No one cares about the FDIC's state supervisory requirement. So why have it?

Last week Martin Gruenberg, the once and future chair of the Federal Deposit Insurance Corp., went before the Senate Banking Committee to answer senators' questions as part of his confirmation process. Gruenberg — the longest-serving member of the FDIC board, and a veteran of one full term as FDIC chair and several stints as acting chair — was joined by fellow board nominees Travis Hill, who would be vice chair, and Jonathan McKernan. Hill and McKernan are required by statute to belong to a party other than that of the president nominating them.  

While Gruenberg wasn't the only nominee at the hearing, he fielded most of the attention and handled it like a pro, taking in stride the hits regarding the departure of his predecessor, Jelena McWilliams, and patiently answering policy questions in turn. Then at one point Sen. Cynthia Lummis, R-Wyo., posed a question about why exactly none of the nominees have state bank supervisory experience. Below is the entire exchange, and I apologize in advance for quoting at such length.

LUMMIS: I want to turn next to Dodd-Frank. 12 USC 1812 (a)(1) requires that the FDIC board have one member with state bank supervisory experience. That's a quote. State bank supervisor is defined in that same statute as "being an officer of a state with primary regulatory authority over state banks." So this is not only a federal regulator that oversees state banks. So neither Mr. Hill nor Mr. McKernan have experience as a state bank regulator. Mr. Gruenberg, have you worked as a state bank regulator, for a state banking agency?

Amanda Andrade-Rhoades/Bloomberg

GRUENBERG: I have not worked for a state banking agency, Senator. 

LUMMIS: Have you ever written a report of examination or issued an exam rating to a community bank, the things that would give you a good understanding of how fair a bank's exam rate is, for example?

GRUENBERG: Well, I would point out that the FDIC supervises, as you know, state-chartered institutions …

LUMMIS: Have you ever written a report of examination?

GRUENBERG: No, I'm not an examiner. I've just served on the board of the agency.

LUMMIS: Do you think someone should have been nominated to the FDIC board with state bank supervisory experience? Because most banks in our dual banking system are state-chartered.

GRUENBERG: They are the majority of the institutions. I understand why you ask the question, Senator, and in a sense … that's also above my pay grade. It's a judgment for the White House in terms of the nominations.

LUMMIS: Well, the statute requires that someone who has actually served as a state bank regulator. That's not you, or any other nominee here. So I think it's pretty clear that the White House and this committee think it's OK to ignore the clear text of Dodd-Frank, and I don't think this committee should move forward with these nominations until we start following the law. 

Lummis's line of argument seems pretty cut and dried — rules is rules, after all. But upon further examination, there's a little more going on here than there might appear at first blush.

The requirement that the FDIC board include one member with state supervisory experience dates back to the go-go '90s, when Congress was actively tinkering with bank regulatory statutes in the wake of the savings and loan crisis of the 1980s. As Jim Cooper, president and CEO of the Conference of State Bank Supervisors, recently noted in these pages in October, the purpose of that requirement was to "ensure the FDIC board included the state banking system's perspective, bringing together both sides of the dual banking system."

In other words, there is value in having someone who knows the state side of the bank supervisory ball in the room when the FDIC is crafting rules. And it's worth noting that these kinds of requirements are all over the financial regulatory apparatus: The FDIC, Securities and Exchange Commission and Commodity Futures Trading Commission (among others) require that their governing boards include a stated number of members of another party than that of the president nominating them — known as minority-party members. 

The Federal Reserve has a requirement similar to the FDIC's that requires "at least one member with demonstrated primary experience working in or supervising community banks having less than $10,000,000,000 in total assets" — a role currently filled by Gov. Michelle Bowman but that was unfilled for years before her nomination. The president is also required to "have due regard to a fair representation of the financial, agricultural, industrial and commercial interests, and geographical divisions of the country" in making Fed nominations — whatever that means. And administrations past and present have been creative in their ways of sidestepping the statutory requirement that no two members of the board may "serve from any one Federal Reserve district." Good thing there aren't two members on the board "from" D.C. or New York.

I'm not trying to dunk on the reasoning behind these statutory requirements. The reason they are there is that there is real value in having rules crafted by a group of people who see things differently or at least from different perspectives and experiences. It is a measure to prevent "groupthink" on the one hand and arrive at better, more durable policies on the other. 

As Gruenberg fends off GOP criticism, nomination hearing puts FDIC step closer to full board

Lummis — and the CSBS, it should be noted — appear to be standing strong in their opposition to these nominees for this reason, but so far it doesn't seem like other Republicans or moderate Democrats intend to go to the mat. And the reason for that is this: If they do, all that will happen is the administration will pull one of the Republican nominees and replace him with one who has state supervisory experience. In other words, this isn't a way for critics of Gruenberg to derail him.

And to put a finer point on it, the FDIC has not brought on a new director with state supervisory experience since Tom Curry, who had been commissioner of banks in Massachusetts, joined the board in 2004. He stayed on until 2017, including five years when he also served as comptroller of the currency.

This is the heart of the problem with these statutory requirements about who can be in the regulatory room: The only effective way to enforce them is through the nomination process, which renders it a political rather than a legal question. I'm not a lawyer, but I did stay in a Holiday Inn Express last night, and I struggle to envision who could credibly establish standing to argue that the confirmation of this slate of candidates caused me personal demonstrable harm that entitles them to redress because none of these nominees have state supervisory experience. So you get what you get and you don't get upset.

I for one think these kinds of requirements have value, but they work the best when they involve passive triggers. For example, the Federal Reserve Act requires that no regional Fed bank president may serve past the age of 65 unless he or she is nominated after the age of 55, and in that case a president may serve for two terms or until the age of 75, whichever comes first. That provision prevents the scenario where someone can be Fed president for life, and the presidents of the Chicago and Kansas City Fed banks are retiring early next year for precisely this reason.

If Congress has decided that it wants certain kinds of people to be in public offices, it has the right to make those decisions — and it has. But these legislative clauses aren't worth very much if they can be so easily sidestepped. Better to either give them some teeth or take them off the books altogether.