    [Senate Hearing 118-458]
    [From the U.S. Government Publishing Office]

                                                      S. Hrg. 118-458

                      BANK MERGERS AND THE ECONOMIC IMPACTS
                                OF CONSOLIDATION

    =======================================================================

                                    HEARING

                                  BEFORE THE

                                SUBCOMMITTEE ON
                                ECONOMIC POLICY

                                     OF THE

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                        ONE HUNDRED EIGHTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

              EXAMINING THE ECONOMIC IMPACTS OF BANK CONSOLIDATION

                                   __________

                                 JULY 12, 2023

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov /

                                    __________

                       U.S. GOVERNMENT PUBLISHING OFFICE
    57-217 PDF                  WASHINGTON : 2025

    -----------------------------------------------------------------------------------

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                           SHERROD BROWN, Ohio, Chair

    JACK REED, Rhode Island              TIM SCOTT, South Carolina
    ROBERT MENENDEZ, New Jersey          MIKE CRAPO, Idaho
    JON TESTER, Montana                  MIKE ROUNDS, South Dakota
    MARK R. WARNER, Virginia             THOM TILLIS, North Carolina
    ELIZABETH WARREN, Massachusetts      JOHN KENNEDY, Louisiana
    CHRIS VAN HOLLEN, Maryland           BILL HAGERTY, Tennessee
    CATHERINE CORTEZ MASTO, Nevada       CYNTHIA M. LUMMIS, Wyoming
    TINA SMITH, Minnesota                J.D. VANCE, Ohio
    KYRSTEN SINEMA, Arizona              KATIE BOYD BRITT, Alabama
    RAPHAEL G. WARNOCK, Georgia          KEVIN CRAMER, North Dakota
    JOHN FETTERMAN, Pennsylvania         STEVE DAINES, Montana

                         Laura Swanson, Staff Director

                   Lila Nieves-Lee, Republican Staff Director

                           Elisha Tuku, Chief Counsel

                      Amber Beck, Republican Chief Counsel

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                           Pat Lally, Assistant Clerk

                                     ______

                        Subcommittee on Economic Policy

                     ELIZABETH WARREN, Massachusetts, Chair

                    JOHN KENNEDY, Louisiana, Ranking Member

    JACK REED, Rhode Island              MIKE ROUNDS, South Dakota
    ROBERT MENENDEZ, New Jersey          THOM TILLIS, North Carolina
    CHRIS VAN HOLLEN, Maryland           CYNTHIA M. LUMMIS, Wyoming
    TINA SMITH, Minnesota                STEVE DAINES, Montana
    JOHN FETTERMAN, Pennsylvania

                  Gabrielle Elul, Subcommittee Staff Director

            Jennifer Newman, Republican Subcommittee Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------

                            WEDNESDAY, JULY 12, 2023

                                                                       Page

    Opening statement of Chair Warren................................     1
        Prepared statement...........................................    22

                                   WITNESSES

    Morgan Harper, Director of Policy and Advocacy, American Economic
      Liberties Project..............................................     3
        Prepared statement...........................................    24
    Michael Faulkender, Dean's Professor of Finance and Chief
      Economist, University of Maryland and America First Policy
      Institute......................................................     5
        Prepared statement...........................................    38
    Alexa Philo, Senior Policy Analyst, Americans for Financial
      Reform.........................................................     7
        Prepared statement...........................................    41

                  Additional Material Supplied for the Record

    Statement submitted by Better Markets............................    46
    Statement submitted by the Bank Policy Institute.................    58
    Letter submitted by CUNA.........................................    60
    Statement submitted by the Massachusetts Bankers Association.....    62

                                     (iii)

             BANK MERGERS AND THE ECONOMIC IMPACTS OF CONSOLIDATION

                                  ----------

                            WEDNESDAY, JULY 12, 2023

                                   U.S. Senate,
      Committee on Banking, Housing, and Urban Affairs,
                               Subcommittee on Economic Policy,
                                                        Washington, DC.
        The Subcommittee met at 2:30 p.m., in room 538, Dirksen
    Senate Office Building, Hon. Elizabeth Warren, Chair of the
    Subcommittee, presiding.

              OPENING STATEMENT OF CHAIR ELIZABETH WARREN

        Chair Warren. This hearing will come to order.
        Good afternoon. I am pleased to be chairing today's
    Economic Policy Subcommittee hearing on the economic impacts of
    bank consolidation. I appreciate our witnesses joining us, and
    I appreciate Senator Kennedy's partnership in putting this
    hearing together. Senator Kennedy is on the floor right now
    giving a speech, but he will join us and told us to go ahead
    and start.
        After the 2008 financial crisis and the subsequent bank
    bailout, Congress passed the Dodd-Frank Act. The law was
    designed to ensure that giant banks could never, ever, ever
    again threaten our economy. But with the collapse of Silicon
    Valley Bank, Signature Bank, and First Republic Bank--three of
    the largest bank failures in our Nation's history--two things
    have become obvious.
        First, bank failures remain a serious threat to our
    economy, putting taxpayers at risk of footing multibillion-
    dollar bailouts if those banks go under. And second, regulators
    are courting disaster by continuing to encourage giant banks to
    grow even bigger. Treating mergers as a solution to financial
    instability increases instability.
        The problem with megabanks goes well beyond the increased
    risk of blowing up the financial system. As big banks get even
    bigger, branch closures increase. This reduces the availability
    of bank services and increases the cost of credit for small
    businesses and for families.
        This problem can be life or death for small businesses that
    cannot find anyone at a big bank who understands the local
    economy or the actual business that is applying for credit. The
    problem is also worse in low-income neighborhoods, where
    research shows that predatory lenders and check-cashers
    proliferate as bank consolidation rises.
        When banks merge, consolidation has ripple effects that
    cost jobs, lower household incomes, and slow economic growth in
    local economies. Bank consolidation may boost CEO pay and
    investor profits, but it hurts everyone else's quality of life.
        This problem seems obvious and should be easy to fix.
    Congress spotted the problem long ago, and in 1960 passed the
    Bank Merger Act to give bank regulators, in consultation with
    the Department of Justice, the authority to block mergers that
    reduce competition, harm communities, or are not in the public
    interest.
        Yet somehow, astonishingly, between 2006 and 2021, the
    Federal Reserve approved more than 3,500 consecutive mergers
    without denying a single one, a streak that would make Cal
    Ripken and Lou Gehrig green with envy.
        The net result of regulators falling asleep at the switch
    is that since 1990, the number of banks in the U.S. has
    declined from over 18,000 to fewer than 5,000.
        Meanwhile, the biggest banks, those at the very top, have
    gotten bigger. In the mid-1990s, the 20 biggest banks in the
    country held a total, all together, of 15 percent of all bank
    assets. Today, the top 20 hold more than 65 percent of all bank
    assets. And the concentration at the very top is even more
    extreme. The biggest four banks alone hold more assets than the
    next 75 banks combined.
        President Biden, to his credit, recognized this problem and
    is working to try to fix it. In his July 2021 executive order
    on competition, he concluded that bank consolidation, quote,
    ``raises costs for consumers, restricts credit for small
    businesses, and harms low-income communities,'' end quote, and
    he ordered banking regulators to update the outdated and failed
    bank merger review policies.
        Two years later, we are finally on the cusp of seeing what
    those new merger guidelines are going to look like. Last month,
    Jonathan Kanter, the Justice Department's top antitrust
    enforcer, indicated that new guidelines would be coming soon,
    and that the Department would be giving much tougher scrutiny
    to mergers.
        That is the good news. I hope these guidelines are out
    soon, and you better believe I want them to be tougher than the
    current rules.
        But I am extraordinarily concerned about what we have seen
    in recent months from banking regulators. When First Republic
    Bank collapsed in April, the bank was ultimately sold to the
    biggest bank in America, JPMorgan Chase. That sweetheart deal
    cost the FDIC Fund $13 billion. Meanwhile, overnight, the
    country's biggest bank got $200 billion bigger.
        And what happened to the regulators? The Acting Comptroller
    of the Currency, Michael Hsu, rubber-stamped the deal in record
    time. When I asked Mr. Hsu at a hearing in May to explain how
    this merger was approved, he was unable to give a clear answer.
        But the overall picture is even worse. Instead of
    inattentive regulators who do not use their tools to block
    increasing consolidation, leaders within the Biden
    administration seem to be inviting more mergers. In a May 2023
    statement before the House Financial Services Committee, Acting
    Comptroller Hsu reassured banks that the agency would be,
    quote, ``open-minded,'' close quote, while considering merger
    proposals. And then earlier this week, he said, quote, ``simply
    prohibiting all mergers of large banks really locks in the
    concentration amongst the existing megabanks, and I don't think
    that's the right answer,'' end quote.
        Treasury Secretary Yellen recently warned that the banking
    ``turmoil'' from the collapse of Silicon Valley Bank, Signature
    Bank, and First Republic might lead to more mergers and that
    regulators would be, quote, ``open to'' them. Then the New York
    Times also reported that Secretary Yellen privately told big
    banks that she would, and I quote, ``welcome more mergers.''
        These comments are stunningly wrongheaded. They indicate
    that key banking regulators have learned exactly the wrong
    lessons from the bank failures earlier this year and from the
    2008 financial crash before it. Too-big-to-fail banks pose
    risks to stability of the financial system and increasing
    banking concentration puts a damper on small business growth
    across the country.
        We need effective regulation and bank supervision that
    prevent big banks from failing in the first place, and we also
    need to police bank mergers to ensure that big banks have
    robust competition to ensure they are serving consumers and
    small businesses.
        I appreciate our witnesses being with us to discuss how we
    can do that.
        So, let me introduce our witnesses and we will get started.
    First I am pleased to introduce Ms. Morgan Harper, who is
    Director of Policy and Advocacy at the American Economic
    Liberties Project. Ms. Harper has years of experience working
    on economic and consumer issues including at the Consumer
    Financial Protection Bureau. So, thank you for joining us, Ms.
    Harper.
        Next, joining us virtually we have Dr. Michael Faulkender.
    Dr. Faulkender is the Dean's Professor of Finance at the
    University of Maryland and Chief Economist at the America First
    Policy Institute. Dr. Faulkender is an expert in financial
    policy, having previously served as Assistant Secretary for
    Economic Policy at the Treasury Department. Thank you, Dr.
    Faulkender, for being with us.
        And finally we have Ms. Alexa Philo, Senior Banking Policy
    Analyst for Americans for Financial Reform. Ms. Philo has
    extensive experience in banking policy and supervision, having
    served as a bank examiner at the New York Fed and as director
    of risk control at multiple banks. Thank you, Ms. Philo.
        Thank you to all of our witnesses for being with us.
        I am going to start with Ms. Harper for your opening
    statement. Ms. Harper, you are recognized for 5 minutes.

