Would McWilliams stay on at FDIC if Biden wins?

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WASHINGTON — At the end of 2008, in the midst of a financial crisis, then-Federal Deposit Insurance Corp. Chair Sheila Bair — a Republican appointed by the George W. Bush administration — told Barack Obama's transition team that she would resign if the newly elected president wanted to choose a replacement.

With U.S. banks on shaky ground following a historic housing crash, the Obama team opted to keep Bair on board. For the next two and a half years, she helped steer the agency and the industry through a wave of bank collapses, leading a bipartisan FDIC board of mostly Democratic appointees.

Twelve years later, the economy has again been dealt a severe blow just ahead of a presidential election, and the FDIC — like the other bank regulators — is facing uncertainty about its post-2020 leadership.

Some observers wonder whether a similar scenario might play out for current FDIC Chair Jelena McWilliams — whose term lasts until mid-2023 — if the likely Democratic nominee Joe Biden wins in November. Unlike many other presidential appointees, the FDIC chief is protected from presidential firings. An incoming administration may want McWilliams to stay on to deal with financial effects of the coronavirus pandemic. But if McWilliams remains, she could be leading an FDIC board that looks very different.

"The president does not have authority to replace the FDIC chairman. That should be clear. It is the chairman’s choice," Bair said in an interview. But she added, “At the same time, you need to take a hard look at the political landscape when you decide whether to stay and whether you can continue to be effective as a minority chair.”

To date, McWilliams has been in lockstep with other Trump-appointed regulators favoring steps to reduce supervisory and compliance burdens, including supporting measures to ease capital and liquidity requirements for smaller institutions, and spearheading an FDIC plan to provide banks relief from brokered deposit restrictions.

An FDIC spokesperson said McWilliams “was confirmed to a five-year term and she intends to fulfill it. Any speculation to the contrary is just that, speculation."

But if Biden were to win, his administration would potentially seek to appoint new leaders for the Office of the Comptroller of the Currency and Consumer Financial Protection Bureau, which both hold seats on the five-member FDIC board. McWilliams would likely lose support for regulatory relief policies she tried to bring before the board. (A fourth seat is currently held by former FDIC Chair Martin Gruenberg, a Democrat, and the fifth seat is vacant.)

“It is not fun to chair a board if you don’t have the votes,” said Aaron Klein, policy director of the Center on Regulation and Markets at the Brookings Institution. “If Biden wins, his administration would almost immediately appoint a new comptroller and a … [CFPB] director who would presumably be more aligned with the president.”

Recalling her own decision, Bair later wrote in her memoir that she “had no desire to continue serving against the president's wishes. I would be hopelessly compromised if I did not have the president's support to continue my job."

But the choice would ultimately be McWilliams's to make, observers said.

“If I were only a couple of years into my term, and I was involved in things that required my attention or if I thought I was making a contribution, I’d want to stay until there was a break and it made sense to leave,” said former FDIC Chairman William Isaac, who served from 1981 to 1985.

It is somewhat routine for FDIC chairs, whose terms last five years, to continue serving after the election of a president from an opposing party. Gruenberg led the agency for the first year and a half of the Trump administration before McWilliams was confirmed in June 2018.

There is reason to expect that if President Trump wins reelection, little would change. Acting Comptroller of the Currency Brian Brooks could continue to head the OCC on an interim basis, or the Trump administration in a second term could nominate him to a full term as comptroller or replace him with another nominee. The term of CFPB Kathy Kraninger lasts until 2023.

But if Biden wins, some observers noted the new administration may delay new regulatory appointments for a while, despite a potential OCC vacancy and a recent Supreme Court decision giving sitting presidents the ability to fire CFPB directors at will. The new administration would be more likely to take a cautious approach to filling those seats with its own appointees if the GOP retains control of the Senate, making confirmation of Democratic appointees more challenging.

“We’re living in a hyperpartisan world where, in a worst-case scenario, nominations don’t get acted upon,” said Lawrence Kaplan, of counsel with Paul Hastings LLP.

Others said a Biden administration could focus on more bipartisan financial policy centered on managing the economic fallout from COVID-19. The extent of damage posed by the pandemic could be a decisive factor in whether McWilliams stays on with the support of whoever occupies the White House.

“Crises tend to unite, or at least they used to, in hearts and actions,” said Karen Petrou, managing partner of Federal Financial Analytics. “An FDIC dealing with a significantly weakened banking system is a very different FDIC than the one we've had for the last three years; it's a much more bipartisan agency.

“Some people feel in the midst of a crisis that continuity is incredibly important,” Petrou added. “I think everyone knows that we're holding our breath from a credit risk and operational risk perspective. We don't know the structural damage COVID is exerting on the economy and therefore on the financial system, and that's going to set the regulatory agenda.”

