By Katanga Johnson and Pete Schroeder

WASHINGTON (Reuters) -The chair of the U.S. Federal Deposit Insurance Corporation on Tuesday refused efforts by the regulator’s Democratic board members to solicit public feedback on bank merger rules.

Republican Jelena McWilliams, chair of the FDIC, said during an open meeting that the move to include the notational vote did not follow proper procedure and was out of order. Democrats criticized her decision as “legally dubious.”

The agency’s legal division determined “that these actions did not constitute a valid circulation of an additional vote, and therefore the document cannot be added to the minutes,” McWilliams said, adding: “That motion is inappropriate.”

The disagreement over the relatively minor issue was the first volley in what looks to be a protracted fight over whether the FDIC’s agenda is set by its three Democratic board members or its lone Republican chairman.

Banking regulators are expected to launch an ambitious agenda in coming months, including rules on climate change risk, cryptocurrency, and fair lending. Many rule-writing projects will require buy-in from several bank regulators, including the FDIC, which oversees thousands of smaller banks nationwide.

The five-member FDIC board currently has three members appointed by Democrats: Consumer Financial Protection Bureau Director Rohit Chopra, FDIC board member Martin Gruenberg, and Michael Hsu, the acting head of the Office of the Comptroller of the Currency.

McWilliams is a holdover from the Trump administration whose term does not expire until mid-2023.

In a statement, Chopra called the decision to rule out the request “unusual and legally dubious,” and suggested Democrats could take additional steps to push their priorities.

“Absent a return to legal reality and constructive engagement, board members will need to take further steps to exercise independence from management and to ensure sound governance,” he said.

Hsu said in a statement that he backed the request for public consultation after the FDIC was unable to strike a compromise, and worried “legal or procedural quicksand” could bog down work on the issue.

Democratic commissioners have been trying to officially request public comment on the FDIC’s bank merger review policies since President Joe Biden issued a July executive order directing agencies to seek ways to boost competition in industries they supervise.

On Thursday, Chopra and Gruenberg, with Hsu’s support, issued a statement saying the FDIC was seeking feedback on bank mergers, only for the FDIC to issue a follow-up statement saying it was never properly approved.

INDUSTRY, CONSUMER IMPACT

Some banks expressed alarm at the unusual fight at the normally placid FDIC, whose insurance is a cornerstone of U.S. community banking.

“Bank deposit insurance is the bedrock of financial stability, and actions that erode or interfere with the functioning of this critical agency create uncertainty and send signals that are harmful to banks, their customers and the U.S financial system,” the American Bankers Association wrote to the FDIC wrote on Monday.

Democratic lawmakers, including House Financial Services chair Maxine Waters, as well as progressive groups, are eager to see more scrutiny over large bank mergers, arguing greater competition would help bolster protections for bank workers, consumers, small businesses, and underserved communities.

(Reporting by Katanga Johnson and Pete Schroeder in Washington; Editing by David Gregorio)

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