Posted on 10th Feb 2012 @ 10:00 AM

When it passed the Dodd-Frank Act, Congress abolished the Office of Thrift Supervision (OTS) and created the Consumer Financial Protection Bureau (CFPB). The OTS director had been a member of the Federal Deposit Insurance Corporation (FDIC) board. So what could be more logical than to give the vacant seat on the FDIC board to the director of the new CFPB?

Now that President Obama has used a controversial recess appointment to name Richard Cordray director of the CFPB, some members of Congress want to take a second look at the FDIC board. Is Cordray — or any CFPB director — really the best possible person to serve as one of the five members of the FDIC board? A House subcommittee considered that issue at recent hearings on H.R. 2081, legislation to take the CFPB director off the FDIC board and replace him with the Chairman of the Federal Reserve.

Bank Premiums at Stake

Testifying before the subcommittee, Michael Hunter, the American Bankers Association’s chief operating officer, declared that “the key question underlying this bill is what expertise is necessary to protect the insurance fund of the FDIC — a fund that is completely financed by premiums paid by the banking industry.

“Maintaining a safe and sound banking system is at the heart of protecting the FDIC insurance fund,” Hunter said. “Safety and soundness regulators, like the Federal Reserve, FDIC and OCC, are keenly aware of how policies impact the likelihood and cost of bank failures. So, representation by these agencies on the FDIC board makes sense.”

Historically, the FDIC board had operated with just three directors, one of them the Comptroller of the Currency. Congress added the OTS director to the FDIC board when the separate insurance fund protecting savings institutions was merged into the FDIC. At that time, the board was expanded to five members.

But how did the CFPB get in the mix? The functional successor to the OTS is the OCC, not the CFPB. “There may be several rationales for filling the vacated seat,” Hunter testified, “but none are [so] true to the original purpose to warrant an automatic substitution of the Bureau for the OTS.”

Having profitable banks is at the core of a viable long-term system that minimizes bank failures, Hunter reminded the subcommittee. While the ABA believes that consumer protection and safety and soundness “go hand-in-hand,” he added, “There is no question that consumer protection policies could be created that act in conflict with safety and soundness. Avoiding such a conflict would be critical in setting FDIC policies.”

But the ABA does not believe that transferring the CFPB seat to the Federal Reserve is the best solution. In the ABA’s view, what is missing on the FDIC board is representation from the banking industry.

While the banking industry foots the bill for the FDIC, it has no voice in the priorities, policies, and staffing of the agency. “Having stakeholders represented on the board rather than the Bureau or the Federal Reserve would be a better approach,” Hunter said.

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