FDIC’s toxic culture raises an opportunity to address its toxic governing schemes

Federal Deposit Insurance Corporation (FDIC) Chair Martin Gruenberg faces serious allegations of workplace misconduct and a toxic culture at the agency. He has said he will resign when someone else is chair. But he conveniently had a “scheduling conflict” that forced him to miss a hearing where he had been scheduled to testify this week. 

Regardless, his downfall should serve as an opportunity to address the broader issue of regulatory overreach that has stifled the banking industry and economic growth under President Biden.

The FDIC, established in 1933 following widespread bank failures, aims to maintain public confidence in the U.S. financial system. It insures consumers’ deposits up to $250,000, supervises financial institutions and manages receiverships. The FDIC is funded through premiums paid by banks and thrift institutions, not by taxpayer dollars, although these costs are indirectly passed on to consumers through higher banking fees. For 2024, the FDIC’s operating budget was set at $2.96 billion.

Gruenberg has been a member of the FDIC board since 2005 and has been at the FDIC’s helm for several administrations temporarily, with his latest swearing-in as chair in January 2023. Recently, he has come under scrutiny due to a report highlighting a culture within the agency of sexual harassment, retaliation and resistance to change. These issues reflect deeper dysfunctions at the FDIC and are influenced by the administration’s progressive policies.

The Biden administration’s regulatory agenda, exemplified by the FDIC, has significantly hindered economic growth. The FDIC’s extensive regulations, comprising thousands of pages of rules and advisories, create a convoluted and often contradictory framework that impedes bank operations. This regulatory overreach creates uncertainty at financial institutions, reducing efficiency and increasing consumer costs.

The FDIC’s enforcement practices further illustrate this overreach. Government examiners impose ad hoc mandates on banks, dictating business decisions and penalizing non-compliance with secret, unappealable ratings downgrades. This environment of uncertainty stifles innovation and growth within the banking sector.

Moreover, the FDIC has increasingly pursued its regulatory agenda through public relations campaigns and high-profile announcements, bypassing transparent, accountable processes. The agency’s progressive-leaning staff further skews regulatory outcomes against the banking industry, promoting an agenda that detracts from its core mission of ensuring financial stability.

The economic consequences of this regulatory excess are significant. Rising compliance costs drive assets out of the traditional banking system, even though banks should be efficient credit providers due to their access to deposits. Small and mid-sized banks are particularly burdened, leading to greater industry consolidation and less competition. This harms consumers by limiting choices and increasing costs.

Additionally, the stringent regulatory requirements have substantially raised the cost of lending. This is particularly detrimental to small businesses and low- to moderate-income individuals who rely on affordable credit. Easing these regulatory burdens could spur significant economic growth and add substantial gains to the U.S. economy.

Congress must take decisive action to address these issues. Lawmakers should focus on reforming the toxic culture within the FDIC and the broader regulatory framework stifling economic growth. Streamlining regulations, increasing transparency and ensuring regulatory agencies operate free from political influence are essential steps.

As Congress scrutinizes Gruenberg’s leadership amid these allegations, it should seize the opportunity to reform regulatory practices. Lawmakers can help foster a more competitive and dynamic financial sector that better serves all Americans by reducing excessive regulations and improving oversight.

Instead of merely addressing the symptoms of regulatory overreach, Congress should aim to reduce and eliminate regulations allowing the marketplace to ensure financial stability, promote innovation, and support economic growth. 

Addressing the internal issues within the FDIC and the broader regulatory overreach is essential for fostering a healthy financial sector. By implementing these reforms, Congress can promote a more dynamic and competitive banking industry that benefits all Americans. This proactive approach will help build a more prosperous and stable economic future.

Vance Ginn is president of Ginn Economic Consulting, host of the “Let People Prosper” show and formerly associate director for economic policy of the White House’s Office of Management and Budget.