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The Impact of the FDIC Scandal

The Impact of the FDIC Scandal

by Starling Insights

Starling Insights Editorial Board

Nov 20, 2023

Observations

Last week, a bombshell Wall Street Journal article portrayed a culture of partying and harassment at the US Federal Deposit Insurance Corporation (FDIC). Further reports alleging that Chairman Martin Gruenberg ignored such behavior and contributed to the "toxic atmosphere" by bullying subordinates have put the FDIC's mission at risk.

During Congressional Hearings following the initial report by journalist Rebecca Ballhaus, Gruenberg assured that the agency does not tolerate harassment or discrimination. However, Gruenberg has himself faced criticism for allegedly having an "explosive temper" and developing a reputation for bullying employees.

These accusations have led some to question "who is watching the watchdog?" to ensure that these cultural issues are resolved. Congress seems eager to use its oversight role to do just that. In the past week, legislators from both parties have called for accountability at the FDIC, ranging from requests for investigations into the cultural issues to demands that Gruenberg resign.

Gruenberg appears steadfast against the calls for him to resign, but has issued a profuse apology to his agency's employees for its cultural deficiencies. "I want to assure you that I'm committed to addressing these issues, including my own shortcomings," he said in a video sent to staff.

Whether or not Gruenberg remains in post, the scandal puts the Biden administration's regulatory agenda at risk. The increased scrutiny may hamper regulators' ability to push through landmark reforms, such as the controversial proposed capital requirements regime US regulators launched a consultation on earlier this year, prior to the 2024 election. This is especially true if Gruenberg were to resign, as the administration would have to find a new Chairman that would secure Senate approval.

However this story develops, it is clear that culture within regulatory agencies matters as much as the culture within the firms they oversee — perhaps even more so. When scandals implicate those who are charged with serving the public, trust in our institutions is damaged.

In the coming weeks, Starling will publish a Deeper Dive report entitled "Physician, Heal Thyself," which will discuss the global push to hold regulators accountable for their organizational culture and the outcomes such culture may drive. Regulators, that is, are increasingly being held to a standard regarding culture and conduct that they have emphasized in recent years among the firms they oversee. This Deeper Dive will only be available here on Starling Insights.

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