     STATEMENT OF MORGAN HARPER, DIRECTOR OF POLICY AND ADVOCACY,
                  AMERICAN ECONOMIC LIBERTIES PROJECT

        Ms. Harper. Great. Well thank you so much Chair Warren,
    Ranking Member Kennedy, and Members of the Subcommittee. It is
    a pleasure to be here, and I appreciate the opportunity to
    testify before you on such an important topic about country's
    economic future.
        As was mentioned, I am the Director of Policy and Advocacy
    at the American Economic Liberties Project, an organization
    dedicated to uprooting a primary driver of concentrated
    economic power--monopolies.
        The 2008 global financial crisis made it abundantly clear
    that megabanks are policy failures. Yet instead of righting
    those wrong, over the last decade we have made the problem
    worse. In fact, it is why I left a white-shoe law firm to work
    as an attorney at the CFPB. There we took on the payday lending
    industry, debt collectors, and banks that broke the law and
    cheated the most vulnerable Americans--veterans, the elderly,
    students, and those earning the lowest incomes.
        At the CFPB, we used our legal authorities aggressively to
    hold lawbreakers accountable. In reality, however, too-big-to-
    fail banks outmuscled everyone. Even as we enforced the law,
    they only got bigger and more powerful. These megabanks lied to
    regulators, cheated consumers, and neglected small businesses
    with no meaningful consequences. Not only are they too big to
    fail, they are too big to effectively regulate. Which leads us
    to today's hearing, as we discuss competing visions for the
    goals of bank merger policy.
        One view is the bigger, the better, that big and small
    banks alike should swallow competitors in a battle to become
    one of the last banks standing. Deregulation, lax merger
    enforcement, and a disregard for our country's bank merger laws
    over the last several decades have brought us closer to this
    hyperconsolidated vision.
        In 1990, there were 15,000 banks in America. Today there
    are hardly more than 4,000. The six largest banks control more
    assets than all others combined. Currently, more than three-
    quarters of the United States' local banking markets are
    considered uncompetitive, and more pronounced in rural areas.
        Evidence of the harms of bank consolidation is vast.
    Consolidation has increased the cost and reduced the
    availability and quality of basic financial services for
    consumers, disproportionately affecting low-income and minority
    communities. It has throttled small business formation and
    lending and introduced greater systemic risks to our financial
    system.
        Regional and community banks' foundational role in local
    economies means that bank mergers increase unemployment and
    reduce wages. Branch closures have devastated communities
    across the country, pushing more Americans into the arms of
    predatory financial firms, like payday lenders and check
    cashers.
        As the Supreme Court put it in its landmark 1963
    Philadelphia National Bank decision, concentration in banking
    accelerates concentration generally, as bigger banks favor
    lending to larger incumbent firms. And as we saw in 2008, and
    again this year, bank consolidation increases systemic risk,
    threatening new crises which themselves are mass concentration
    events.
        Now some of our top bank regulators, like Treasury
    Secretary Yellen and Acting Comptroller Hsu, are championing
    more consolidation, contradicting the competition priorities of
    their own President. Two days ago, the same day that the Acting
    Comptroller publicly advocated more bank mergers, his own
    agency punished Bank of America for illegally cheating its
    consumers. It was ordered to pay a quarter billion dollars in
    penalties. This is the definition of too big to fail and too
    big to effectively regulate.
        But there is a different vision for competition in banking,
    Congress' original vision, laid out in the bank merger
    statutes, aiming to protect a vibrant ecosystem of small banks
    that propel the world's strongest economy. This vision
    prioritizes competition on the merits, where banks compete for
    savings and borrowers by offering better rates, easier access
    to credit for businesses and entrepreneurs, and more services
    to a broader customer base. This is the kind of competition our
    banking system was built around, the kind that will lead to a
    more stable, sustainable, and dynamic economy.
        More than 60 years ago, Congress rejected the
    consolidation-friendly view that some of our financial
    regulators are now advancing. Our laws did not change. Our
    banking regulators have. America thrives with a robust and
    competitive banking sector, and Congress and this Subcommittee
    have an opportunity to ensure we realize this vision.
        For decades we have tried consolidation. This strategy
    created a worldwide economic crisis in 2008, and we cannot
    afford another. Congress and bank regulators must enforce our
    laws to restore fairness and competition in banking.
        Thank you again for this opportunity, and I look forward to
    your questions.
        Chair Warren. Thank you very much. I really appreciate it,
    Ms. Harper.
        So, next we are going to hear from Dr. Faulkender. You are
    recognized 5 minutes, and I think you are joining us virtually.

     STATEMENT OF MICHAEL FAULKENDER, DEAN'S PROFESSOR OF FINANCE
     AND CHIEF ECONOMIST, UNIVERSITY OF MARYLAND AND AMERICA FIRST
                            POLICY INSTITUTE

        Mr. Faulkender. Thank you, Chairwoman Warren, Ranking
    Member Kennedy, and Senators on the Committee for the
    opportunity to speak to you remotely. I am attending an
    academic conference in Boston so thank you for this opportunity
    to speak on a safe, sound, resilient, and growth-facilitating
    financial system.
        I have been a finance professor since 2002, and had the
    privilege of serving as the Assistant Secretary of the Treasury
    for Economic Policy during the previous Administration. I am
    proud to have led the implementation of the Paycheck Protection
    Program, working closely with community, regional, and large
    banks, CDFIs, MDIs, credit unions, and fintechs to save
    millions of Americans from the potential economic ravages of
    the pandemic.
        Historically, our Nation's economic strength has arisen
    from the ingenuity and dynamism of our private sector. Much of
    that growth originates from America's small businesses, who
    often seek credit from local and regional lenders. According to
    a recent Federal Reserve report, small bank loan portfolios in
    June of 2021 were more than 13 percent comprised of small
    business loans, compared to just 6 percent for the largest
    banks.
        To understand why this is the case it is helpful to
    understand the difference between hard and soft information.
    FICO scores, debt-to-income ratios, and collateral values are
    hard information that can just as easily be evaluated from
    across the country as from across the desk. Soft information,
    like the unique needs of a local demography or why a particular
    business model is viable in a particular geography is much more
    difficult to translate numerically and communicate in a large,
    hierarchical organization. Access to financing at the local
    level depends on financial institutions with local roots.
        At the same time, technology has transformed financial
    services, with ATMs, online, and mobile banking programs and
    computerized underwriting models. These systems have large
    fixed-development costs and low variable costs, resulting in
    enormous returns to scale. An implication of this paradigm is
    consolidation where four megabanks service nearly 48 percent of
    the Nation's deposits in 2022.
        Such consolidation creates challenges. Bankers in New York
    and San Francisco do not necessarily understand the local
    lending needs of Baton Rouge or western Massachusetts. We must
    ensure a vibrant ecosystem for credit provision to America's
    thriving small businesses without valid concerns about systemic
    risk creating extraordinary burdens.
        This raises the third major factor, which is the evolving
    regulatory environment. In my view, a number of reforms are
    needed. First, Dodd-Frank presumes that financial regulators
    will stay ahead of the banks. However, if bank supervisors
    cannot identify and address simple interest rate risks and
    duration imbalances, how can we rely upon them to stave off
    more complicated risks?
        Second, the system benefits from different banks pursuing
    different technologies, customer segments, and underwriting
    models. When regulators replace the judgment of the banks with
    their own, regulatory failures that, for instance,
    overemphasize credit risk and underemphasize interest rate
    risk, cause common shocks that put the entire system in greater
    jeopardy. For our largest institutions, I believe the solution
    is greater capital, not greater bureaucracy.
        Third, the systemic risk exception on deposit insurance has
    proven problematic. Statutory language explicitly or even
    implicitly saying that large banks have a more robust deposit
    guarantee than community and regional banks causes exactly the
    consolidation that policymakers should avoid. While we should
    perhaps guarantee non-interest-bearing transaction account so
    that American workers can be sure paychecks will clear, nowhere
    should law or policy provide differential deposit insurance
    based on bank size.
        Fourth, uniformly applying regulation and supervisory
    tactics to all banks when only the largest pose particular
    types of risk make small and regional banks less competitive.
    Bank supervisors should not request that small banks comply
    with, quote, ``best practices,'' end quote, that are not
    mandated.
        Finally, bank regulation must make it easier for new banks
    to enter. Since 2010, only 62 new FDIC-insured banks have been
    chartered in the United States. Creating stricter mandates for
    our Nation's banks may, instead, cause marginal activities to
    go toward shadow banks without making the Nation's financial
    systems safer. Regulators should work with industry and
    academics to identify the impediments to de novo banking so
    that greater bank entry might partially offset consolidation.
        Our banking system must continue improving accessing,
    lowering costs, and safeguarding financial information.
    Economies of scale mean that there will be several large
    institutions. Policymakers and regulators must ensure that
    there are enough of these banks to maintain significant
    competition. Regarding systemic risk, regulators will never
    have the information and sophistication necessary to stay ahead
    of the banks' activities. Instead, much of what regulators
    monitor should be left to the owners of the banks. Let capital
    do the work of the regulators. This would greatly reduce
    compliance burdens on small and regional banks that cannot
    afford the fixed costs of the regulatory apparatus and still
    compete.
        I look forward to participating in today's hearing. Thank
    you.
        Chair Warren. Thank you, Mr. Faulkender. I really
    appreciate your remarks here.
        And now we go to Ms. Philo. You are recognized for 5
    minutes.

