Breakingviews: Big banks win with FDIC head’s resignation

Martin Gruenberg just gave big U.S. banks a gift. The head of the Federal Deposit Insurance Corporation, and an architect of new, yet-to-be-implemented capital buffer rules, said he would step down from his post. Democrats hope to squeeze through a proposal while the FDIC’s chair remains on the job. A speedier resignation would put Republicans in charge; they want the rules to die. Either way, the likes of JPMorgan and Bank of America win.

It’s not clear how long Gruenberg, who didn’t give a firm date for his final day, can last. His planned resignation follows a Wall Street Journal investigation, and subsequent law firm probe, into sexual harassment at his agency. Gruenberg’s anger issues figured prominently in the report, leading to calls for wholesale changes and putting progressive Democrats in an awkward position. While he apologized for the behavior, it eventually became untenable for some, like Senate Banking Committee Chairman Sherrod Brown, to back Gruenberg even as the regulator attempts to finish high-priority Basel 3 bank capital rules, backed by both Gruenberg and Brown’s party.

The remaining scenarios are favorable to banks, to varying degrees. With Gruenberg semi-sidelined, the Federal Reserve Chair Jerome Powell will have the loudest voice in the interagency process and water down the existing proposal, which has been panned by banks as too stringent. Powell said in March that the bank-hated plan won’t be finalized absent significant changes. Democrats — and banks — would likely see that as half a loaf worth accepting. Banks are now holding excess capital in anticipation of the new rules. A lighter touch would enable them to free up cash and potentially buy back stock.

That’s probably the worst-case scenario for banks, too. An even better outcome would be for the November election to come around without a finalized proposal. That would be made easier if Gruenberg were ushered to the door in the next couple of months. That would make the Democrats lose their commission majority, plus Gruenberg’s successor as acting chairman would be Vice Chairman Travis Hill, a Republican. The chairman decides what comes up for a vote.

Even finishing the rules later this summer would put their survival at risk: a Republican takeover in Washington would allow Congress to use an obscure legislative maneuver called the Congressional Review Act, enabling the legislative body to void recently-enacted regulations. Regulators move slowly even in perfect conditions. With the Gruenberg storm still overhead, the Basel Endgame seems increasingly far away.