Jonathan McKernan exits FDIC

Federal Deposit Insurance Corp. Director Jonathan McKernan Monday said he would leave the agency in order to maintain the partisan balance of the agency's board of directors. 

The announcement comes after former National Credit Union Administration Chair Rodney Hood was tapped by the Trump administration Friday to serve as acting Comptroller of the Currency — a role whose duties include sitting on the FDIC board. Under FDIC rules, no more than three members of the board can be from the same party. The addition of Hood, a Republican, along with the existing FDIC acting Chair Travis Hill and Acting Consumer Financial Protection Bureau Director Russell Vought, means McKernan — who has not been nominated to a role under the current administration — was the odd man out.  

"My term has expired, and with the new Acting Comptroller, we would have more Republicans on the Board than permitted by law," he wrote in an X post Monday morning. "I've every confidence that under the new FDIC leadership, the FDIC will succeed in its mission while also reversing the regulatory overreaches of the last few years."

McKernan's exit leaves the FDIC board with just three Republicans as Trump has yet to nominate any Democratic members to the board. To fill the remaining seats, the Senate leader for the party that does not hold the White House typically pulls from top Senate Banking staff or political appointees from elsewhere in the government. The board can still technically pass regulation with the partially staffed board as was done for most of 2022. Between Jelena McWilliams' departure in December 2021 and Hill and McKernan's swearing-in in January 2023, the board continued to hold meetings and pass measures.

McKernan — who came to the FDIC after serving as a banking lawyer, Senior Counsel for Policy at the Federal  Housing Finance Agency as well as a stint as Republican staff counsel on the Senate Banking Committee — spent his time at the agency offering measured critiques of the Biden administration's proposed regulations, including those aimed at raising capital requirements for large banks and those governing agency consideration of bank mergers. 

During his time in office, beginning in January 2023, McKernan was one of two Republican appointees on a majority Democratic bank regulatory board. In his time he opposed a number of initiatives, most notably the Basel III endgame capital rules.

McKernan voted against the initial Basel proposal, which would have raised the proportion of unborrowed funds banks must foot for lending activities. McKernan opposed the move because the rationale for the proposal was improperly justified and because it could give nonbanks a competitive edge, drawing deposits out of the highly regulated, insured banking system.

"I don't think the solution is to pile on more prescriptive regulation or otherwise try to push responsible risk-taking out of the banking system," McKernan said of the proposed rule. "I think what we need to do is accept — and I mean truly accept — that bank failures, including large bank failures, are an inevitable result of a dynamic and innovative economy, and we should plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for ending this practiced habit we've seemed to develop for privatizing gains while socializing losses."

McKernan also made some affirmative propositions, like calling for more detailed guidance governing banks' relationships with financial technology firms. In July 2024, he suggested regulators consider making their third-party risk guidance more specific in order to foster innovation and competition in the financial services sector.

The outgoing director also played a major role in responding to a sexual and interpersonal harassment scandal at the agency. 

The FDIC workplace scandal came to light late last year after the Wall Street Journal published an investigation detailing numerous instances of sexual harassment and racial prejudice at the agency spanning decades. The FDIC established a special committee to investigate these claims as a response, appointing FDIC board members Michael Hsu and Jonathan McKernan to lead the investigation. Law firm Cleary Gottlieb Steen & Hamilton was ultimately tapped to undertake the independent review, whose results were published last year and largely corroborated the findings of the Wall Street Journal investigation.

While FDIC board members, including Chair Martin Gruenberg — a Biden appointee — were not themselves accused of sexual misconduct or harassment, the report detailed instances where Gruenberg yelled at and berated subordinates but did not explicitly call for his ouster. Despite the report's findings, Gruenberg retained his position and participated in subsequent hearings in both congressional chambers. However, pressure began to mount for the chairman as Senate Banking Committee Chair Sherrod Brown publicly called for new leadership at the FDIC, leading Gruenberg to announce his intention to step down. 

McKernan repeatedly called for a change at the top of the agency brass, saying "a fresh start sooner rather than later [was] important to [re]establish credibility" at the agency and called for more direct oversight by the Republican board members — namely himself and then-Vice Chair Hill.

McKernan found an unlikely ally in former Consumer Financial Protection Bureau Director Rohit Chopra, who shared his concern over the growing control large asset managers wield over banks they invest in, though the two took differing approaches to solving the issue. 

The nation's three largest investment firms — Vanguard, BlackRock and State Street, a custody bank that has investments in other banks — have seen substantial growth in their portfolios as a result of the popularity of index funds pegged to publicly traded companies. As a result, the three firms were estimated to cast roughly a quarter of the total votes at the annual meetings of S&P 500 companies at the end of 2017 according to scholarly estimates.

Under law, companies that obtain 10% or more of a stake in a bank can be considered to have a controlling interest in the bank, and thus be subjected to heightened regulatory constraints, particularly concerning extensions of credit from the bank to the nonbank owner and related affiliates.

Many firms have historically avoided those restrictions under "passivity agreements," in which  companies commit to remain passive investors in the bank. In some cases, the FDIC has accepted such agreements struck by the Federal Reserve Board and investors, but the agency appears to want more direct oversight going forward. 

In April 2024, the FDIC board reviewed two proposals addressing the control of banks by asset managers introduced by Chopra and FDIC Board Member Jonathan McKernan. McKernan's proposal called for enhanced monitoring of major index fund managers to ensure compliance with existing regulations, while Chopra's broader proposal aimed to reinstate FDIC oversight on acquisitions of voting securities at the holding company level.

Both proposals were withdrawn after failing to get the support of acting Comptroller of the Currency Michael Hsu, who said that the agency didn't have enough information to pursue the changes. 

The FDIC has since renegotiated its passivity agreement with investment firm Vanguard — whereby the firm pledges to remain a "passive investor" in the banks it buys stock in — which allows the asset manager to remain exempt from being considered a bank holding company, which would trigger heightened regulatory requirements. 

The FDIC is currently working with BlackRock on a similar agreement, and in January gave the firm a one month extension to enter into an agreement regarding the controlling power of its stakes in FDIC-regulated banks.