The Chair of the FDIC is facing calls to resign after a scathing report. The implications for banks could be significant

New York (CNN) — Martin Gruenberg, the chair of the Federal Deposit Insurance Corporation, is facing a barrage of calls from lawmakers to resign after a scathing 234-page report released Tuesday detailed pervasive sexual harassment, discrimination and bullying at the agency.

If he heeds the calls, there could be significant ramifications for banks across the country.

The report, undertaken by the law firm Cleary Gottlieb Steen & Hamilton and commissioned by the FDIC, confirmed the findings of a November Wall Street Journal investigation revealing a long-standing problematic culture. It did not find that Gruenberg alone was responsible for the issues described in depth in the report based on interviews with over 500 employees.

“We do recognize that, as a number of FDIC employees put it in talking about Chairman Gruenberg, culture ‘starts at the top,’” the report said.

It also documented several instances where he lashed out at subordinates “particularly when being delivered bad news or conveyed views with which he disagrees.” That’s caused staffers to delay delivering news they fear would upset him. Gruenberg’s temperament “may hinder his ability to establish trust and confidence in leading meaningful culture change,” the report added.

Gruenberg did not respond to a request for a comment. An FDIC spokesperson told CNN Gruenberg “is already implementing the recommendations in the report” and that “at his direction” the agency is “working to identify and appoint a transformation monitor as well as an independent third-party expert to support these efforts.”

The majority of lawmakers calling on Gruenberg, a Democrat who was appointed by President Joe Biden, are Republicans. Aside from Democratic Rep. Bill Foster, Democrats have stopped short of calling on Gruenberg to resign.

That’s likely because if Gruenberg were to resign, Vice Chair Travis Hill, a Republican appointee, would automatically become chair until a replacement is appointed by the president and confirmed by the Senate. In the interim, that would leave the agency deadlocked with one other Republican and two Democratic members on the FDIC’s board of directors.

Rulemaking would come to a “screeching halt,” Dennis Kelleher, president and CEO of Better Markets, a group that advocates for oversight of the financial sector, told CNN. With Hill at the FDIC’s helm, there would also likely be little appetite to work with the Federal Reserve and Office of the Comptroller of the Currency to pass any kind of regulations that beefs up bank capital requirements, he said.

Last year, the three agencies approved a preliminary step to finalizing the rules known as Basel III Endgame — which would require the nation’s largest banks to set aside more capital, limiting the amount of funds they have to lend to customers. The agencies are in the process of evaluating the initial proposal, which Hill voted against, and may propose new rules based on the comments they received.

That’s why Jaret Seiberg, a policy analyst at TD Cowen, said in a Tuesday note, “Gruenberg’s departure would be a positive for the bigger banks.”

Seiberg doesn’t think it’s likely Gruenberg will resign, however, especially since progressive Democrats like Sen. Elizabeth Warren aren’t calling for his resignation. Similarly, White House press secretary Karine Jean-Pierre didn’t convey that Biden has any reservations about Gruenberg’s abilities to lead the FDIC.

Kelleher also expressed concerns that Hill would not react fast enough if there was a banking crisis like last year’s, which the FDIC played a key role in mitigating. Even though Hill did not lead the agency at the time, he was second-in-command, and there’s no evidence he would prolong or exacerbate a banking failure.

Hill, through an adviser, declined to comment.

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