Consumer Financial Protection Bureau Director Rohit Chopra Tuesday reopened a debate around restricting banks from share buybacks and dividends during times of economic distress.
At Tuesday's Federal Deposit Insurance Corp. board meeting, Chopra expressed concern that during the 2008 financial crisis, the COVID-19 pandemic, and the 2023 bank failures, regulators imposed restrictions on capital distributions on an individual basis rather than system-wide. That approach, he said, allowed some banks to reward executives and shareholders while the public provided direct or indirect support to stabilize the system.
His draft policy — which was not put to a vote — proposes classifying such distributions during systemic stress as unsafe and unsound, advocating for system-wide restrictions to preserve resources for absorbing losses and supporting lending.
"When they do these buybacks and dividends that depletes capital, giving money to the shareholders that is no longer available to absorb losses or to lend to customers and clients in a recovery phase," he said. "Imposing limitations on an individual institution during a time of stress can raise questions in the capital markets about that individual institution's viability. [Therefore, it] may be preferable for the entire system to be restricted from engaging in capital distributions, since it may actually reduce depositor runs in the aggregate."
FDIC Vice Chair Travis Hill — who is most likely to succeed chair Martin Gruenberg atop the agency when President-elect Donald Trump takes office next month — pushed back on the concept, calling the proposal overly broad and inequitable. Hill argued it would disproportionately disadvantage FDIC-supervised institutions, including community banks, compared to nationally-chartered and state-member banks regulated by the OCC and Federal Reserve, as well as nonbank entities.
Hill warned that blanket prohibitions could deter private capital from aiding struggling banks, increasing the risk of FDIC receiverships and destabilizing the system.
"Bank holding companies with profitable nonbank subsidiaries would generally be able to continue making distributions, while bank holding companies with only FDIC-supervised subsidiaries generally would not," he said. "An industry-wide prohibition on bank distributions makes banks less attractive as investments and hurts their ability to raise capital."
Gruenberg thanked Chopra for raising the discussion while acknowledging the complexities of the issue. Reflecting on the 2008 crisis and the pandemic, he noted the significant risks posed by dividend distributions during times of stress.
Chopra also raised a second issue: the FDIC's handling of banks criminally convicted of money laundering. He criticized loopholes in the 1992 Annunzio-Wylie Anti-Money Laundering Act, which mandates deposit insurance termination proceedings for banks convicted of certain money laundering offenses.
Chopra said that some charges — including conspiracy and charges against a bank's parent holding company — are not among the violations that trigger deposit insurance termination proceedings under Annunzio-Wiley. He proposed updating the FDIC's enforcement policy to initiate proceedings for related charges under separate statutory authority. Deposit insurance proceedings do not necessarily lead to termination, but are an avenue for the agency to consider penalties.
"The bottom line is simple: banks are supposed to meet the convenience and needs of local communities, of households and businesses," Chopra said. "If a bank is criminally convicted of meeting the convenience and needs of cartels or terrorists, Congress expects that appropriate sanctions are at least considered."
The FDIC Board approved a proposed $3 billion Operating Budget for 2025, marking a 2.2% increase from 2024. The budget raises funding for ongoing operations by $161.4 million, while reducing the Receivership Funding component by $100 million due to lower expected resolution activity. The agency also cut seven staff positions in the 2025 budget.
