Members of the Federal Deposit Insurance Corp. board on Tuesday debated the merits of allowing a vote on the sale of a failed bank, with some members arguing such a move would boost accountability, while others warned the additional step could slow down the auction process. 

Board members should be required to vote on the sale of any failed bank that has $50 billion or more in assets, and should have more oversight into how the agency handles significant bank failures, FDIC board member Jonathan McKernan proposed.

“I suspect some people are surprised to hear that the board did not actually vote on the FDIC sale of First Republic after it failed in April,” McKernan said, referencing the auction process that resulted in JPMorgan Chase assuming all of the deposits and most of the assets of San Francisco-based bank. 

In a sale orchestrated by the FDIC, agency staff selected JPMorgan Chase as the winning bidder under delegated authority, McKernan said. 

But given the size of First Republic and “significant policy considerations” associated with its sale, the board should have taken direct responsibility by voting on the sale, said McKernan, who criticized what he called a lack of accountability among board members regarding the auction process.

McKernan called for each board member to go on the record, for or against, a staff-recommended sale. 

“Requiring each board member to go on the record is important for accountability and transparency,” he said. “Ideally, requiring each board member to go on the record also could lead to better outcomes as each board member would have a strong incentive to actively monitor the auction process, develop an informed view on the staff-recommended sale, and present credible challenges to staff on key questions.” 

Value on the table

McKernan has already voiced concerns with the way in which First Republic was sold to JPMorgan Chase, telling Bloomberg in May he didn’t believe the process was competitive enough.

“We didn’t give nonbank bidders a real opportunity to participate on the same terms as bank bidders with respect to loss-share arrangements and deal financing, so, again, there’s a real question whether we left value on the table,” McKernan told the wire service. “The bottom line here is the FDIC is hindering the ability of nonbanks to participate in these auctions. Their participation is really in name only.”

In its sale of First Republic, the FDIC evaluated bids from PNC, Citizens Bank and Fifth Third, but competing bids either proposed breaking up First Republic or would have required a more complex structure to handle the bank’s $100 billion in mortgages, sources told Bloomberg. The other bids also would have cost the Deposit Insurance Fund more, one source said.

McKernan on Tuesday reiterated his criticism of the sale.

“I think that the board, as a whole, should have played more of a role in monitoring the auction process there,” he said. “That auction process did not take sufficient steps to develop options under which nonbank bidders could have acquired the assets of First Republic.”

The process also failed to let options develop, under which bidders could have acquired only the insured deposits of First Republic, leaving the uninsured deposits behind to bear losses, McKernan argued.

“Had an eventual board vote been contemplated, I think the board, as a whole, hopefully would have had a call or two that week where we would have talked about this and perhaps maybe a minority of the board could have driven some real-time enhancements in the auction process and remediate these gaps, maybe even result in a different winning bid,” he said. “We shouldn't, in my view, try to give ourselves some plausible deniability around these key questions by delegating the hard questions to staff. My proposal would fix all that and help restore to the board to its proper oversight role.”

‘Fog’ of failures

But Michael Hsu, an FDIC board member who serves as acting head of the Office of the Comptroller of the Currency, warned that requiring a board vote on the sale of a failed bank could impede the FDIC’s ability to resolve the situation in an orderly manner. 

“In the fog of large bank failures, the risk of a game of telephone as information is gathered and shared is elevated. Complexity and time pressures can further exacerbate that risk,” he said Tuesday. “Multiply that by five board members each seeking to do the right thing, but with differing levels of familiarity with the failing bank and associated issues, and the likelihood that such a process creates counterproductive noise and confusion can rise materially.”

Instead, to help mitigate that risk, Hsu said he supports an FDIC staff proposal that would give the board the power to decide whether a vote should be taken in the first place.

Threat of deadlock

Consumer Financial Protection Bureau Director Rohit Chopra, who also sits on the FDIC board, expressed concern over the “very plausible scenario” that a future four-member board could deadlock should it be allowed to vote on a failed bank sale.

“I don't want to see a situation where there is an ad infinitum deadlock,” he said. “I do hope that even where a majority of the board does not want to vote, that board members do feel that they can express their views in writing in public as they should.”

FDIC Vice Chair Travis Hill said he supported McKernan’s proposal but is mindful of the time constraints that could be present when an institution fails.

“I view the staff’s proposal as a reasonable compromise that balances these objectives while achieving a similar result,” Hill said.

JPMorgan Chase’s takeover of the collapsed First Republic has drawn criticism from Sen. Elizabeth Warren, D-MA, who said regulators’ decision to allow the sale increased concentration in the U.S. banking industry, putting the financial system at risk.

Warren in May called for Hsu and FDIC Chair Martin Gruenberg to detail their reasoning behind the decision.

“The net result of these machinations is that, without a complete regulatory review, and at a cost of $13 billion to the ... Deposit Insurance Fund, the nation’s biggest bank — already too big to fail — got a bargain deal on a failing bank that made it even bigger,” she wrote. “This is a troubling outcome, leaving me with numerous questions.”