Neither of two competing proposals for changes to the federal bank deposit insurer’s rules implementing the Bank Control Act (BCA) were adopted Thursday by the agency’s board after sponsors of the two proposals withdrew them, largely after it became apparent that neither could gain a majority vote.
In its meeting, the Federal Deposit Insurance Corp. (FDIC) Board ultimately did not vote on separate proposals offered by board Member Jonathon McKernan and Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra. McKernan is an appointed member of the board; Chopra is a member because of his status as CFPB director.
Although McKernan’s proposal earned the support of fellow appointed board member Vice Chairman Travis Hill, it did not earn support from a third member. Chopra’s proposal likewise did not receive three votes in support, as Acting Comptroller of the Currency Michael Hsu said he would not support either proposal. Board Chairman Martin Gruenberg, the fifth member of the panel, did not offer a position on either proposal.
McKernan said his proposal would direct agency staff to assess each year whether certain asset managers that manage large index funds control an FDIC-supervised bank.
“To the extent an asset manager relies on a passivity commitment or other similar regulatory comfort to avoid a control determination, staff would also assess each year whether that asset manager complied with any commitments or other conditions under that comfort,” McKernan said of his proposal.
“That’s it. It’s that simple. Very basic,” McKernan said. “All I’m trying to do is get us to monitor compliance with existing law. This is cautious incrementalism in action. Exceedingly so.”
Vice Chairman Hill voiced support, saying he agreed with the principle that the FDIC should take steps to confirm that large asset managers with passivity agreements are living up to those commitments.
He described Chopra’s proposal as that developed by the FDIC staff (which he said was “oddly being introduced” by Chopra), and said he would not support it.
“This proposal would expand well beyond ensuring passivity at the largest asset managers, and would require a range of other types of bank investors to file duplicative notices with both the FDIC and the Federal Reserve,” he said.
Chopra said his proposal was aimed at changing FDIC rules to ensure that fewer suspicious changes in bank control can escape FDIC review (using Farmington State Bank as an example).
Farmington State Bank, which served its rural Washington state community for 136 years, was closed last year for improperly changing its business plan without receiving prior approval for those changes from its supervisors. According to the Fed, in 2020, the bank’s holding company was acquired by a resident of The Bahamas. In approving the acquisition, the Fed (and the Washington State Department of Financial Institutions, the local supervisor) imposed certain conditions on the new owner and the company – including that, for three years, the bank and the holding company were prohibited from taking certain actions.
However, subsequent exams found that the bank had, indeed, violated the prohibitions outlined in a cease and desist order against the bank “by engaging in activities which changed the Bank’s business plan and general character without receiving prior written approval from the Board of Governors, the Reserve Bank, or the WSDFI, including the Bank’s entering into a non-binding memorandum of understanding with a third party whereby the Bank committed to ‘work with’ the third party ‘to design the necessary IT infrastructure’ to facilitate the third party’s issuance of stablecoins to the public in exchange for receipt of 50% of mint and burn fees on certain stablecoins, and took material steps to implement that memorandum of understanding.”
Chopra said his proposal would prevent future banks from escaping FDIC review in such circumstances.
But Acting Comptroller of the Currency Michael Hsu, also a member of the board by virtue of his position at the Office of the Comptroller of the Currency (OCC0, said he opposed both proposals – which ultimately led them to be withdrawn (although he thanked both McKernan and Chopra for offering them).
Hsu said that current FDIC procedures and rules, and cooperation among the bank regulators, were enough to tackle such future developments as that at Farmington State Bank.
Hsu said that the “issue of bank ownership and control is shared across the FDIC, OCC, and Federal Reserve. We are inextricably linked on it given how banking organizations have structured themselves. To address this effectively requires interagency coordination and, ideally, a shared understanding and approach to bank control, notices, and passivity agreements. In short, I believe we should work together to strengthen bank control assessments, instead of creating more process and opportunities for turf battles or fragmentation.”
April 25, 2024 — FDIC Board Meeting