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— Analysis —
To ward off massive consolidation in the industry, the Riegel-Neal Interstate Banking and Branching Efficiency Act also limited concentration in the industry by capping any banking institution's share of national deposits at 10%. Although the Department of Justice examines bank mergers for antitrust concerns, the agency's focus is on local market concentration. Consequently, the national ownership cap is the federal government's main check on national concentration. Amid the worst financial crisis in 80 years, however, the statutory restraint on a bank's size is being ignored. In the rush to shore up the nation's banking system, the only concern banking regulators now seem to have for the 10% deposit cap is how to get around it.
-- Browse other stories in this Special Report -- Enter the giants Big, big and beyond Chain of fools Brrrrrrrr Neither short nor sweet Doffing the cap Last year, when Bank of America Corp. bought Chicago-based LaSalle Bank, it came close to the 10% ceiling. Then BofA bought Countrywide Financial Corp. and has since swallowed Merrill Lynch & Co., both of which have banking operations holding consumer deposits protected by the Federal Deposit Insurance Corp. But with BofA bumping up against the ceiling just as the industry was on the precipice of crisis, banking regulators decided now is no time to turn down willing buyers for struggling institutions. To enable BofA to acquire Countrywide and then Merrill, the regulators took advantage of the arcane structure of the banking industry, which four federal agencies oversee and generally is divided into banks and thrifts, which most people know as savings and loans. To enable the acquisitions of Countrywide and Merrill Lynch, both owners of thrifts, federal regulators decided the money they hold wouldn't count toward BofA's 10% cap if the purchased outfits continued to run as individual units. Before the banking crisis, few in the industry would have expected regulators to leave acquired thrift deposits out of a bank's deposit tally. Now it's accepted practice. Similar lenience allowed J.P. Morgan Chase & Co. to acquire Washington Mutual Inc. Combined, the two institutions hold roughly 14% of the nation's insured deposits. After acquiring Wachovia Corp., Citigroup Inc. says its share of national deposits stands at 9.8%, which in less tumultuous times would disqualify it from making another large acquisition. Today, there's probably room to grow. "In the last three weeks all the rules and the landscape have changed 180 degrees," says Thomas Vartanian, chairman of the financial institutions and electronic commerce transactions groups at Fried, Frank, Harris, Shriver & Jacobson LLP. "The signal we're getting from regulators on transactions now is that whatever rules need to change to foster stability, they'll change." Most banking customers know they can receive FDIC coverage if they put money into either a bank or a savings and loan, but very few know the difference between the two types of institutions. There are differences, though, and in Washington they are taken seriously. Commercial banks, to prevent overexposure to one sector of the economy, must spread their lending among mortgages, loans to businesses, credit cards and other types of borrowing. Federal regulation of banks is shared among the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC. Thrifts, on the other hand, must focus on home lending and the Office of Thrift Supervision regulates them. Franca Harris Gutierrez, a partner in Wilmer Cutler Pickering Hale and Dorr LLP's Washington office, says all the bank regulators are putting a priority on resolving problems at troubled banks quickly, largely to promote consumer confidence in the banking system. She adds that this year, the FDIC has been forced to handle one or two failures each month. "Banks are generally declared failed on a Friday, the FDIC is appointed as receiver and, if the failed institution was acquired by another bank, the acquired deposits are opened under the new bank by Monday." The speed doesn't mean the general requirements of safety and soundness are being circumvented, she says. Regulators may have been shopping a bank's operations for weeks before taking it over and understand the problems with a commercial bank's books. "That the recent acquisitions are going quickly isn't surprising," she says. "It's the scale that's noteworthy." But it will be years before the FDIC can sort out just how much the 13 failures so far this year will cost. For example, Citigroup has agreed to buy Charlotte, N.C.-based Wachovia, and has said it will absorb up to $42 billion in losses, leaving the FDIC on the hook for whatever is left over -- a cost unlikely to be known for years. Because the ultimate cost to the banking industry and taxpayers of this year's takeovers is open-ended, there should be added concern about concentration and banks' willingness to provide their communities with needed services at competitive rates, argues Matthew Lee, executive director of Inner City Press, a public interest group watching the banking industry. Federal rules ostensibly require a 30-day cooling off period for acquisitions by banks, but those public comment periods have been waived as federal overseers rush to shore up the industry. "There's something kind of lawless about it," Lee says. "The way it is now, there's no oversight." One aspect of the comment period has been an opportunity to assess banks' compliance with the Community Reinvestment Act, which requires banks to spell out how they are serving their local communities, particularly low-income areas where they take deposits. When Countrywide was bought, the public comment period remained in place and borrowers' complaints about predatory lending practices gave the nation an early indication of the brewing home loan crisis. Such windows to the industry now appear closed. |
When Congress let banks set up branches across state lines in 1994, many lawmakers worried that interstate banking would lead to a wipeout of community banks by a handful of giant nationwide institutions.
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