    STATEMENT OF ALEXA PHILO, SENIOR POLICY ANALYST, AMERICANS FOR
                            FINANCIAL REFORM

        Ms. Philo. Good afternoon, and thank you Chair Warren and
    Ranking Member Kennedy for the opportunity to testify. I want
    to talk about the dangers of excessive concentration and the
    need for the banking agencies to swiftly update and apply their
    bank merger review frameworks.
        As you noted, President Biden issued an executive order in
    2021 to promote competition in the economy. It encouraged the
    agencies to review their practices and adopt a plan no later
    than 180 days from the order, and yet here we are, 2 years
    later, and the agencies have yet to publish new guidelines.
        We at AFR, Americans for Financial Reform, are deeply
    concerned about the concentrated power in banking and the wave
    of bank mergers and acquisitions that facilitated it. Bank
    consolidation has produced historically high concentration in
    the U.S. financial sector, the number of U.S. banks has
    plummeted from the '80s to today, and you mentioned a number of
    stats here that sort of reinforce that point.
        The agencies' history of rubber-stamping bank mergers has
    come at a great cost, with marginalized and rural communities
    disproportionately affect. The Bank Merger Act and BHC Act
    require the agencies to consider convenience and the needs of
    the community, and yet bank mergers have reduced availability
    of credit, increased fees for basic banking services, and
    lowered interest rates offered to depositors. These adverse
    effects are even more pronounced in communities of color, low-
    and medium-income communities where bank consolidation has led
    to significant branch closures.
        Bank mergers continue to drive large numbers of branch
    closures, and this disparately affects places where few
    branches existed in the first place, especially rural areas,
    especially low-income urban areas.
        Bank mergers' harmful effects also extend to small
    businesses, as we have talked about. Community banks have
    traditionally specialized in lending to local entrepreneurs and
    farmers. When banks consolidate, small business lending
    declines as bigger banks tend to serve larger commercial
    customers.
        Bank mergers exacerbate systemic risk. Due to recent
    mergers, PNC, Truist, and Capital One are now bigger than
    Washington Mutual, Countrywide, and Nat City when they failed
    in the 2008 financial crisis. Large bank mergers can exacerbate
    existing problems, such as the too-big-to-fail dynamic, as well
    as related problems such as when banks become too big to
    manage.
        The American public would be better served by the agencies
    evaluating emergency sales such as those that we saw through a
    lens broader than just the least cost to the insurance fund,
    including resulting effects on financial stability, ability to
    manage the combined entity, anticompetitive impacts, and other
    negative economic consequences not beneficial to communities
    served or the economy. The least cost calculation criteria
    should also be more transparent.
        In terms of needed actions, those opposed would have us
    believe that we need deregulation to check concentration,
    pointing to failures to supervise SVB. We disagree. A
    supervisory failure does not indict all supervision. It argues
    for stronger regulation and effective supervision.
        Also, regulations promote competition, level playing
    fields, and oversee systemic risk--I am sorry. I want to
    apologize. I want to restate.
        Also, regulations to promote competition, level playing
    fields, and oversee systemic risk do not categorically squelch
    innovation and diversity of business models. They can, in fact,
    do the opposite.
        Among AFR's proposals, we have listed a few here and I have
    more in my written testimony: pausing merger approvals until
    guidelines are strengthened; conducting a retrospective
    analysis on the impact of prior banking mergers; fulfilling the
    obligation to determine how a proposed merger will benefit the
    needs of the community with a robust community benefit
    agreement.
        This assessment should consider other relevant factors in
    addition to the bank's CRA rating, such as guaranteeing that a
    consumer merger is in the public interest by requiring CFPB
    approval, requiring disclosure of discussions between the
    institutions and regulators, and so on and so forth.
        To conclude, the above proposals are needed to protect the
    American public and combat the hands-off approach to merger
    reviews that has resulted in increased consolidation and
    inflicted substantial harm on the economy, small businesses,
    and communities, rural and Black, Indigenous, people of color
    communities.
        Thank you for allowing me to testify today. I greatly
    appreciate it.
        Chair Warren. Thank you, Ms. Philo. I really appreciate
    your comments.
        So, I am going to start with 5 minutes, first round of
    questions.
        So, the vast majority of banks that disappeared over the
    last few decades were not financial giants. They were small
    banks with deep roots in their communities. These are the banks
    that know local communities. These are the banks that know
    local neighborhoods, know local businesses. These are the banks
    that do the painstaking local lending that is a lifeline for so
    many small businesses. But those local banks are the ones that
    are disappearing.
        Since the mid 1990s, the share of banking assets and
    lending markets controlled by community banks has been cut in
    half. In just the last 15 years, the number of community banks
    has shrunk by more than 40 percent. Today, one-third of all
    rural counties no longer have a local bank.
        The result is that more communities in America, especially
    rural communities and communities of color, have little choice
    but to turn to big banks for checking accounts, loans, and
    other financial services. This increases costs for families and
    small businesses, and it has major consequences for the entire
    economy.
        So, Ms. Harper, let me ask you, what happens to a community
    when the last small bank in town closes up shop?
        Ms. Harper. Thank you for the question, Senator, and I am
    glad that you actually used the word ``lifeline,'' because when
    that last community bank, small bank leaves, it truly does take
    the heartbeat of the local economy with it. These small banks
    are, as you mentioned, serving and meeting the needs of small
    businesses, which fuel the rest of that local economy, and
    without them we see job losses, we see less employment, we see
    less dynamism in that economy.
        And then also we see the impact on consumers. When those
    services go away for consumers as well, they are left with
    higher-priced services, but then also it lays the groundwork
    for some of those predatory firms that I mentioned in my
    introductory statements--payday lenders, check cashers--that
    once in that trap, as we know, God help you, because then that
    opens up the door for debt collectors and possibly even
    eviction.
        So, it is extremely devastating when these small banks go
    away, and that is why it is so important we are having this
    hearing today, to make sure our bank merger policy does not
    exacerbate the problem.
        Chair Warren. All right. Really powerful point. Let me see
    if I can pull this just a little bit and focus again on small
    businesses. So, let's say I own a small bakery in Sturbridge,
    Massachusetts, and I have an idea to open another bakery in
    another town, but I need a loan to be able to do that. Now
    maybe I had a hard time during the pandemic, my profits may
    have been spotty for a period of time, but I am optimistic that
    a new storefront is the best long-term investment for my
    business.
        Do you think I have a better chance of getting that loan
    from my local community banker, if I have one, than, say, Wells
    Fargo, that just moved into town?
        Ms. Harper. Oh, absolutely. I mean, big banks are set up to
    serve larger clients. That is where they make the most profit,
    and that is where their incentives lie. And small banks have
    the time, have the incentive to do the type of relationship
    lending that is going to serve small businesses. And we also do
    not need to think about those in a hypothetical. The data bears
    out that, in fact, the largest banks are only providing about
    18 percent of small business loans, where we see that community
    banks are providing about 50 percent.
        Chair Warren. Yeah, so think about that--wait--for one more
    minute. So, here they control all these assets, but in terms of
    how much of that money is making it back into communities and
    into small businesses, you are telling me--do the numbers one
    more time.
        Ms. Harper. Only 18 percent of the small business loans are
    actually coming from the larger financial institutions.
        Chair Warren. So, 82 percent are coming from the smaller
    financial institutions, community banks, and others.
        Ms. Harper. And others, yes. But at least 50 percent are
    coming from smaller community banks. And, you know, the other
    piece of evidence that I would point to is the PPP program. In
    terms of the pandemic, that was an opportunity where, in
    moments of extreme need by our small business community, which
    I think we are all aware of, the big banks did not step up.
    They were only providing 3 percent of those loans, and in fact,
    the community banks were providing about 30 percent.
        Chair Warren. Yeah. All right. Very interesting.
        So, I try to think about when community banks are gobbled
    up by bigger banks, small businesses, which generate about 44
    percent of all U.S. economic activity and create about two-
    thirds of all jobs in this country, lose their primary source
    of capital. And that means less economic growth and more
    concentration throughout the economy.
        So, when Treasury Secretary Yellen and Acting Comptroller
    Hsu effectively put up a billboard inviting more big bank
    mergers, they claim it will help our financial system be safer,
    that that is the reason they are doing this. So, I want to
    probe that just a little bit here.
        Ms. Philo, we have decades of academic research on the
    relationship between mergers, bank concentration, and key
    indicators of financial stability. So, does this research show
    that mergers are the way to increase stability in the banking
    sector?
        Ms. Philo. Absolutely not, Senator. We saw, in the run-up
    to the 2008 crisis, in particular, but we have seen repeatedly
    in crisis environments that big bank merger do increase the
    risk of financial crisis. You have increasing complexity with
    the combining of large institutions. You have increase in
    concentrations, increase in interconnectedness and being
    entwined with the financial system.
        So, there are studies that actually document and analyze
    this, one, in particular, that is often referred to, showing
    that one large bank merger has negative repercussions greater
    than five combined smaller institutions with the same deposits.
        Chair Warren. Same deposit amount, the economic impact of
    the failure of one big bank is far greater than the economic
    impact of five smaller banks, even though the same dollar
    number of deposits is affected. Is that right?
        Ms. Philo. That is what the studies show, and these studies
    include from our agency partners as well. So, I mean, this is
    sort of well understood and documented.
        Chair Warren. OK. So, I also understand, from what you are
    saying, that mergers increase the risk of creating more banks
    that are too big to fail, right, because we keep moving up,
    bigger, bigger here, leaving taxpayers on the hook for bailing
    them out when they blow up and taking the economy down with
    them. So, that is more banks that can get away with playing the
    ``tails, I win, heads, you lose'' game that banks have played
    for a very long time.
        Ms. Harper, do you agree with Secretary Yellen and Acting
    Comptroller Hsu that more mergers would make our financial
    system safer?
        Ms. Harper. No, not at all, and it is extremely
    disconcerting to hear them suggest that.
        Chair Warren. And how about you, Ms. Philo?
        Ms. Philo. No, exactly. Similar answer. It is concerning.
        Chair Warren. OK. Secretary Yellen and Acting Comptroller
    Hsu have it exactly backwards. Bank consolidation does not make
    our financial system and economy stronger. It makes them
    weaker. And if we are serious about protecting community banks
    and preventing taxpayer bailouts, then we need to fix the root
    of the problem, consolidation. Bank consolidation harms
    consumers, it deprives small businesses of capital, and it
    creates an ever-growing number of too-big-to-fail banks.
        Thank you. Senator Reed.
        Senator Reed. Thank you very much, Madam Chairman, and
    thank you to the witnesses.
        Ms. Philo, we have seen regulatory approvals of private
    equity-backed acquisitions of open insolvent banks. Why should
    banking agencies be skeptical of approving these merger
    acquisitions or applications, and what specific elements of
    private equity model are dangerous when applied to banking?
        Ms. Philo. Thank you, Senator Reed, for the opportunity to
    speak to this. It is deeply concerning, and I am going to quote
    a part of a letter the AFR put out there on April 21, 2022.
    ``The private equity industry controls an ever-increasing
    portion of the U.S. economy. The extractive business model
    requires it acquire and consume more businesses and sectors
    every year. It has increased in size eightfold over the past
    two decades, from $700 billion in global assets in 2000, to
    $5.8 trillion in 2018.''
        So, I could continue, but I think what we have seen is
    private equity firms have different incentives, and when they
    come in and they acquire a bank or a health care organization
    or an insurance company, there is a propensity to put profit
    first and to squeeze as much profitability out of the
    arrangement as possible. And as we know, in the banking sector,
    that is not at all the intention, and I think obviously in
    health care as well.
        Senator Reed. And typically these banks are community
    banks, and with that kind of leadership, which is not community
    oriented, you do not get the same kind of attention to people,
    the people that are your customers. Is that accurate?
        Ms. Philo. I think that is exactly right. Private equity
    firms acquiring a community bank, coming in will not have that
    same commitment to the local economy, will not have the same
    understanding of the local economy, and will not prioritize it
    because it will not be aligned, most likely, with their efforts
    to increase the profitability of the business.
        Senator Reed. And there is another aspect, too, is that in
    situations of failed banks the FDIC will entertain offers for
    partial ownership by private equity. The alternative is to sell
    the institution to a peer bank. It seems, again, the same
    dangers of private equity we talked about in a full acquisition
    would be inherent in buying a piece of a bank. Is that
    accurate?
        Ms. Philo. That is accurate. I think you would have to be
    particularly vigilant in that context because, first, least
    cost could mean extremely inappropriate practices and put
    customers at risk in terms of the financial services and
    products offered. So, I do believe you will get a mismatch in
    terms of the objective of the banking organization that has
    been acquired and the needs of the community.
        Senator Reed. Let me change subjects for a moment. In the
    Dodd-Frank bill, which I participated in, we set a rule that
    the financial stability of the United States has to be
    considered in the merger calculation, the impact of the merger
    on the financial stability of the United States. But this
    factor has been unevenly apprised by agencies. Should that be
    more rigorous and transparent in establishing the criteria for
    this financial stability factor and explaining why the merger
    does not impact?
        Ms. Philo. I do believe that we should, and I think that is
    a really key lesson coming off of the 2023 crisis. SVB, in
    particular, Silicon Valley Bank, made an acquisition in the
    years prior to its failure, and the Federal Reserve, in
    approving that, did not, spoke to financial stability, signed
    off from a financial stability perspective, but said nothing
    about how that came across, what kind of data went into it. So,
    I think that is absolutely a priority, Senator.
        Senator Reed. Well, let me ask a question for both the
    witnesses here present. How does current bank merger framework
    evaluate AML practices, anti-money laundering practices, and
    cybersecurity risks when they look at the mergers? Ms. Harper.
        Ms. Harper. Well, and I think you are accurately
    identifying, that is one of the factors that should be
    considered in any merger review. But I also want to re-
    emphasize, and building off of my colleague's comments, that
    there is a particular role that banks in our economy are
    supposed to play. It is a public role, and they are chartered
    to fulfill that role, which is moving capital and serving the
