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The long-simmering debate over banking industry consolidation and the “too big to fail” doctrine is reaching the boiling point. The government’s frantic efforts to tame the burgeoning financial crisis keep coming back to that fundamental issue.
The pending acquisition of troubled Wachovia Corp. by Wells Fargo & Co. won Federal Reserve Board approval despite the fact that the two organizations may control more than ten percent of all financial institution deposits in the United States.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (12 U.S.C. 1842(d)) forbids any financial institution from acquiring a bank where the resulting institution would control more than ten percent of the total deposits of insured financial institutions nationwide. The same law also prohibits bank acquisitions where the resulting institution would control more than thirty percent of the combined deposits of all financial institutions in any one state.
In a statement explaining its Wachovia-Wells Fargo order, the Fed noted that, based on the latest information available at that time, the two institutions together controlled 10.116 percent of deposits nationwide. Assuming the two would merge without altering their deposit totals, the transaction would violate Riegle-Neal.
Nonetheless, the Fed had no problem approving the acquisition, which financial regulators had urgently sought. The Fed noted that the Riegle-Neal Act refers to control of deposits “upon consummation of the acquisition.” The Board noted that the exact portion of deposits Wells Fargo would control once the acquisition had been consummated could not be accurately known in advance, particularly in light of the weakened condition of Wachovia.
However, the Board declared that it expected the ultimate figure to be somewhat less than ten percent. The Fed based this expectation on two facts: (1) the total of all deposits nationwide was increasing at an unusually strong pace during the financial crisis, and (2) deposits at Wachovia were rapidly decreasing as depositors responded to news of the institution’s difficult situation. Thus, the Fed surmised, it was reasonable to assume the resulting institution would likely control less than ten percent of all deposits “upon consummation of the transaction.”
In an earlier case, the Fed’s June 5 order approving Bank of America’s acquisition of troubled Countrywide Bank resulted in an institution that held 10.91 percent of deposits nationwide. “A large number of commenters” objected to the merger on that basis, the Fed observed.
However, those objections were unjustified, the agency declared. Riegle-Neal specifically prohibits the acquisition of a “bank” where the transaction triggers the ten percent ceiling. In this case, the institution being acquired, Countrywide Bank, was chartered as a savings institution. Savings institutions are not considered “banks” under the Bank Holding Company Act, so the acquisition of Countrywide did not violate the Riegle-Neal Act’s restrictions.
Two examples are the Federal Reserve Board’s Oct. 12 order approving Wells Fargo’s acquisition of Wachovia and the recent revelation by “senior officials” that the government plans to use its Capital Purchase Program to “drive consolidation.” According to press reports, anonymous officials said the government “wants not only to stabilize the industry, but also to reshape it.”
Those are alarming words to many small banks. “The current crisis has made it painfully obvious that the financial system has become too concentrated, and — for many institutions — too loosely regulated,” the Independent Community Bankers of America (ICBA) testified at a recent House hearing on the future of financial services regulation. “The doctrine of too big — or too interconnected — to fail, has finally come home to roost, to the detriment of American taxpayers.”
The trade group praised Federal Reserve Chairman Ben Bernanke’s recent comments on the issue: “We need to have that local knowledge that is incorporated in local lending, local community banking,” Bernanke declared. If we have oversight, if we strengthen the system so that it’s less prone to be damaged by the failure of one firm, and if we develop a resolution regime, I think we will at least get our hands around the too-big-to-fail problem.”
The ICBA cautioned the committee, “Government interventions necessitated by the too-big-to-fail policy have exacerbated rather than abated the long-term problems in our financial structure.” Government-orchestrated mergers, acquisitions, and closures have helped the big become even bigger, and now just four banks control more than 40 percent of total deposits and 50 percent of total assets. “Such excessive and concentrated power” is dangerous, ICBA warned.
The trade group also noted that community banks face an unlevel playing filed. “One of the unfortunate realities of our current system is that the policy of too-big-to-fail creates two classes of uninsured depositors — those that have 100 percent de facto coverage in too-big-to-fail banks and those who stand to lose money in too-small-to-save institutions,” ICBA said. “This leaves community banks at a distinct disadvantage in competing for deposits.” The temporary increase in deposit insurance coverage mitigates this disadvantage, but only for a while.
The ICBA recommended that “too big to fail” banks should be reduced in size because they pose systemic risk to both the Deposit Insurance Fund and the nation’s financial system. “Rescuing such institutions from failing has cost our nation dearly in treasure and in confidence,” ICBA testified. “ICBA believes these institutions should be split up or required … to divest themselves of enough assets so that they cease to pose a systemic risk to DIF and our economy.”
The ICBA also urged Congress not to overreact. “Troubled times call for cool heads and measured responses. Let us learn the lessons of history and not repeat the rush to legislate that are the marks of Sarbanes-Oxley, the Patriot Act, and other bills written during crises that pushed the pendulum too far off center.”
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