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Policy Implications of the New Mega-Bank Merger Wave

JANUARY 16, 2004


Banker Update: Policy Implications of the New Mega-Bank Merger Wave

Financial elephants are mating again. This was anticipated after the BofA-Fleet merger was announced on October 27. Wednesday's announcement was a $58 billion merger deal joining JPMorgan Chase and Bank One. Clearly, other financial institution elephants also must be in the hunt. Why be content at a mere $400 billion in assets when your peers are in the $1trillion range?

The mating of the financial elephants requires regulatory approval. But such couplings have been encouraged by government and regulatory policies spanning a decade. The interstate banking and branching legislation of 1994 was written to facilitate the nationwide march of Hugh McColl's Nations Bank, and passage of the Gramm-Leach-Bliley Act signaled that massive mergers across the financial services industry were encouraged. Recall, too, that Chairman Greenspan blessed the Citcorp-Travelers merger in September of 1998-at the very time that legislation authorizing such mergers was pending before the Congress. At that point, legislation repealing Glass Steagall Act restrictions became inevitable-as did ever larger financial institutions.

Such mergers have enormous public policy implications. First, their establishment increases systemic risk, and when systemic risk is on the table regulators will not fail an organization. Former FDIC chairman Bill Seidman stated that the regulator hasn't been born who would allow a large bank to fail. Former Fed governor Larry Meyer said it more diplomatically two months after the passage of GLB, noting in January 2002 that "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."

The second major concern is that such institutions are too big to regulate effectively. Starting with unethical (if not illegal) large bank relations with Enron, the press has been full of stories regarding the fines and penalties imposed on our largest financial institutions for highly questionable actions. Clearly, with size comes the temptation to skate at the edges of legal boundaries.

Unfortunately, the regulators are better at uncovering illegal deeds AFTER they have been committed than preventing them in the first place. And this is scary. It was Federal Reserve Bank president Gary Stern who lamented-apparently to no avail-that the Fed's allocation of sup & reg resources was wacky, that more had to be focused on systemic risk banks and less on the too-small-to-save community banking sector.

Hopefully the administration and the Congress will recognize that effective regulation and supervision must be based on a size differential if our diversified financial services industry is to prosper. We also hope that the regulators find courage this month to lift substantially the asset size limit for the small bank exam under the tiered CRA system, as they approve mega-mergers that have enormous CRA implications. The branches of huge financial institutions never see a CRA examiner.

Massive concentration is an issue going beyond the financial services industry. Economic power begets political power. We hope this becomes an issue in the presidential and congressional campaigns.