Reinstated FDIC committee threatens to politicize supervision of banks

The Democrat-controlled Federal Deposit Insurance Corp. is doing away with an independent board to which banks could appeal the agency’s regulatory decisions. In its place, it will revive a committee made up of one member of the FDIC’s board and two current staff members.

The revival of the Supervision Appeals Review Committee (SARC) and elimination of the Office of Supervisory Appeals (OSA) will allow active government officials, subject to political pressure from the White House, to provide a final determination on reviews of regulatory actions against banks. 

As recently as December of last year, the FDIC was on track to remove conflicts of interest and improve independence in the supervisory appellate process. The FDIC replaced the SARC with the OSA to hew to statute’s intent to establish an “independent intra-agency appellate process.” The OSA would have been staffed by former government employees with extensive experience and no conflicts of interest. 

In May, the FDIC decided to reverse course and arbitrarily reinstate the SARC without input from stakeholders. A notice and request for comment was issued after the FDIC had already made the change. The FDIC’s disinterest in soliciting feedback from parties that will be directly affected by this change in the appellate process shows an explicit disregard for due process.

Bloomberg News

The notice provides the FDIC’s board of directors with more direct authority over the appellate process. The SARC will be chaired by a current FDIC board member, and its two remaining members will be a deputy or special assistant to FDIC board members, and the FDIC’s general counsel. The FDIC board member who chairs the SARC will not be as independent from political pressure as a former government employee.

According to the guidelines, acting FDIC Chair Martin Gruenberg has full discretion to choose the chair of the SARC. Rohit Chopra, director of the Consumer Financial Protection Bureau, who sits on the FDIC board of directors, could be chosen to serve as the SARC chair. Director Chopra’s notorious reputation for being “unduly combative” toward the banking industry would make him unfit to perform unbiased reviews of banks’ appeals of supervisory determinations.

The new appellate process could also provide Chopra more leeway to weaponize the Truth in Lending Act and Regulation Z. Since Regulation Z restitution is explicitly mentioned as a “material supervisory determination” that can be appealed to the SARC, Chopra could simultaneously regulate banks from his post at the CFPB and review potential appeals to regulatory supervision of bank compliance with rules and statutes governing credit card fees. 

The SARC’s lack of impartiality increases the risk of bank examiners retaliating against banks for pursuing appeals. Increased risk of retaliation puts the FDIC’s decision to return to the SARC at odds with a mandate in the Riegle Community Development and Regulatory Improvement Act that ensures “appropriate safeguards exist for protecting the appellant from retaliation by agency examiners.”

The risk of retaliation under the SARC is exactly why appeals submitted in the past were few and far between.  

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The politicized appellate process could hamper bank mergers and acquisitions. Fear of retaliation from a biased review process might deter a bank from appealing its Community Reinvestment Act rating, which is taken into consideration when a bank applies for a merger. This excessive government coercion could limit services provided to consumers and put U.S. banks at a competitive disadvantage to foreign counterparts. 

The notice will also allow members of the SARC to interact with supervisory staff without sharing the communication with the appealing bank. Confidential communication without transparency could engender collusive or biased determinations against a bank without the bank being able to defend itself.

The FDIC’s decision to reinstate the SARC without stakeholder feedback flies in the face of formal due process that should be afforded to parties affected by the significant change in the appellate process. Instead of moving forward with the SARC, the FDIC should retain the Office of Supervisory Appeals to ensure that reviews will be impartial, independent of pressure from the White House, and void of duplicative regulatory enforcement from the CFPB and bank examiner retaliation.