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The misconduct scandal swirling at the FDIC is threatening to derail a Washington crackdown on the biggest U.S. banks.

FDIC Chair Martin Gruenberg, who has been leading efforts to shore up large lenders, is facing growing calls for resignation. The Wall Street Journal reported this week that FDIC employees have suffered a toxic work environment for years and that Gruenberg and other agency leaders did little to rein it in.

Gruenberg’s potential exit — not a sure thing but a possibility — could scramble the path forward on a series of planned regulations that big banks have already been trying to stop, including requirements to beef up their financial buffers. Banks say the rules could cost them billions.

MM spoke with several banking industry lobbyists, consultants and Capitol Hill aides on both sides of the aisle to inform this morning’s analysis. While some were cautious to endorse the idea that Gruenberg’s situation would be a game-changer, many saw the prospect of dramatic consequences. One senior financial services lobbyist told MM it’s “brutal timing” for the administration’s financial regulatory agenda.

“You had a very strong Democratic front line there,” said Michele Alt, a veteran bank regulator who’s now a partner at Klaros Group. “Suddenly, the general’s at risk.”

Gruenberg’s departure would leave Republican FDIC Vice Chair Travis Hill at the helm of the agency’s board, which could be paralyzed by a 2-2 partisan split. Hill and fellow GOP board member Jonathan McKernan recently opposed efforts by Gruenberg to roll out tougher rules for big banks, including an increase in capital requirements drafted in tandem with other banking agencies.

“Nothing’s going to get done,” Alt said.

While bankers won’t spike the football publicly, it comes as lobbyists have been pleasantly surprised by the traction they’ve gotten convincing lawmakers on both sides of the aisle to push back on the looming big bank rules.

“The proposal is showing some very significant vulnerabilities,” Federal Financial Analytics managing partner Karen Petrou said of the planned hike in bank capital.

Given the political backdrop, it’s unclear how a potential Biden nominee to replace Gruenberg would fare in the Senate. It would take months to even get to that point.

Beyond FDIC board politics, there’s a view taking shape among policymakers that the scandal – as well as multiple and potentially lengthy investigations – could impede the agency’s day-to-day job of ensuring that banks are safely handling Americans’ deposits. House Financial Services Chair Patrick McHenry said the FDIC “is at best preoccupied with this sideshow and at worst compromised.”

The big questions, per BTIG director of policy research Isaac Boltansky, are whether Democrats stand by Gruenberg and whether Washington’s interest in the FDIC drama survives the time it takes for the agency’s outside law firm to complete a planned review.

“On the first question, Democrats are cognizant that the whole bank regulatory agenda would be impaired if the chairman leaves and that will almost certainly impact their political calculus,” Boltansky told MM. “Perhaps the serious issues in question would foster a rare moment of bipartisanship allowing a new chairman to be confirmed, but color me deeply skeptical. On the second question, only time will tell.”

It’s Friday — Do you have tips on what’s happening at the FDIC? Insights into what’s next? MM wants to hear from you: [email protected].

Fed Vice Chair for Supervision Michael Barr and other officials from the Fed, Treasury and OCC will speak at the The Clearing House annual conference in New York …

The latest on the FDIC firestorm — POLITICO has a full report on the fallout around the agency’s misconduct scandal. A few key events:

— Republican lawmakers are beginning to call for Gruenberg’s resignation but Democrats are holding their fire for now. McHenry vowed to conduct an investigation. Senate Banking Chair Sherrod Brown called on the FDIC inspector general to look into the agency’s workplace culture.

— Sen. Elizabeth Warren, a vocal advocate for the bank capital rules being driven by Gruenberg, said she supports an independent investigation into workplace misconduct allegations under Democratic and Republican administrations.

— Some Democrats started to voice more pointed criticism. “No one should be subject to sexual harassment and discrimination, and Chair Gruenberg’s response has been insufficient,” said Rep. Ayanna Pressley, per Jasper Goodman.

— The FDIC’s two GOP board members called on Gruenberg and the agency’s general counsel to recuse themselves from an upcoming independent review and said the board should direct the inquiry. Better Markets president and CEO Dennis Kelleher said the two Republicans should also recuse themselves from any investigation because one stands to become chair and because of their views on “highly consequential pending policy actions.”

— The FDIC abruptly canceled a public meeting scheduled for Thursday morning. The board was planning to finalize a special banking fee to shore up its deposit insurance fund after this spring’s regional bank failures. It later approved the plan in a closed-door process — a move that annoyed those in the banking lobby who had concerns about the fee and wanted a public debate.

The view from the banking world — From one industry representative: “If there were similar reporting about a bank CEO, he or she would be removed by the bank’s board by the end of the day, and spend the next five years defending lawsuits and investigations by the banking agencies.”

Wall Street warms to Nikki Haley — The FT reports that the GOP presidential contender drew big names to “a small meet-and-greet breakfast with financiers including BlackRock chief executive Larry Fink, and an evening fundraiser co-hosted by former Goldman Sachs president Gary Cohn.”

Great wall of skepticism — Many companies aren’t buying Chinese President Xi Jinping’s assurances about his country’s business climate, as he uses a U.S. trip to lure back American investors.

Why Bidenomics is falling flat — Karen Petrou writes in the NYT that the mortal enemy of Bidenomics isn’t Donald Trump. “It’s a reliance on aggregate and average numbers that mask the nature of the economy Americans experience.”

The CFTC’s AI plan — Chair Rostin Behnam said the agency will soon unveil an internal AI task force that will seek public feedback next year, Declan Harty reports. It could result in new rules or guidance.

“In terms of protecting financial stability, particularly where it comes to AI models, there can be great promise and great risk,” CFTC Commissioner Christy Goldsmith Romero said. “Data and assumptions matter. Concentration risk in AI is also a challenge given the costs of developing AI.”

Washington spooks traders — The political landscape in Washington has become the top concern for active traders at Charles Schwab and TD Ameritrade, per Schwab’s latest quarterly sentiment survey.

Bill Demchak’s warning — Per Victoria Guida, the PNC CEO said bank regulations had contributed to “unregulated, highly leveraged” firms becoming bigger players in the Treasury market. “We don’t necessarily get a clear view on how that leverage plays through the system,” he said.