    interests of small businesses and consumers. And what we know,
    based on all of the evidence from the past several decades,
    where we have seen pulling away of enforcing the types of rules
    that would require considering things like money laundering is
    that it is leaving our financial system less stable and
    creating more harms for consumers and small businesses.
        So, that is why, at this point, we should have a very
    strong presumption against approval of mergers, and we really
    need to come back to the original vision of Congress to make
    sure that we are considering a whole set of harms in analyzing
    individual transactions.
        Senator Reed. Thank you. Ms. Philo, your comments, on
    cybersecurity in particular.
        Ms. Philo. Yes. I think it is a great question because
    there is no requirement to consider issues like that, and I
    think that it is an important part of the reforms that we are
    looking for to make sure that those tough questions are asked
    and that they are answered, both with the appropriate data and
    disclosure.
        Senator Reed. Thank you very much. Thank you, Madam
    Chairman.
        Chair Warren. Thank you. I appreciate it, Senator Reed.
        So, I want to take a look at another issue, and that is the
    rapid consolidation of our banking system is not the result of
    some natural phenomenon, like gravity, that it just had to
    happen. It is the consequence of deliberate decisions by
    financial regulators that have made it easier for big banks to
    grow bigger by gobbling up their competitors. One place where
    these decisions have the biggest impact is in the bank merger
    review process, which determines whether a bank can merge with
    or buy up another bank.
        So, Ms. Philo, you have seen this process up close, so I
    thought maybe we could just walk through the basics on it.
    Let's go back to the bakery example here. So, if I own a bakery
    and I want to buy another bakery, two little bakeries in two
    little towns, and I have got the money, I can just go buy the
    other bakery. I can cut a deal with the current owner, the
    owner wants to retire, I can buy the bakery.
        That sounds fine, but if a bank wants to buy up another
    bank or merge with another bank, can they just go out and close
    the sale the same way they would if it were a bakery buying
    another bakery?
        Ms. Philo. Absolutely not, Senator. It is a very complex
    set of regulations and guidelines, and as we know, banking
    organizations, not just the ultra-large, are highly complex.
        So, no, banks merging is much more complex. They need
    authorization from the relevant agencies, whoever is their
    primary regulator.
        Chair Warren. So, they have to go to their regulator.
        Ms. Philo. Correct.
        Chair Warren. They have to tell their regulator what they
    want to do, fill out an application to be able to do it.
        Ms. Philo. A very elaborate application, if I might add.
    There is a very intensive, as you know, focus on deposits, and
    yet there is a vast array of other things considered as well.
    And there is a period of, one might expect, you know, a year-
    plus where there is a review and an engagement with the
    regulators to review the merger.
        Chair Warren. OK. So, assuming we have a federally
    chartered bank here, which most banks are. So, the three
    regulators, the ones that you might have here, the OCC, the
    FDIC, or the Fed, depending on the size of the bank and who is
    the primary regulator, actually has to go through, look at all
    this information, and takes a year or so to go over the books
    to understand the local community and to look through before
    there is any approval of going forward with this bank merger.
    Is that right?
        Ms. Philo. That is correct. That is correct. There is also
    a DOJ review.
        Chair Warren. So, there is more.
        Ms. Philo. There is more.
        Chair Warren. That is not enough by itself. Go ahead.
        Ms. Philo. Absolutely. Once that has been completed and
    they worked out the application, the Department of Justice also
    reviews the application for its competitive effects.
        Chair Warren. OK. All right. So, a lot going on here. So
    DOJ Antitrust Division takes a look at it after the banking
    regulators have, and they have both got to sign off before you
    can go forward. OK. So, we have established that banks are a
    little different than bakeries.
        Ms. Philo. A little different.
        Chair Warren. Got it. So, banks file their application to
    merge and both DOJ, Department of Justice, and financial
    regulators are taking a look. Now the DOJ's Antitrust Division
    reviews all these deals and looks at them for anti-competitive
    effects, but a purchasing bank, the bank that is doing the
    buying, their main Federal regulator, that is their banking
    regulator, is ultimately responsible for approving or denying a
    deal. Is that right? So, Antitrust looks at it for its anti-
    competitive effects, but the banking regulator is the one who
    gives the final yes or no. Is that right?
        Ms. Philo. That is correct.
        Chair Warren. OK. I just want to make sure I have got this.
        So here is what I want to focus on. Since it is the banking
    regulators that have both the initial information and the
    ultimate say-so on this, what are the banking regulators
    looking at? You have been in this world. What it is that you
    would evaluate if you were a banking regulator and asked to
    approve the merger of two banks? Talk to me about the kind of
    things you would be looking at.
        Ms. Philo. Absolutely. I think there is a great deal of
    discussion about deposits, and clearly that is a focus.
        Chair Warren. So, you would look at deposits.
        Ms. Philo. Yes, but there is a great deal more. Also we
    have talked about the anti-competitive effects. But we would
    quickly go to financial stability, especially for the larger
    banking organizations. We would also go to public interests and
    the benefit to customers and communities. And then last, and
    these are in the guidelines and required, financial managerial
    resources. So, is the firm's oversight and apparatus, the lines
    of defense and all that in order, and other financial resources
    there.
        Chair Warren. OK. So, what you are supposed to look at is
    actually set out in these merger review guidelines, right, and
    as you say, it is things like does it harm consumers, can
    management really be counted on here to run it, is the bank
    going to be stable, is it going to destabilize the access to
    banking in the region. And if the regulators believe that any
    of those harms could be caused by the merger, what are they
    supposed to do?
        Ms. Philo. They are supposed to factor that into the
    assessment.
        Chair Warren. Factor them into what?
        Ms. Philo. Into the assessment of whether to approve the
    acquisition.
        Chair Warren. And at least in theory, if there are
    problems, are they supposed to approve?
        Ms. Philo. No.
        Chair Warren. I want to make clear, this is the guidelines.
    At the end of the day they are not about saying, ``Boy, there
    are a lot of problems, but go ahead. Have a great time.''
        Ms. Philo. Right.
        Chair Warren. OK. So, they are supposed to deny.
        So, outlining this process that is designed to make sure
    that when a bank merges with another bank that is does not
    endanger our financial system, it does not harm consumers, it
    does not harm small businesses and their access to credit.
    These are very important goals.
        So, that suggests to me there should be a really high bar
    for approving a merger, and yet, let's look at the data.
    Somehow the FDIC, the OCC, and the Fed, the three regulators
    here, have basically never seen a merger they did not love.
    Since 2013, the FDIC has received more than 1,100 bank merger
    applications, and how many did they formally deny? A nice round
    number--zero.
        What about the OCC? Since 2013, the OCC has received nearly
    500 merger applications. How many of these did the OCC deny?
    Answer, zero.
        And things do not look great at the Fed either. Since 2006
    and 2021, a span of more than 15 years, the Fed has approved
    more than 3,500 merger applications and denied zero.
        In fact, out of the thousands of merger applications that
    have been filed over the last 20 years, just 1, and that was
    last year, was formally denied by regulators.
        So, let me ask the question this way. In fact, let's bring
    you in, Dr. Faulkender. Is it your view that out of the
    thousands of mergers that have been approved over the last 20
    yeas that none of them, or only one of them posed a threat to
    competition, a risk to financial stability, reduced options for
    consumers, more constrained borrowing for small businesses, or
    any of the other factors that regulators are required to
    consider?
        Mr. Faulkender. Thank you for the question, Senator. You
    know, I went to graduate school because I worked at a
    commercial bank and we got acquired, and that was what spurred
    me to go get a Ph.D. And I can tell you that what happened in
    that instance was that there was excessive consolidation in the
    area, and so what the regulators required was that there be
    spinoffs or selloffs, divestitures of certain branches.
        And so it is a little bit more complicated that the
    mergers, that none of them are denied. Usually what happens is
    that if they are approved, they are approved with restrictions
    like divestitures, in order to make sure that there is still
    sufficient local competition.
        Chair Warren. And are we confident that that is exactly
    what has happened?
        Mr. Faulkender. I have not reviewed every one of them. And
    let me say, Senator, I think my testimony revealed that I am
    very concerned about the lack of local information that is lost
    with acquisitions. I just hope we get a chance to also, though,
    talk about that that the biggest thing small banks suffer from
    is their inability to compete on technology. And so I think
    that where we could maybe have some conversation is how do we
    lower the cost of small and community banks competing with
    large banks on technology because of the economies of scale.
        Chair Warren. So, I think that is a very important point,
    Dr. Faulkender, and certainly something that I am sure folks in
    the banking industry who are trying to run these community
    banks are talking about.
        But let's face it. As long as the big boys are out there
    gobbling them up, there is not much time to talk about how you
    spend energy and resources building up your technology. When
    you are getting swallowed up, and the community banks are
    disappearing, as we see from the data here that they are, I
    think the consequences are pretty obvious, and I hope we can
    help the community banks.
        But part of this starts at the merger review level. So let
    me ask you, Ms. Philo, about your view about this. Of all these
    banks for which only one, in all this period of time, was
    formally denied a merger approval, do you think that none of
    them posed any risk or that there were enough other conditions
    put in place so that every one of the criteria were met, the
    criteria that are currently laid out in the merger review
    guidelines?
        Ms. Philo. I believe it would be hard to say that every
    single instance that we have from historically going back so
    many decades would have met every one of them, according to
    their specific criteria. I think that would be a stretch to
    imagine that.
        Chair Warren. Yeah. And, you know, I get it. People make
    mistakes. Regulators make mistakes. Human beings make mistakes.
    I understand that. But notice, if they are just random mistakes
    they will be mistakes in both directions. There will be some
    times when mergers will be disapproved that maybe would have
    been OK and not posed a risk, and there will be some times one
    will slip through that actually does cause harm to consumers or
    that cuts access to credit for small businesses.
        But when you see this kind of an approval rate, that is
    effectively 99.99 percent approval rate, you really have to say
    the system is tilted the wrong way, that we are not using a
    high enough bar in the current merger review guidelines.
        So, let me just do one more quick one and then I will give
    this over to Senator Van Hollen, and that is to focus in on a
    merger review guideline process that has effectively become a
    rubber stamp, and the banks know that it is a rubber stamp.
    Sure, there may be a little bit of song and dance around, ``Oh,
    we promise to do this in the local community,'' or ``We promise
    to do that,'' but no indication there is any particular follow-
    up on this.
        So, in that context, President Biden, early in his term,
    called for tougher standards that apply real scrutiny to bank
    mergers. Ms. Harper, do you agree with President Biden that our
    bank merger guidelines need to be toughened up in order to keep
    both consumers, small businesses, and our financial system
    safe?
        Ms. Harper. Yes, and it is very encouraging, both what we
    are seeing from President Biden and also from the Department of
    Justice Antitrust Division that they intend to apply what is
    the statutory obligation, which is a holistic assessment of
    harms from any potential merger.
        Chair Warren. That they are actually going to follow the
    law.
        Ms. Harper. That is an idea, right?
        Chair Warren. There we go. Ms. Philo, how about you. Do you
    agree with President Biden on this?
        Ms. Philo. I absolutely agree with President Biden.
        Chair Warren. Good. You know, I am extremely disappointed
    that when I asked our nominees to the Federal Reserve board
    this same question recently, they refused to give a straight
    answer. I am seriously concerned that we are being presented
    with nominees to key roles regulating banks who cannot clearly
    state that they agree with President Biden that concentration
    in the banking industry is a serious problem.
        It is clear that our bank merger rules need to be tougher,
    and that I why I will soon reintroduce my Bank Merger Review
    Modernization Act, which would strengthen and modernize the
    bank merger review guidelines so that regulators actually do
    their job of protecting small banks, consumers, and our
    financial system from unchecked consolidation.
        I will keep pushing Congress to pass this bill, but this is
    one time that regulators do not have to wait on Congress. I am
    glad that banking regulators and the DOJ are following
    President Biden's directive to strengthen the bank merger
    review guidelines, which they can do under current law. Even
    so, it is time to get this review finished and get it out the
    door. We need our regulators to deliver even before those
    guidelines are out and certainly once the guidelines come out.
        Senator Van Hollen.
        Senator Van Hollen. Thank you, Senator Warren, and thank
    you for holding this hearing. Thank you to all our witnesses.
    Dr. Faulkender, it is great to have a University of Maryland
    Terp as part of the witness panel here.
        And I have been able to listen a little bit from my office
    to some of the testimony, and it reinforces the understanding
    that access to banking services is a really important indicator
    of wealth-building and prospects for being able to have a
    successful life where you can support your family. Obviously,
    that includes credit scores, access to lending to purchase a
    home, and other things like that in the testimony. And I think,
    Ms. Harper, you made the point that during the pandemic the PPP
    program became much more successful when we opened the doors
    and made it very clear that more community-based banks, CDFIs,
    and other entities should be conduits for the emergency
    funding. And you also cited the information about small
    business loans, I think 50 percent of small business loans
    coming from community-based banks versus the bigger banks.
        So, clearly access to community banking and local banking
    services is important for a variety of reasons, which is why I
    have been also troubled by the consolidation in this sector. If
    you look at the National Community Reinvestment Coalition
    reports they found that over the course of 2017 to 2021, the
    U.S. saw historic levels of bank branch closures. And the
    Baltimore metro area experienced the second-highest rate of
    branch closures during this period of time, losing 96 branches.
        And yes, we have, of course, seen more of a transition to
    technology, but we also know that there are lots of
    individuals--the elderly and lower-income individuals--who rely
    on that direct community banking relationship.
        So, my question to you, and I think you alluded to it
    earlier, Ms. Harper, is, in addition to denying individuals
    access to these sources of lending within the community, if
    that is not there they often do turn to predatory lenders and
    others that take advantage of them, and, in fact, that ends up
    costing them a lot more in the long run. Can you just elaborate
    a little bit more on that point?
        Ms. Harper. Absolutely, and thank you for the question,
    Senator. We do see that these harms of consolidation are
