Testimony Before the Federal Reserve Bank of New York Concerning the Merger of Bank One Corporation into J.P. Morgan Chase & Co.
Good morning. My name is Chris Cole, and I am Regulatory Counsel for the Independent Community Bankers of America, a trade association representing approximately 4600 banks with 17,000 locations nationwide. Nationally, ICBA members hold more than $624 billion in assets and more than $391 billion in loans for consumers and small businesses. We are pleased to have the opportunity to comment on the proposed merger of Bank One Corporation into J.P. Morgan Chase & Co.
ICBA continues to be concerned with the continued concentration of banking assets in the United States and the effect this concentration has not only on bank competition but on consumers, small businesses, and communities. This merger will catapult J.P. Morgan Chase into the second largest bank holding company in the United States in terms of assets and, with the consummation of the Bank of America/ Fleet merger, will mean that the top eight financial institutions in this country will control over 50% of total U.S. banking assets. As the FDIC Chairman recently predicted, "we could well see a banking industry with a few institutions having assets in the trillions of dollars, and perhaps only half as many community banks as we have today." This trend has disturbing implications not only for our financial system, but also for consumers, small businesses and communities.
The evidence shows that increased concentration in the banking industry has not benefited bank customers and has not had a positive effect on the convenience and needs of the communities served by the acquired banks. The economies of scale that supposedly justify large bank mergers either do not materialize or are not passed on to customers. For example, large bank mergers often have an adverse effect on consumer deposit pricing and often result in higher fees to consumers. A Harvard study showed that instances of improved operating results after a large bank merger were due primarily to higher re-pricing, not economies of scale, suggesting the use of increased market power by the large banks to raise prices. Year after year, the Federal Reserve's own annual survey of bank retail fees shows that the average fees charged by multi-state banks are significantly higher than those charged by single-state banks. We therefore urge the Board to examine closely the effect that this merger will have on deposit pricing and fees in areas where the merger partners overlap such as in Texas and Florida, and whether consumers will be adversely impacted by the merger.
Bank mergers and large bank consolidation often have an adverse effect on small business lending which is a key engine for sustaining the U.S. economy. Commercial banks are the leading suppliers of credit to small businesses and community banks account for 34 percent of all commercial bank small business loans, which is more than twice the community banks' share of total banking assets. In contrast, the large banks tend to devote much smaller portions of their assets to small business lending. Mergers involving small banks tend to increase small business lending while mergers of large banks tend to reduce it.
For instance, a study issued two months ago by the Small Business Administration's Office of Advocacy shows that that small businesses receive less bank credit on average in regions with a large share of deposits held by the largest banks. The report found that access to credit by small businesses is significantly affected by bank consolidation and that this was forcing many small businesses to turn to non-bank suppliers of credit to fulfill their needs. Small Texas farmers have reported that large bank mergers in that state affect agriculture lending, often resulting in the termination of an important source of credit particularly in those rural communities where there are not many agricultural lenders.
Along with consumers and small businesses, it is often the case that local communities are also adversely impacted when statewide banks are acquired by large, national bank franchises located outside the state. The new, larger bank seldom has the same commitment as the acquired bank to the local communities and to local charities and civic groups. ICBA thinks that the large, national banks like J.P. Morgan Chase should be examined locally under the CRA-as community banks are examined--instead of simply at the main office of the bank. That way, the banking agencies can tell whether the national bank's CRA program is actually impacting the local community.
However, the biggest concern to regulators by this mega-merger should be the fact that trillion dollar financial institutions pose systemic risks to our financial system. Citigroup, Bank of America and J.P. Morgan Chase following this merger will have, in total, more than $3.5 trillion in assets and will control approximately 35% of total banking assets. Former Federal Reserve Board Governor Larry Meyer warned after the passage of the Gramm-Leach-Bliley Act in 1999, noting, "The growing scale and complexity of our largest banking organizations…raises as never before the potential of systemic risk from a significant disruption in, let alone failure of, one of these institutions."
We note that the Bank Holding Company Act, as amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994, prohibits the Federal Reserve Board from approving an interstate transaction that would result in the acquirer holding more than 10% of the total amount of deposits of insured depository institutions in the United States. Following the merger, J.P. Morgan will have approximately 6.7% of the nation's deposits. However, under the law, the Federal Reserve Board is also required to respect state deposit caps. J.P. Morgan Chase's market share will not be near the state deposit caps of Colorado (25%), Kentucky (15%) or West Virginia (25%) but will exceed the Texas cap of 20% if the deposits in Texas as of the date of its Federal Reserve application are counted.
In its application to the Federal Reserve Board, J.P. Morgan Chase claims that over $20 billion of deposits in that state are "national" deposits located in Houston, Texas and should not be counted as Texas deposits. J.P. Morgan Chase argues that these deposits are for national securities services or for mortgage escrow services and should be excluded not only from any statewide analysis of merger, but also on the likely impact the merger would have on the Houston bank market. We understand that J.P. Morgan Chase has already moved some of these deposits to branches outside of Texas. If the deposits were counted, J. P. Morgan Chase would not only exceed the 20% cap in Texas but would have a 46% share of the deposits in the Houston market, which would be well in excess of antitrust guidelines.
ICBA hopes that both the Texas Bank Commissioner and the Federal Reserve will examine J.P. Morgan Chase's claim carefully. Large banks should not have the ability to re-characterize their local deposits as "national" or move them to another state in order to comply with the state deposit caps or to resolve an antitrust issue. More specifically, if J.P. Morgan Chase used those deposits in Texas for a period of time so that it could increase its lending activity in that state, it should not have the ability to re-characterize them as national deposits or move them from Texas to another state in order to comply with the Texas state deposit cap or to resolve a competition problem in the Houston banking market.
Furthermore, we hope that if any divestitures do take place in Texas or any other states, that the Federal Reserve will make sure that community banks have the opportunity to be involved in the bidding process. Sometimes, large banks exclude community banks from the bidding process in a divestiture so we hope that the regulators will assure community bank access to any bidding process.
In summary, we urge the Federal Reserve Board to examine the impact this merger will have on consumers, small businesses and communities and the risk that these mega-mergers pose to our financial system. We also hope that the regulators review J.P. Morgan Chase's compliance with the Texas state deposit cap and, if divestitures are needed, will assure community bank access to the bidding process.