

Those concerned about the FDIC’s past targeting of various legal industries in “Operation Choke Point” during the Obama administration should also be alarmed about potential abuses enabled by the RECOUP Act. For instance, a recent guidance document the FDIC issued in conjunction with other bank regulators warning of the supposed risks to banks of dealing with the fossil fuel industries have been read by observers as not-so-subtle pressure on banks to sever relationships with companies and individuals in those sectors. Americans for Tax Reform’s Bryan Bashur has postulated that under the RECOUP Act, executives of banks that lend to oil and gas producers could be subject to the bill’s removal provisions for “fail[ing] to appropriately implement or oversee, for example, ‘climate risk’ reporting or controls.” 

The RECOUP Act will not make the banking system safer. It will instead entrench the power of the FDIC responsible for the toxic workplace culture and could enable politically motivated abuses. Congress should scrap the legislation and pursue true reform that creates more accountability for America’s banks and those regulators that oversee them. 

John Berlau is director of finance policy at the Competitive Enterprise Institute and author of “George Washington, Entrepreneur.” Ari Patinkin is a former research associate at CEI.