    exacerbated in communities where we have mostly minorities and
    rural areas as well, and those harms are vast. As you said,
    that I mentioned in my introductory remarks, that we see
    increased fees, junk fees that are imposed, even if we are just
    talking about the traditional system that is more likely to
    occur and disproportionately affects these communities.
        But then also, you know, rejection of mortgages, for
    example. A lot of lower-income folks who might be more likely
    to rely on an FHA-backed loan, rates of approval will decrease
    based on this lack of access to banking services.
        And so it is very critical that we do what we can to get
    back to congressional intent here, to recognize the harm.
        And I do want to get back to one of the references that the
    professor mentioned on economies of scale. What we do not see
    is evidence that we are addressing any of these harms of the
    economies of scale. So great to have better technology, but if
    it is ending up like what we saw in the merger of BB&T and
    SunTrust, that you immediately are closing 800 branches, that
    you have customers that are so upset because they cannot access
    good customer service that they are going to local news to
    complain about it, then what are we really getting here, and
    are we applying the right analysis in determining whether or
    not these transactions are actually going to, again, get back
    to the statutory obligation that they are not promoting anti-
    competitive behavior and that they are serving the public role
    that the banking system is supposed to be fulfilling.
        Senator Van Hollen. Right. No, I think those are all good
    points, and I think the other challenge we have got, of course,
    is that when it comes to the nonbanking or the fintech sector,
    there are some good actors there but there are also many that
    take advantage of the fact that they do not have the same level
    of standards and regulations. In fact, obviously, that applies
    sector-wide. Some exploit that more than others.
        But can you just talk to the fact that one way maybe to a
    little better even the playing field here would be to apply
    some of the similar standards and rules to the nonbanking,
    fintech sector.
        Ms. Harper. Yeah. I think we definitely need to have level
    playing field in how we are thinking about all entities that
    are providing financial services to consumers. But ultimately
    the best way to create that competitive environment is exactly
    what the topic of today's hearing is, which is strong bank
    merger policy that is not exacerbating the consolidation, that
    is driving consumers to, which you rightly point out. There are
    some good products, but some that are more likely to hit when
    those banks go away, when those branch closures happen, are
    those that are predatory like payday lending and check cashing,
    et cetera.
        And so it is very important that we get this right, but it
    is not complicated. We have the rules of the road. Congress
    figured it out, and we just need to make sure we have banking
    regulators that are going to follow that course.
        Senator Van Hollen. Thank you. Thank you all for your
    testimony.
        Chair Warren. Thank you for questions.
        So, bank regulators' unwillingness to block bank mergers
    over the last few decades has made our banking system more
    concentrated. Bank regulators have also made the too-big-to-
    fail problem even worse.
        During the 2008 crash, regulators arranged shotgun
    marriages between our Nation's biggest banks, which enhanced
    the dominance of the behemoths that rule our financial system
    today. In fact, JPMorgan can thank the regulators for its
    status as our Nation's biggest banks. Regulators arranged for
    JPMorgan to acquire Washington Mutual when it failed in 2008,
    thus catapulting JPMorgan to the top of the banking heap. A few
    months ago, America was treated to rerun of the get-bigger-
    though-marriage show. The regulators approved JPMorgan's
    purchase of First Republic, so that America's biggest bank got
    $200 million bigger.
        Now Ms. Philo, when a troubled bank is on the verge of
    failing and the FDIC steps in, is the FDIC required to sell off
    the entire bank to another bank?
        Ms. Philo. No. It is required to look at least cost, but it
    is not required to sell the failed bank to another bank.
        Chair Warren. So, what else could it have done?
        Ms. Philo. It should evaluate the selling of the parts of
    the bank.
        Chair Warren. So, it could liquidate the bank.
        Ms. Philo. Correct.
        Chair Warren. It could sell it for parts.
        Ms. Philo. Correct.
        Chair Warren. Or it could sell it in whole to another
    bidder.
        Ms. Philo. Correct.
        Chair Warren. And when it is choosing among those options,
    what is it supposed to consider?
        Ms. Philo. It is supposed to consider the least cost, and
    that is a statutory requirement. And one of the challenges is
    that is a very narrow requirement. That is a requirement that
    focuses explicitly on the dollars and cents aspect, the cost,
    if you will, in currency terms. And yet what we are also
    realizing is critical is the need to consider financial
    stability, competition, and other issues that also have costs.
    So this focus on the dollars and cents part of the cost is
    concerning.
        Chair Warren. OK. So let me turn to you again, Dr.
    Faulkender. According to the least-cost test, if two banks put
    in a bid to buy the failed bank's assets and both of those
    amounts are less than the Deposit Insurance Fund would spend
    liquidating the bank, the FDIC would have to go with one of
    those bank's bids. Is that correct? That is what the least-cost
    test means?
        Mr. Faulkender. That is likewise my understanding, yes.
        Chair Warren. OK. So, Ms. Philo, if a bank, let's just say
    Bank A, will take over the failed bank assets with a bid that--
    we could talk about these in bids, like someone is going to
    make money here. That is not actually what is going to happen--
    with a bid that results in a $10 billion hit to the Deposit
    Insurance Fund, and Bank B would take over the failed bank with
    a bid that would cost the fund $11 billion, the FDIC, by law,
    has to accept which bid?
        Ms. Philo. The lower one.
        Chair Warren. The lower bid. The one that would cost the
    FDIC $10 billion rather than the one that would cost it $11
    billion. Is that right?
        Ms. Philo. Correct.
        Chair Warren. OK. All right. And you were saying earlier,
    and that is because the only thing that really comes into this
    part of the analysis is the dollars and cents part of this,
    right, just the dollars, on what is going to happen in this
    purchase.
        OK. So the question is, does the FDIC need more flexibility
    to evaluate options during the resolution process? And that is
    what I am trying to do in the Bank Merger Modernization Review
    Act. But I want to see if I can dig a little bit deeper into
    how the FDIC arrives at its conclusions right now. I think they
    ought to be able to consider some other factors, but let's just
    focus on what the law is right now.
        Ms. Philo, when the FDIC is comparing the loss to the
    Deposit Insurance Fund, that it is expected to result, from
    different resolution options--we have Bank A bidding and Bank B
    bidding--how does it actually determine those numbers, that one
    is going to cost $10 billion and one is going to cost $11
    billion?
        Ms. Philo. Sure. It needs to do the analysis and compare
    all alternatives. It needs to model the outcomes and compare
    all of the costs related with the transaction. This includes a
    present value basis, so traditional merger finance, a realistic
    discount rate, appropriate assumptions, and I think that is
    really key.
        Chair Warren. Oh, I love that. Only the appropriate
    assumptions. OK.
        Ms. Philo. You know, assumptions like the assumed interest
    rate obviously is a big one, assumptions around asset recovery,
    asset holding costs, contingent liabilities, et cetera, et
    cetera. The list goes on. Assumptions are important.
        Chair Warren. OK. So throughout this, though, it sounds
    like, depending on what assumptions you make on each one of
    these you are going to end up with somewhat different numbers,
    a lot of unknowns in this process, especially when we consider
    that banks may fail very quickly and that regulators are up all
    night scrambling to figure out what they are going to do.
        The FDIC may not have all of the information that it needs
    to accurately estimate the failing bank's assets, its
    liabilities, get them appropriately evaluated, and any tweak
    that you make to the assumptions could have a big impact on the
    ultimate outcome.
        So Ms. Philo, from your experience, is there a lot of room
    for these estimates to vary, or are these estimates, do they
    turn out to be pretty precise? What is your sense?
        Ms. Philo. These estimates absolutely do vary, and they are
    just that. They are estimates. Oftentimes, in traditional
    environment, they are based on using several methods and
    bringing them to bear and coming up with as much precision as
    possible. And yet there is a lot of variability, and we have
    seen that.
        We have seen that in the valuation, for example, of Merrill
    Lynch in the heat of the 2008 crisis. To your point, the
    valuation takes place not only under very extremely short
    timeframes, but in that environment, you know, crashing
    markets. So it is extremely difficult to value, and we have
    seen the results of that being extremely difficult, in terms of
    revisions after the fact, I think.
        Chair Warren. Yeah. I always think that the sample, I do
    not know if you remember it, but on the Wachovia Bank during
    the 2009 crisis, the FDIC's own numbers, their own staff said
    that the Wells Fargo bid would result in a cost to the fund of
    somewhere between $5.6 and $7.2 billion. That is a $1.6 billion
    range, but that is a lot of money in that range.
        So, that is how challenging this is for the regulator.
        I want to hit one last question here, Ms. Philo. Does the
    public have good information on the calculations that the FDIC
    made when comparing resolution options for a transaction?
        Ms. Philo. No, regrettably, we do not have details on the
    assumptions and the estimates that we would like to have, I
    think. We have had to take their word for it, essentially.
        Chair Warren. Yeah. So that is the position we are in. It
    just kind of turns into black box at the end of the day.
        You know, I do not think we ought to be taking the FDIC at
    its word. When making decisions about whether to sell a failed
    bank to a financial giant, or to a slightly smaller giant, the
    FDIC is relying on highly malleable estimates, not on gospel,
    and they get a free pass by saying their models prove that that
    was the least-cost alternative and the only way to resolve the
    bank under the law.
        The FDIC needs to provide more transparency around how it
    makes these decisions. If it truly was the case that a deal
    blew a $13 billion hole in the Deposit Insurance Fund, which is
    what happened when the FDIC allowed JPMorgan to book a $3
    billion profit on the deal when it was able to purchase First
    Republic, then the FDIC should have to show its math and prove
    that that really was the least-cost alternative.
        Every time a financial crisis hits, all the rules that are
    intended to protect against greater banking consolidation seem
    to evaporate, even though banking consolidation is what got
    into trouble in the first place. More big bank mergers is not
    the solution here, and we need regulators who understand that.
        I want to thank our witnesses for being with us today, for
    participating in our hearing. Questions for the record are due
    1 week from today. That is Wednesday, July 19th. For our
    witnesses, once those questions are in, you will have 45 days
    to respond to any questions.
        Again, thank you, and before I close I would like to enter
    into the record statements from Better Markets, the
    Massachusetts Bankers Association, the Credit Union National
    Association, and the Bank Policy Institute. We are grateful for
    their comments that help us better understand both what is
    happening right now with bank mergers and where we need to
    strengthen the bank merger guidelines. So with that this
    hearing is adjourned.
        [Whereupon, at 3:43 p.m., the hearing was adjourned.]
        [Prepared statements and additional material supplied for
    the record follow:]
                  PREPARED STATEMENT OF CHAIR ELIZABETH WARREN
        Good afternoon. I'm pleased to be chairing today's Economic Policy
    Subcommittee hearing on the economic impacts of bank consolidation. I
    appreciate our witnesses joining us, and Senator Kennedy's partnership
    in putting this hearing together.
        After the 2008 financial crisis and the subsequent bank bailout,
    Congress passed the Dodd-Frank Act. The law was designed to ensure that
    giant banks could never again threaten our economy. But with the
    collapse of Silicon Valley Bank, Signature Bank, and First Republic
    Bank--three of the largest bank failures in our Nation's history--two
    things have become obvious.
        First, bank failures remain a serious threat to our economy,
    putting taxpayers at risk of footing multibillion-dollar bailouts if
    they go under. And second: regulators are courting disaster by
    continuing to encourage giant banks to grow even bigger. Treating
    mergers as a solution to financial instability increases that
    instability.
        The problem with megabanks goes well beyond the increased risk of
    blowing up the financial system. As big banks get even bigger, branch
    closures increase. This reduces the availability of bank services, and
    increases the cost of credit for small businesses and families.
        This problem can be life or death for small businesses that can't
    find anyone at a big bank who understands the local economy or the
    actual business that needs credit. The problem is also worse in lower-
    income neighborhoods, where research shows predatory lenders and check-
    cashers proliferate as bank consolidation rises.
        When banks merge, consolidation has ripple effects that cost jobs,
    lower household incomes, and slow economic growth in local economies.
    Bank consolidation may boost CEO pay and investor profits, but it hurts
    everybody else's quality of life.
        This problem seems obvious--and should be easy to fix. Congress
    spotted the problem long ago, and in 1960 passed the Bank Merger Act to
    give bank regulators, in consultation with the Department of Justice,
    the authority to block mergers that reduce competition, harm
    communities, or are not in the public interest.
        Yet somehow, astonishingly, between 2006 and 2021, the Federal
    Reserve approved more than 3,500 consecutive mergers without denying a
    single one--a streak that would make Cal Ripken and Lou Gehrig green
    with envy.
        The net result of regulators falling asleep at the switch is that
    since 1990, the number of banks in the U.S. has declined from over
    18,000 to less than 5,000.
        Meanwhile, the biggest banks have gotten bigger. In the mid-1990s,
    the 20 biggest banks in the country held 15 percent of all bank assets.
    Today, the top 20 hold more than 65 percent of all bank assets. And the
    concentration at the very top is even more extreme. The biggest four
    banks alone hold more assets than the next 75 banks combined.
        President Biden, to his credit, recognized this problem and is
    working to try to fix it. In his July 2021 Executive order on
    competition, he concluded that bank consolidation [quote] ``raises
    costs for consumers, restricts credit for small businesses, and harms
    low-income communities,'' and ordered banking regulators to update
    outdated and failed bank merger review policies.
        Two years later, we are finally on the cusp of seeing what those
    new merger guidelines are going to look like. Last month, Jonathan
    Kanter, the Justice Department's top antitrust enforcer, indicated that
    new guidelines would be coming soon--and that the Department would be
    giving much tougher scrutiny to mergers.
        That's good news. I hope these guidelines are out soon, and you
    better believe I want them to be tougher than the current rules.
        But I'm extraordinarily concerned about what we've seen in recent
    months from banking regulators. When First Republic Bank collapsed in
    April, the bank was ultimately sold to the biggest bank in America, JP
    Morgan Chase. That sweetheart deal cost the Federal Deposit Insurance
    Fund $13 billion.
        Meanwhile, overnight, the country's biggest bank got $200 billion
    bigger. And what happened to the regulators? The Acting Comptroller of
    the Currency, Michael Hsu, rubber stamped the deal in record time. When
    I asked Mr. Hsu at a hearing in May to explain how this merger was
    approved, he was unable to provide a clear answer.
        But the overall picture gets worse. Instead of inattentive
    regulators who don't use their tools to block increasing consolidation,
    leaders within the Biden administration seem to be inviting more
    mergers.