Former FDIC officials noted that Bair’s tenure was defined by bipartisan efforts and forging consensus among regulators that did not always agree. A full-throttle economic crisis, they said, could similarly test McWilliams’s ability to leverage relationships across the agencies as well as on Capitol Hill, where she spent six years as a senior staffer for the Senate Banking Committee.

“One of the reasons [Bair] was so effective on a bipartisan basis was, she had very good relationships across the aisle,” said Michael Krimminger, former general counsel at the FDIC and now senior counsel at Cleary Gottlieb. “She had great working relationships with both Republicans and Democrats.”

Bair formed a close alliance with Gruenberg — then the FDIC board’s vice chairman — during both the Bush and Obama presidencies, and the vast majority of items brought before the board during that time passed unanimously. In contrast, Gruenberg has opposed most of the reg relief measures supported by McWilliams.

McWilliams could face challenges to forging a bipartisan approach in a Biden administration following stances the FDIC has taken under her watch, Krimminger said. For example, the FDIC had signed on to a controversial proposal by former Comptroller of the Currency Joseph Otting to reform the Community Reinvestment Act over the objections of community advocates, although the FDIC has yet to issue its own final rule.

For an incoming Biden administration, “there will be real questions raised about how Chairman McWilliams and the FDIC moved forward on certain changes to some of the Dodd-Frank capital requirements, liquidity standards, and changes to the Community Reinvestment Act in particular,” said Krimminger.

Still, any interference from a political handover in Washington could be muted because financial regulators are rarely a top priority in the appointments process.

There are a lot of jobs to fill" when a new president takes office "and the FDIC and OCC aren’t always at the top of the list.
William Isaac, former FDIC chairman

“When the new president comes in, they usually don’t get to confirming new regulators at the FDIC and the OCC until at least six months after the election,” Isaac said. “There are a lot of jobs to fill, and the FDIC and OCC aren’t always at the top of the list.”

But if Brooks is still acting comptroller, he could be easily replaced under a new Democratically appointed Treasury secretary. Meanwhile, the Supreme Court’s decision in Seila Law v. CFPB removed restrictions on a president’s ability to fire a CFPB director without cause.

Some analysts see room for compromise on key areas of policy between McWilliams and a potential Democratic majority on the FDIC board.

“Chairman McWilliams is respected inside the building,” said Isaac Boltansky, director of policy research at Compass Point. “She is viewed as a consensus builder from her current seat right now. And so I think there are things that can be done.”

Klein agreed, saying McWilliams has tried to keep politics out of her decision-making.

“McWilliams has dedicated a lot of her life to public service. She pursues what she thinks is the good policy,” he said. “I may often disagree with her and what she thinks is good policy, but I firmly believe she is motivated by doing what she thinks is good policy.”

In the next presidential term, the CRA reform effort will likely loom large over the FDIC if the agency hasn’t finalized its portion of the rule before the presidential election.

“There has to be action on the Community Reinvestment Act,” Boltansky said. “There’s going to be a fair amount of cleaning up that needs to be done there, given the divergent standards that we have.”

But if McWilliams is chairing a board with a majority of Democratically appointed directors, she would likely face resistance to making changes resembling the OCC’s final CRA rule. Consumer advocates, Democrats and others have harshly criticized the OCC’s regulation, saying it undermines the mission of the anti-redlining law.

“The CRA proposal, regardless of the substance of the proposal, is a third rail. It is at least as political as it is substantive,” Petrou said.

McWilliams would also likely have to take a cautious approach to easing standards for banks’ partnerships with nonbanks. Under her leadership, the FDIC recently joined the OCC in finalizing a rule that enables banks to avoid the effects of the Madden v. Midland Fund court decision. The ruling had cast doubt on whether banks could sell loans to debt buyers in states with lower usury caps.

Similarly, a bipartisan FDIC board could struggle to reach consensus on whether to approve pending applications for industrial loan company charters. McWilliams has indicated a willingness to approve such bids, and the FDIC broke a protracted freeze on ILC decisions in March when it approved two applications, for Square and Nelnet.

The OCC has continued to appear open to approving nontraditional firms for banking charters, with Brooks recently pushing for the creation of a limited-purpose license for payments companies.

But such charter efforts could face more resistance in a Democratic administration.

“The questions around the separation of commerce and banking are getting hairier, as evidenced by the payments charter coming down the pipe on the OCC side,” Boltansky said. “When those questions become more complicated, which they are, there’s enormous political pressure to slow down on all fronts.”

But in the long run, if the pandemic does lasting damage to the economy, the policy issues of the last few years may become “a sideshow,” said Petrou. The FDIC's focus could change significantly compared with when McWilliams took the job in 2018.

“The Obama administration walked in, in 2009, and the world of financial regulation changed instantly and dramatically, because we were at the worst of the great financial crisis,” Petrou said. “I think that will almost surely happen again in 2021, if the underlying structural damage of the pandemic throughout the financial system is being laid bare.”

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