WASHINGTON — Federal Deposit Insurance Corp. Chairman Martin Gruenberg's announcement that he will step down when a successor is confirmed will likely weaken regulators' hands in pushing for capital hikes in the Basel III endgame proposal, and may also give the Federal Reserve a stronger hand in influencing other joint rulemakings, experts say.
Only hours after Senate Banking Committee chair Sherrod Brown, D-Ohio, called for new leadership at the FDIC, Gruenberg
While the beltway has already begun to game out
"For all intents and purposes, we're in June," Gardner said. "We're going into Memorial Day weekend and [Congressional] recesses. So the best you can do over the next couple of weeks is an announcement of a nominee. They'll have to go through [Federal Bureau of Investigation] vetting, get a Senate Banking Committee confirmation hearing … You're gonna have another recess around July 4 — so that'll be out. You have a further recess in July for the Republican National Convention and August is off, now we're into September, and Senate floor time is very valuable."
Gardner added that there is also a very real chance that a potential Gruenberg successor would be ousted within months of confirmation if Trump wins. Gruenberg's predecessor as chair, Jelena McWilliams,
"If you're [Senate Majority Leader] Schumer and if you're the White House, are you prioritizing floor time for judicial appointments that get lifetime appointments, or the FDIC chairman — who could be undercut in January?" Gardner said. "The Republicans — if they take over in January 2025 — they can do exactly to Marty Gruenberg what Democrats did to McWilliams."
Isaac Boltansky, an analyst with BTIG, said that while the political spotlight has been on Gruenberg's political future and eventual exit, his role atop the agency is mostly noise for bankers and financial markets, who are fixated on one rule in particular: the Basel endgame capital proposal.
"That's the main thing for bankers and markets," he said. "I don't think they're following the drama around Gruenberg as closely as everyone inside the beltway, because they have confidence now that the rule is going to be dramatically softened."
One aspect of the
Joseph Lynyak, a partner with law firm Dorsey & Whitney, argues the FDIC is already less influential in hashing out capital hikes for the largest banks considering its statutory role is primarily in regulating state-chartered banks, which tend to be smaller and categorically not affected by the coming capital reforms. The Fed, meanwhile, oversees bank holding companies and by extension the largest and most complex banks.
"They would certainly have input," he said. "But FDIC would probably not be taking a leadership role in terms of considering the effects of the proposed Basel rules."
Members of the Fed's Board of Governors have been mixed on the Basel proposal since it was first issued last July. Fed Govs.
Gardner says he believes there is a less than 50% chance of the Basel endgame being finished by year end, but that an imminent change in administrations could speed things up.
"Regulators can read the pulse, right? They all know what the political situation is, especially the heads of the agencies," he said. "So there's going to be a time when they decide that — in their view — the risk of a Trump victory is so high that they're going to have to swallow hard, compromise on a host of issues and wrap it up quickly before year end."
That's largely because, Gardner argued, failing to finalize something before a theoretical Trump victory would all but doom the proposal in the short term.
"If they miscalculate or they just are unwilling to compromise and Trump wins, I think you'll probably see a slowdown in work," said Gardner. "At that point it's unrealistic it would be done by year end or the inauguration."
He also notes — as evidence by endgame's architect Fed vice chair for supervision Michael Barr's testimony at recent Congressional hearings — regulators have yet to even agree on what will be in the rule, let alone whether or not to repropose the rule.
Experts are split as to what the timeline will look like. Boltansky says he sees the agencies fast-tracking the rule, and making significant changes to get it done.
"The likeliest outcome is that they make a number of changes to the rule and try to finalize it this year," he said. "[Though] I also fully admit that a reproposal is still possible, I just think that the most probable outcome is finalization before the election."
Boltasnky noted that, in general, making "material changes to the rule"
"At a minimum, we continue to expect targeted tweaks to how the proposal treats mortgages, green tax credit investments, fee-based income such as swipe fees, corporate loans, and trading activities," said Boltansky. "I've also heard some suggestions that they can take an alternate course and finalize part of it while reproposing another part —
Lynyak is fairly confident the rule is headed for a reproposal, particularly given the gravity and impact on large banks of the proposed reforms.
"My view is that I think that Chairman Powell signaled very clearly that a reproposal with further amendments to the proposal is being considered and I think that would be likely the approach they would be taking, as opposed to simply issuing an amended rule," he said. "When you look at these kinds of issues, you [make changes like this] once in every decade, so you have to do it right. Giving the banks an opportunity to look at a reproposal and having public comment … is critical for operational and business plans of the larger banks."
