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ICBA Calls for Congressional Hearings on Systemic Risk Inherent in Megabank Mergers

Washington, D.C. (Feb. 25, 2004) - Yesterday Federal Reserve Board Chairman Alan Greenspan called not only for a new regulatory structure over the three housing GSEs, but also for congressionally imposed constraints on the growth of their debt and portfolios. Chairman Greenspan pointed to future systemic risk problems if such actions weren't taken.

In today's testimony before the Senate Banking Committee, Fannie Mae Chairman and CEO Franklin D. Raines appropriately noted that the largest banking companies in the United States have grown "at a similar rate in a combination of mergers and internal organic growth" as the housing GSEs. Raines noted that "the three largest bank holding companies will have grown by 585 percent since the early 1990s."

Raines, a former highly successful budget chief of the United States, also pointed out that "if Fannie Mae were to stop guaranteeing and investing in mortgages, the credit and interest rate risk inherent in mortgages would not go away. Instead, these risks would have to be borne by other institutions, primarily banks and thrifts," leading to higher risks for taxpayers.

It is equally clear that some of the risk would move into the three largest banking institutions, which already pose systemic risks to our financial system. Former Federal Reserve Board Governor Larry Meyer warned of the growing systemic risk of the large complex banking organizations in early 2000, and Minneapolis Federal Reserve Bank President Gary Stern also has alluded to this recently.

In turn, the recent indictment of former Enron CEO Jeff Skilling, who was in the chain of command when large U.S. banks played a role in creating off-shore debt funding mechanisms that led to the collapse of Enron, raises ongoing serious questions about the adequacy of the supervision and regulation of our nation's largest banks.

Pending before the Board of Governors of the Federal Reserve System are two applications for megabank mergers — the Bank of America-FleetBoston Financial merger and the J.P. Morgan Chase-Bank One merger. Approval of these mergers would build more systemic risk into the banking system, as the privatization of Fannie Mae and Freddie Mac, as advocated by Chairman Greenspan, would transfer risk to these institutions.

The ICBA calls on the Senate Banking Committee and the House Financial Services Committee to conduct prompt oversight hearings of these mergers focusing on the adequacy of regulation and supervision of the nation's largest banks and their growing systemic risk to our financial system and economy.