        In a May 2023 statement before the House Financial Services
            Committee, Acting Comptroller Hsu reassured banks that the
            agency would be [quote] ``open-minded'' while considering
            merger proposals. And then earlier this week, he said, quote,
            ``simply prohibiting all mergers of large banks really locks in
            the concentration amongst the existing megabanks, and I don't
            think that's the right answer,'' end quote.

        Treasury Secretary Yellen recently warned that the banking
            ``turmoil'' from the collapse of Silicon Valley Bank, Signature
            Bank, and First Republic might lead to more mergers and that
            regulators would be--quote--``open to'' them. Then the New York
            Times also reported that Secretary Yellen privately told big
            banks that she would, and I quote, ``welcome more mergers.''

        These comments are stunningly wrongheaded. They indicate that key
    banking regulators have learned exactly the wrong lessons from the bank
    failures earlier this year and the 2008 financial crash before it. Too-
    big-to-fail banks pose risks to stability of the financial system and
    increasing banking concentration puts a damper on small business growth
    across the country.
        We need effective regulation and bank supervision that prevent big
    banks from failing in the first place. We also need to police bank
    mergers to ensure that big banks have robust competition to ensure they
    are serving consumers and small businesses.
        I appreciate our witnesses being here to discuss how we can do
    that.
                                     ______

