Questions for FDIC Chair Nominee Christy Goldsmith Romero
Hypothetical questions on regulatory conduct Brian Knight would ask at this week's Nomination Hearing.
This week, the Senate Banking Committee will hold a Nomination Hearing for multiple presidential nominees to government agencies, including Christy Goldsmith Romero for Chairperson and Member of the Board of Directors of the Federal Deposit Insurance Corporation (FDIC). In keeping with our usual practice here at FinRegRag, Brian Knight has several questions he would ask the nominee for FDIC Chair if he were in the position to do so. Here are the questions he would pose to Christy Goldsmith Romero:
The FDIC clearly has a problem managing its staff's conduct, leading to well-publicized incidents of FDIC staff abusing their power against their colleagues. I assume you are familiar with those incidents, correct?
This abuse has lead to the creation of new bodies and processes within the FDIC to help improve accountability.
However, FDIC staffers, including senior staffers, abusing their power is sadly neither new nor limited to the recent allegations. Are you familiar with the fact that FDIC employees abusing their power goes back further?
Are you familiar with the FDIC OIG reports regarding how FDIC staffers, including senior leadership, misused their power to target lawful products that FDIC staff opposed for moral reasons, specifically refund anticipation loans and payday loans?
Are you familiar with how FDIC officials, lacking clear legal reasons to prohibit banks from providing support relief to these legal industries, rely instead on supervisory tools like "reputation risk" and "moral suasion" to threaten banks unless they dropped these legal products and clients?
Are you familiar with, in the wake of these abuses, the FDIC created a new process for banks to appeal supervision decisions that was more fair and independent, but that this system was reversed by your predecessor, whose ability to police the abuses of FDIC staff has been shown to be charitably described as lacking?
Do you agree, given the demonstrated internal and external abuses of power by FDIC staff that greater and more independent accountability methods are needed? Will you commit to reinstate the more neutral supervisory appeals process that your predecessor unwisely scuttled?
Keeping on this theme, have you read the Supreme Court's opinion in NRA v. Vullo? It relates to the New York bank regulator abusing her power to target an advocacy group whose politics she disagreed with, using among other things reputation risk as a tool to discourage banks from doing business with advocacy groups she disagreed with.
Do you agree that, if the allegations against Maria Vullo are correct, she abused her power? And that such conduct is inappropriate for a bank regulator?
I've previously mentioned the FDIC OIG reports of similar incidents, though those did not involve First Amendment concerns. Yet they did show bank regulators abusing the sacred trust placed in them to try and effectively outlaw legal products they disagreed with. Often relying on the vague concept of reputation risk as a catch-all justification.
Do you believe reputation risk is a legitimate tool for regulators, especially if the concern is that a bank doing business with a legal but controversial client would cause other clients to leave the bank?
If so, why would regulators be in a better position than the bank themselves to assess this?
What level of risk would be necessary for regulators to invoke this power? Must the bank be at risk of failure or is any economic loss sufficient?
Must the regulator have some sort of objective, externally quantifiable and critiquable metric for this, or is gut instinct enough?
Which constituency's opinion should matter? Is it only reputation loss to actual customers? What about potential customers? What about employees, the media, activists, or the regulators themselves. Whose opinions matter?
Going back to NRA v. Vullo. It is certainly true that the NRA is controversial, but so is planned parenthood, or any number of other groups. If regulators are going to warn about the risk of doing business with controversial clients, can they pick and choose which controversies they take note of, or do they need a neutral and objective criteria?
Let's go back in time. In the 1970s, Arab states tried to get US banks to cut ties with Israel and Israeli firms by offering banks more business if they cut ties, or threatening to pull their business if they didn't. This is effectively a reputation risk scenario. A bank serving customer A risked losing more business from customer B, who dislikes A, unless the bank dropped A. Should regulators have warned banks about the reputation risk of doing business with Israel? If not, why not. Remember, religion and national origin were not legally protected classes yet, so there was no federal law preventing banks from dropping Israeli clients.
If not, why not? Doesn't the moral intuition apply more broadly?
Would you commit to a rulemaking that makes clear the FDIC does not and will not use so-called reputation risk stemming from a bank providing legal banking services to a legal industry as a factor in supervision, regulation, or enforcement?
If not, would you at least commit to clarifying the exact scope of how the FDIC will use reputation risk, including its methods, criteria, and metrics via notice-and-comment rulemaking?