FDIC chair Gruenberg says he will step down once successor is announced

(This May 20 story has been refiled to remove duplication of paragraph 7)

By Pete Schroeder

WASHINGTON (Reuters) - U.S. Federal Deposit Insurance Corp Chair Martin Gruenberg said on Monday he planned to step down, finally succumbing to a months-long scandal over sexual harassment and other misconduct at the top bank regulator.

Gruenberg, whose five-year term ends in 2028, said he would step down once a successor is confirmed. The White House will soon put forward a nominee to replace him, deputy press secretary Sam Michel said in a statement.

The pending departure of Gruenberg, a Democrat and Wall Street critic who had been a senior leader at the FDIC for nearly two decades, comes at a critical time for the agency - just a year after three major banks failed and as many lenders continue to struggle amid elevated Federal Reserve interest rates.

The FDIC is also working with other bank regulators on several efforts to tighten regulations, including a contentious plan to boost big bank capital requirements.

With Gruenberg staying on until a replacement is announced, Democrats can claim a moral victory while allowing the agency to continue with its regulatory agenda, said Todd Baker, a senior fellow at Columbia University’s law and business schools.

"It’s a stalemate and it achieves most of the goals of the administration - that is, to retain control over the FDIC’s agenda," he added.

Gruenberg had clung to his job since November when a Wall Street Journal report exposed widespread misconduct at the FDIC, despite outcry from multiple congressional Republicans and some Democrats. The newspaper report was confirmed by a damning external review this month.

But on Monday, Democratic Senator Sherrod Brown, who chairs the Senate Banking Committee, said there must be "fundamental changes" at the agency and called for Gruenberg to be replaced, in a key development that piled pressure on the FDIC chair.

Analysts said it was unclear how long it could take the White House to get a new nominee through the thinly divided Senate, while Brown's Republican counterpart, Senator Tim Scott, and other Republicans called for Gruenberg to go immediately.

"We’re skeptical that Gruenberg will be able to hang on," Ian Katz, managing director of policy research firm Capital Alpha Partners, wrote in a note. "This is like trying to contain a raging fire."

Should Gruenberg leave the agency without a confirmed replacement, leadership of the FDIC would fall to Travis Hill, the agency's vice chair and a Republican. The agency would then be deadlocked 2-2.

Gruenberg, 71, had been at the FDIC since 2005 and is the longest-serving FDIC board member in the agency's 89-year history. During that time he served as its chair twice - once under President Barack Obama and the second under Joe Biden.

Last week, Gruenberg testified alongside several other banking regulators before Congress. He vowed to take steps to address longstanding cultural issues at the agency, as well as his own personal conduct, after the review found multiple instances in which he lost his temper with subordinates.

But Republicans and Democrats alike expressed skepticism that Gruenberg would be able to overhaul the agency. He was sworn in to his current five-year term as chair of the FDIC in January 2023. He had also served as chairman from November 2012 to mid-2018.

"After chairing last week’s hearing, reviewing the independent report, and receiving further outreach from FDIC employees to the Banking and Housing Committee, I am left with one conclusion: there must be fundamental changes at the FDIC. Those changes begin with new leadership," Brown said in his statement.

(Reporting by Pete Schroeder and Douglas Gillison in Washington; Writing by Michelle Price; Editing by Leslie Adler, Lisa Shumaker, Megan Davies and Matthew Lewis)