                      PREPARED STATEMENT OF MORGAN HARPER
      Director of Policy and Advocacy, American Economic Liberties Project
                                 July 12, 2023
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                    PREPARED STATEMENT OF MICHAEL FAULKENDER
    Dean's Professor of Finance and Chief Economist, University of Maryland
                       and America First Policy Institute
                                 July 12, 2023
        Chairwoman Warren, Ranking Member Kennedy, and Senators on the
    Subcommittee, thank you for the opportunity to speak with you today on
    the importance of a safe, sound, resilient, and growth-facilitating
    financial system for our Nation. I have been a finance professor since
    2002, having published extensively on the capital raising activities of
    firms and previously was an Associate Editor at the Journal of Finance
    and the Journal of Financial Services Research. In addition, I had the
    privilege of serving as the Assistant Secretary for Economic Policy at
    the U.S. Department of the Treasury during the previous Administration.
    In that role, I worked closely with the Small Business Administration
    to quickly implement the Paycheck Protection Program and ensure that
    the economic devastation that might have resulted from the pandemic was
    not realized.
        Part of my team's work at Treasury was to engage with a vast array
    of lenders across our Nation to ensure that eligible small businesses
    were able to obtain their PPP funds. I worked closely with community,
    regional, and large banks, CDFIs, MDIs, credit unions and FinTechs to
    better understand the issues they were confronting and to resolve the
    challenges they and their borrowers were facing. In December 2020,
    Treasury worked closely with Congress on legislative updates to PPP,
    extension of a second round of loans for the hardest hit small
    businesses, and enactment of additional capital funding for CDFIs and
    MDIs.
        Historically, our Nation's economic strength has arisen from the
    ingenuity and dynamism of our private sector. Advancements in
    industries such as technology, pharmaceuticals, financial services, and
    entertainment disproportionately occur in the United States. This
    outcome is consistent with the academic literature that compares
    economic outcomes in different countries around the world and documents
    that ``a business environment that promotes competition, private
    property rights, and sound contract enforcement boosts economic
    growth.'' A critical part of that business environment is access to
    capital. Unlike Europe where the history of the banking sector was
    largely to facilitate the borrowings of Governments, in the United
    States, we have historically had a decentralized banking system to meet
    the needs of businesses and consumers.
        Significant economic growth originates from America's small
    businesses. According to data from the U.S. Chamber of Commerce and the
    U.S. Small Business Administration, small businesses account for 64
    percent of new jobs in the United States and the comprise 46 percent of
    U.S. employment. In a Nation as ethnically diverse and geographically
    dispersed as ours, a robust private sector comprised of millions of
    small businesses is essential to meet the heterogeneous needs and
    desires of our Nation.
        Indispensable to meeting the needs of U.S. small businesses has
    been the availability of credit from local and regional lenders.
    According to a recent Federal Reserve report, ``large banks tend to be
    proportionately less committed than smaller banks to small business
    lending.'' Smaller banks with less than a billion dollars in assets on
    average had loan portfolios in June 2021 that were more than 13 percent
    comprised of small business loans. That figure was just 6 percent for
    the largest banks.
        To understand why this disparity exists, it is helpful to employ a
    dichotomy used in the academic banking literature--the difference
    between hard and soft information. As my coauthor Mitchell Petersen
    defines it, hard information is knowledge that can be ``easily reduced
    to numbers.'' On the other hand, soft information ``requires a
    knowledge of its context to fully understand, and that becomes less
    useful when separated from the environment in which it was collected.''
    Things like FICO scores, debt-to-income ratios, and collateral values
    are hard information that can just as easily be evaluated from across a
    desk as from across the country. The unique needs of a local demography
    and why a particular business model is viable in a particular geography
    is much more difficult to translate numerically and communicate in a
    large, hierarchical organization. That is why access to financing at
    the local level depends on a robust network of financial institutions
    with local roots, not just a handful of national megabanks.
        The other factor at play has been the innovation of technology and
    telecommunications. The last 50 years have seen extraordinary
    advancements in computing power and the speed with which information
    moves at ever lower cost. Within financial services, we have witnessed
    the deployment of ATMs around the Nation. Online and mobile banking
    means that depositing checks and paying bills is faster and more
    convenient than ever. Customers can now make deposits from anywhere in
    the country, access their money 24 hours a day, 7 days a week, easily
    transfer money between accounts, and pay bills from their computer or
    their phone. Lending underwriting models can now be programmed with
    borrower information verified entirely electronically and credit
    decisions issued nearly instantaneously. What we must understand about
    the economics of creating these ATM networks, online platforms, and
    lending systems is that they have large fixed-development costs and low
    variable costs, resulting in enormous returns to scale that make a
    partial shift toward larger banks something to be expected. The cost of
    creating the online platform is substantial for the first customer with
    almost zero incremental cost for the second.
        Individual States and the U.S. Congress recognized the benefits of
    these technological and communication advances, green lighting the
    realization of such scale economies when it facilitated intrastate
    branching and later interstate banking. However, an important
    implication is that we now have greater concentration of banking
    activity than ever, with four megabanks serving nearly 48 percent of
    the Nation's deposits in 2022. According to the FDIC, in 1934, there
    were 14,146 commercial banks in the United States. That number stayed
    above 13,000 between 1934 and 1984 when the number of commercial banks
    in our Nation peaked at 14,496. Since 1984, that number has declined
    every single year down to 4,136 in 2022, a decline of more than 71
    percent.
        This enormous consolidation creates new challenges. Returning to
    the intersection of the information environment with advancements in
    technology, an equilibrium has emerged where hard information banking
    activities are being done primarily by large scale, multitrillion
    dollar banks who can easily incorporate numerical inputs into lending
    decisions. However, this model does not work for soft information
    loans. Some of the necessary information is lost as scale increases due
    to the difficulty of passing that information through a large
    organization.
        Critical banking activities that rely on soft information are where
    community and regional banks are pivotal. Local knowledge requires
    local decision-making. Bankers in New York do not necessarily
    understand the local needs of Baton Rouge, LA, just as bankers in San
    Francisco may not know the lending opportunities in western
    Massachusetts. Local and regional bank executives and their boards
    constantly strive to find the balance between deploying the
    technological advances their customers require at an affordable cost
    while maintaining credit allocation decisions among those with the best
    information. We must ensure a vibrant ecosystem for providers of soft-
    information loans and not allow our concerns about systemic risks from
    large institutions to create extraordinary burdens for the primary
    capital providers to America's thriving small businesses.
        This raises the third major factor banks must contend with--the
    evolving regulatory environment. Following the financial crisis,
    Congress enacted Dodd-Frank to impose greater requirements on the
    banking sector. In my view, this approach was misguided in numerous
    ways:
        First, it presumes that financial regulators will be able to stay
    ahead of the banks they supervise. As the recent collapses of Silicon
    Valley Bank and First Republic Bank demonstrate though, if bank
    supervisors cannot identify and address simple interest rate risk and
    duration imbalances at the banks it oversees, how can we rely upon them
    to stave off more complicated risks from exotic derivatives or lending
    activities to new industries? This problem is compounded when banks
    have an incentive to complicate or obfuscate their operations.
        Second, it causes the banking sector to be more uniform, as Tyler
    Goodspeed and I discussed in a recent Wall Street Journal opinion
    piece. One of the historical strengths of our financial system has been
    its vast number of participants and heterogeneity of business models.
    This means that when one bank fails, others are not identically weak.
    The overall system benefits from different banks pursuing different
    technologies, customer segments, and underwriting models. When
    regulators replace the judgment of the banks with their own, regulatory
    failures that over-emphasize credit risk and under-emphasize interest
    rate risk, for example, cause common shocks that put the entire system
    in greater jeopardy. For our largest institutions, I believe that the
    solution is greater capital, not greater bureaucracy. When investors
    have more of their own money at risk, they will force bank management
    to manage the risk they create better than any bank regulator.
        Third, the systemic risk exception on deposit insurance has proven
    extraordinarily problematic. The Treasury Secretary's recent decision
    to declare uninsured deposits to be covered even though the banks
    clearly were not systemic means that depositors no longer have reason
    to discipline the banks at which they place their money. Imposing 5
    percent haircuts on the deposits of large technology companies, private
    equity funds, foreign depositors, and wealthy individuals would have
    sent a message that chasing yield with uninsured deposits is risky and
    sometimes results in losses. Instead, the outcome is that regional
    banks have seen significant deposit losses with some of those funds
    flowing to large banks, making them even larger. Statutory language
    implicitly saying that large banks have a more robust deposit guarantee
    than community and regional banks causes exactly the concentration of
    risk that policymakers should avoid. I agree that we need to take
    another look at deposit insurance and perhaps guarantee non-interest-
    bearing transaction accounts so that American workers can be sure that
    paychecks written on bank accounts with balances above the deposit
    limit are protected. Nowhere should law or policy provide differential
    deposit insurance based on the size of the bank.
        Fourth, uniformly applying regulation and supervisory tactics to
    all banks when only the largest pose particular types of risk make
    small and regional banks less competitive. Large banks have the scale
    to implement large fixed-cost regulatory compliance obligations
    economically. This is why during the Trump administration, we raised
    the threshold for heightened supervision to $250 billion in assets
    while allowing supervisors discretion to extend such requirements to
    banks as small as $100 billion in assets. Such a bank without a chief
    risk officer for 8 months certainly should have received that
    heightened supervision. However, even if SVB had undergone the Fed's
    stress test, it would have passed because stress tests in 2022 focused
    on credit risk and ignored the 40-year high inflation caused by
    Congress' excessive spending. However, it is not just what statutes and
    regulations say that create problems. When bank supervisors request
    that small banks comply with more onerous requirements because they are
    ``best practices'', even though they are not mandated, compliance costs
    rise, and small banks are less economical.
        Finally, bank regulation must make it easier for new banks to enter
    into existence. Since 2010, only 62 new FDIC-insured banks have been
    chartered in the United States, which is why we have seen the number of
    banks decline so dramatically in the last 40 years. Another of my
    former coauthors, Mark Flannery, served as Chief Economist at the
    Securities and Exchange Commission during the Obama administration. He
    pointed out a paradox in financial regulation that greater regulation
    may actually result in the average dollar being less regulated. The
    more that we make it difficult to comply with regulation, the more
    money goes into shadow banking. Passing on stricter mandates to our
    Nation's banks may instead result in marginal funds going to less
    regulated credit unions or unregulated FinTechs without necessarily
    making depositors or the system safer. This is why it is appropriate
    that we ask our regulators to work with industry and academics to
    identify the impediments to de novo banking so that greater bank entry
    might partially offset consolidation.
        With regard to the bank merger review process, I think it is
    important that we give greater thought to the definition of local and
    regional competition. Lending activities of credit unions and FinTechs
    should be accounted for in determining the changes in market power that
    may be caused by a combination of banks. Regulated depository
    institutions and lenders who serve a locality online without a physical
    footprint are likewise competitors who should be acknowledged.
    Additionally, I agree with maintaining the current language in the law
    that requires the FDIC to accept the bid that is least costly to the
    insurance fund when resolving a failed bank. That said, we should make
    sure that the prospect of FDIC loss sharing guarantees do not delay
    mergers of poor performing banks to the detriment of the insurance
    fund.
        Our banking system must continue innovating the provision of
    financial services to improve access, lower costs, and safeguard
    financial information. This means that there will be numerous large
    institutions realizing significant economies of scale engaged in hard
    information lending activities. Policymakers and regulators must ensure
    that there are enough of these banks to maintain significant
    competition so that no single bank is able to exert market power. From
    a systemic risk management standpoint, we should not assume that
    regulators will have the information and sophistication necessary to
    stay ahead of the banks' activities. Instead, we should require that
    systemically important financial institutions are highly capitalized so
    that they have the internal incentives to mitigate risk. Much of what
    regulators monitor should be left to the owners of these banks--let
    capital do the work of regulators. This would also greatly reduce the
    compliance burdens on small and regional banks who cannot afford the
    fixed costs of the regulatory apparatus and still compete.
        While the efficiency of scale may be tempting, top-down command and
    control by Government over what products Americans can purchase, what
    loans can be extended, and how companies must operate curtails the
    ability of entrepreneurs to serve our fellow citizens. We must return
    these decisions to the private sector.
        I look forward to participating in this important conversation.
                                     ______

