Who is watching the watchdog when it comes to FDIC behaviour?
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Lewd comments, strip club visits, loutish behaviour on training trips and pressure to drink while on the job. It sounds like an all too familiar Wall Street scandal. But this time, the alleged bad boys aren’t bankers, but the regulators charged with keeping them in line.
According to a Wall Street Journal investigation, the Federal Deposit Insurance Corporation has suffered for years from what former employees described as a “toxic atmosphere” that prompted women to quit while men accused of misbehaviour remained employed. Female bank examiners described a sexualised, boys’ club environment that encouraged heavy drinking.
The claims stretch back more than a decade, and continued even though the agency’s inspector general warned in 2020 that the FDIC “had not established an adequate sexual harassment prevention program” and incidents might not be properly reported.
They also come after 15 years of campaigning by global regulators to change the culture of banking in order to prevent a repeat of the 2008 financial crisis. The irony would be delicious if it were not so depressing.
The 6,000-strong FDIC is the rock on which US banking stability rests. It insures more than 850mn accounts at 4,700 lenders, and is charged with finding a solution when any of them fail. That job came to the fore earlier this year when Silicon Valley Bank, Signature and First Republic fell over, sending US regional banks into a brief tailspin.
The FDIC also directly supervises more than 2,700 lenders; the rest are overseen by the Federal Reserve and other agencies. The allegations of a toxic culture come primarily from the watchdog’s bank examiners, many of whom work in regional offices and spend months on the road visiting individual institutions.
So far, FDIC chair Martin Gruenberg is saying the right things, telling staff in a video message that harassment and discrimination are “completely unacceptable . . . we will not tolerate it.” The FDIC has hired the law firm BakerHostetler to do a “top to bottom assessment”.
But Gruenberg’s long tenure calls into question his ability to make changes to the agency’s culture. He has been on the FDIC board for 18 years and chair or acting chair for nine, in three separate stints. He also has a reputation for preferring a non-confrontational approach. This can help forge consensus but is less than ideal when rear ends need kicking.
Shocking as the current allegations are, they do not come out of the blue. The FDIC has dropped precipitously in recent employee satisfaction surveys: it went from being rated the top midsized US government agency in 2016 to 17th out of 27 last year.
Attrition among field examiners, about 30 per cent of the agency’s workforce, has more than doubled in the past two years to 12.2 per cent for women and 11.8 per cent for men last year, the highest level since at least 2015. The similarity between male and female rates, rather than being reassuring, suggests that the bad behaviour is taking a toll beyond its direct targets. Regulators have long argued for such a link as they lectured bankers to clean up their acts in the service of financial stability.
The FDIC was the primary federal regulator for both First Republic and Signature before they collapsed. Post mortems found that the FDIC staff “missed opportunities” to flag up problems at Signature and were “too generous” with First Republic. The Signature report also highlighted a shortage of examiners experienced enough to tackle large and complex banks.
The revelations come at a delicate time for bank watchdogs. They have put forward far-reaching proposals to tighten capital rules for large and regional US banks. The tougher standards would affect not just global behemoths but also those with $100bn or more in assets, many of them supervised by the FDIC.
The industry, led by JPMorgan Chase’s Jamie Dimon, is pushing back. The bankers contend that the new rules, known as the Basel III endgame, would sharply increase borrowing costs and hurt economic growth. The FDIC’s troubles make it easier for bankers to raise questions about the regulator’s authority and argue for watering down the proposals. The revelations could undercut claims that tighter rules rather than better supervisors are needed to keep the banking system safe.
Whether or not the capital proposals survive, the FDIC must take concrete steps to repair its culture and credibility. It has no hope of keeping the financial services industry in line if top officials tolerate the kinds of behaviour that would get a banker fired. Protecting financial stability cannot be the preserve of crude party animals.
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