                       PREPARED STATEMENT OF ALEXA PHILO
             Senior Policy Analyst, Americans for Financial Reform
                                 July 12, 2023
        Thank you Chair Warren and Ranking Member Kennedy for the
    opportunity to testify today. I want to talk about the dangers of
    excessive concentration and the need for the banking agencies to
    swiftly update and more rigorously apply their bank merger review
    frameworks.
        President Biden issued an Executive order on Promoting Competition
    in the American Economy that encouraged the banking agencies to review
    current practices and adopt a plan, no later than 180 days after his
    issuance of Executive order to revitalize merger oversight. \1\
    President Biden's order made it clear: this is the time to fight
    consolidation, not facilitate it. However, almost 2 years later, the
    agencies have yet to publish new guidelines. They have not gotten
    tougher in the ways needed to stop blithely approving mergers and start
    conducting robust assessments of bank mergers that properly scrutinize
    impacts on communities, market competition, and financial system
    stability.
    ---------------------------------------------------------------------------
         \1\ President Joseph R. Biden. ``Executive Order on Promoting
    Competition in the American Economy''. July 2021.
    ---------------------------------------------------------------------------
        We at Americans for Financial Reform (AFR) are deeply concerned
    about concentrated power in banking, and the wave of bank mergers and
    acquisitions that have facilitated it, mergers and acquisitions
    approved by the Federal bank regulators, not just in the last several
    years, but over the past few decades. Bank consolidation has produced
    historically high concentration in the U.S. financial sector. The
    number of U.S. banks has plummeted from 18,000 in the 1980s to less
    than 5,000 today. \2\ More than three-quarters of local banking markets
    were considered uncompetitive in 2021, with a Herfindahl-Hirschman
    Index (HHI) exceeding the DOJ's threshold for ``high concentration.''
    Nonetheless, Federal bank regulators have not formally rejected a
    merger application in over 15 years. \3\
    ---------------------------------------------------------------------------
         \2\ As of March 31, 2023, there were 4,096 commercial banks,
    including 4,096 commercial banks and 576 savings and loan associations
    in the U.S. insured by the Federal Deposit Insurance Corporation (FDIC)
    with U.S.$23.7 trillion in assets. ``FDIC Quarterly''. Federal Deposit
    Insurance Corporation.
         \3\ Kress, Jeremy C. ``Modernizing Bank Merger Review''. 37 Yale
    Journal on Regulation. 2021.
    ---------------------------------------------------------------------------
        On the contrary, approval rates for bank mergers have reached
    record highs, as the agencies have waved through mergers more quickly
    than ever. \4\ In 2021, the fifth-biggest bank in the country, U.S.
    Bancorp announced an agreement to acquire MUFG Union Bank for $8
    billion. \5\ This and other megamergers have resulted in growing
    concentration in the banking sector, which, in turn, has harmed
    consumers and small businesses, undermined financial stability, and
    negatively impacted consumer privacy.
    ---------------------------------------------------------------------------
         \4\ Supra n. 2 at p. 445.
         \5\ AFR and CRL Letter sent to the Fed on TD Bank/First Horizon
    Bank Merger and Overdraft Fees (ourfinancialsecurity.org).
    ---------------------------------------------------------------------------
        Civil rights and consumer financial justice organizations including
    AFR raised concerns about abusive overdraft practices in particular as
    an example of serious consumer harms that needed to be taken into
    account, along with systemic risk and consolidation issues, around TD
    Bank's application to merge with First Horizon. The banks ultimately
    announced the termination of their merger agreement, citing uncertainty
    about regulatory approval.
        The agencies' history of rubber-stamping bank mergers has come at a
    cost, with marginalized and rural communities disproportionately
    affected. The Bank Merger Act and Bank Holding Company Act require the
    banking agencies to consider the convenience and needs of the
    community. To fulfill this statutory obligation, regulators need to
    evaluate holistically how bank consolidation can harm consumers in
    general and low- and moderate-income (LMI) neighborhoods in particular,
    including in light of past experience on how mergers have harmed small
    businesses, community banks, and households, especially those in BIPOC
    (Black, Indigenous, and people of color) and rural communities.
        Bank mergers have reduced availability of credit, increased fees
    for basic banking services, and lowered the interest rates offered to
    depositors. \6\ These adverse effects are even more pronounced in
    communities of color and LMI communities where bank consolidation has
    led to significant branch closures. \7\ The vast majority of bank
    customers still rely on in-person branches for access to banking
    services; thus closures allow high-fee check cashing and predatory
    financial firms to step in. \8\ Furthermore, many merging banks have a
    history of poor consumer protection safeguards. \9\
    ---------------------------------------------------------------------------
         \6\ Bord, Vitaly M. ``Bank Consolidation and Financial Inclusion:
    The Adverse Effects of Bank Mergers on Depositors''. December 2018 at
    6-9.; Mark J. Garmaise and Tobias J. Moskowitz. ``Bank Mergers and
    Crime: The Real and Social Effects of Credit Market Competition''. 61
    J. Fin. 495, 509-14 2006.
         \7\ Dymski, Gary A. ``The Bank Merger Wave: The Economic Causes
    and Social Consequences of Financial Consolidation''. Review of
    Industrial Organization Vol. 19. No.4. Pp. 249-50. December 2001.
         \8\ Supra n. 7. Bord. Pp. 23-25.
         \9\ Dymski, Gary A. ``The Bank Merger Wave: The Economic Causes
    and Social Consequences of Financial Consolidation''. Review of
    Industrial Organization. Vol. 19. No.4. Pp. 249-50. December 2001.
    ---------------------------------------------------------------------------
        One study found that Black mortgage applicants are less likely to
    get mortgages in counties where bank mergers occur and that
    divestitures from mergers exacerbate racial mortgage disparities. \10\
    Additionally, merging banks tend to reduce their mortgage lending after
    completing a deal and the decline in mortgage lending is more
    pronounced to Black borrowers. A 2020 study found that while merging
    banks made more loans to prime borrowers, they curtailed lending to
    subprime borrowers after the merger. \11\ These impacts are felt most
    strongly among Black and Hispanic mortgage applicants and already
    underserved communities. \12\
    ---------------------------------------------------------------------------
         \10\ Gam, Yong Kyu, and Yunqi Zhang. Southwestern University of
    Finance and Economics and Nankai University. ``Dismembered Giants: Bank
    Divestitures, Local Lending, and Housing Markets''. 55th American Real
    Estate and Urban Economics Association. January 2019. Pp. 4 and 41.
         \11\ Ratnadiwakara, Dimuthu, and Vijay Yerramilli. Louisiana State
    University and University of Houston. ``Effect of Bank Mergers on the
    Price and Availability of Mortgage Credit''. September 2020. P. 21.
         \12\ Id. at pp. 1 and 6.
    ---------------------------------------------------------------------------
        Bank mergers continue to drive large numbers of branch closures,
    and this disparately affects places where few branches existed,
    especially rural areas and low-income urban areas. \13\ Between 2008-
    2016, 86 new banking deserts were created in rural areas, according to
    a study by the National Community Reinvestment Coalition (NCRC). \14\
    An updated study showed that bank mergers account for at least some
    branch closures. For example, BB&T and SunTrust Banks closed 565 (16.5
    percent) branches nationally due to their merger into what is now
    Truist Bank.\14\
    ---------------------------------------------------------------------------
         \13\ Jad Edlebi. NCRC Research. ``Bank Closure Update (2017-
    2020)''. Accessed September 2022.
         \14\ NCRC. ``Bank Branch Closures From 2008-2016: Unequal Impact
    in America's Heartland''. Accessed September 2022. Supra n. 7.
    ---------------------------------------------------------------------------
        Additionally, bank mergers have been tied to broader community
    harms, including increases in evictions, increasing rates of debts sent
    to collection agencies, and even rising property crimes. \15\
    ---------------------------------------------------------------------------
         \15\ Supra n. 7. Bord, Pp. 30-32; Garmaise and Moskowitz, Pp. 518-
    523.
    ---------------------------------------------------------------------------
        Bank mergers' harmful effects also extend to small businesses.
    Community banks have traditionally specialized in lending to local
    entrepreneurs and farmers. When banks consolidate, however, small
    business lending declines, as bigger banks tend to serve larger
    commercial customers. Thus, bank mergers have hurt small businesses by
    reducing the supply of credit, \16\ and increasing the cost of credit.
    \17\ Small business lending is particularly affected when a community
    bank is acquired by a nonlocal bank. \18\ Scholars have linked bank
    consolidation to lower rates of small business formation and adverse
    effects for their local economies, including decreases in commercial
    real estate development, new construction, and local property values.
    \19\ Communities affected by bank mergers also suffer rising
    unemployment, declines in median income, and rising income inequality.
    \20\ These damaging impacts historically have disproportionately
    disadvantaged people of color, women, people with limited English
    proficiency as individuals as well as the communities where these
    people live.
    ---------------------------------------------------------------------------
         \16\ Berger, Allen N., et al. ``The Effects of Bank Mergers and
    Acquisitions on Small Business Lending''. 50 J. Fin. Econ. 187, 217,
    222. 1998; Craig, Steven G., and Pauline Hardee. ``The Impact of Bank
    Consolidation on Small Business Credit Availability'', 31 Journal of
    Banking and Finance 1237, 1248-58. 2007; Sapienza, Paola. ``The Effects
    of Banking Mergers on Loan Contracts''. 57 Journal of Finance 329, 364.
    2002.
         \17\ Supra n. 7. Garmaise and Moskowitz, P. 515; Supra n. 12,
    Sapienza, pp. 329, 364.
         \18\ Jagtiani, Japa, and Raman Quinn Maingi. ``How Important Are
    Local Community Banks to Small Business Lending? Evidence From Mergers
    and Acquisitions''. Pp. 18-20. Working Paper. Revised August 2019.
         \19\ Supra n. 7. Garmaise and Moskowitz, P. 515.
         \20\ Id. at p. 518.
    ---------------------------------------------------------------------------
        Bank Mergers exacerbate systemic risk. As the Federal Reserve's own
    research demonstrates, distress at one large bank poses a significantly
    greater systemic risk than distress at a number of smaller banks with
    equivalent total assets. \21\ Due to recent mergers, PNC, Truist, and
    Capital One are now bigger than Washington Mutual, Countrywide, and
    National City when they failed in the 2008 financial crisis. \22\ Large
    bank mergers can exacerbate existing problems, such as the ``too-big-
    to-fail'' dynamic, as well as related problems, such as when banks
    become ``too-big-to-manage.'' \23\ ``Too big to fail'' describes a firm
    that is so deeply ingrained in an economy that its failure would be
    disastrous to that economy. Too-big-to-fail status can distort
    competition in banking markets by allowing large conglomerates to enjoy
    more favorable financing than their smaller rivals. \24\
    ---------------------------------------------------------------------------
         \21\ Lorenc, Amy G., and Jeffery Y. Zhang. ``The Differential
    Impact of Bank Size on Systemic Risk'', Fed. Reserve Bd. Fin. and Econ.
    Discussion Series, Working Paper No. 2018-066, 2018. Pp. 12-18.
         \22\ Wilmarth, Arthur E. ``Raising SIFI Threshold to $250B Ignores
    Lessons of Past Crises''. American Banker. Feb 2018.
         \23\ Kress, Jeremy, C. Kress, ``Solving Banking's `Too Big To
    Manage Problem' ''. 104 Minnesota Law Review 171. 2019. Pp. 186-192.;
    Menard, Lev. ``Too Big To Supervise: The Rise of Financial
    Conglomerates and the Decline of Discretionary Oversight in Banking'',
    103 Cornell Law Review, Pp. 1527, 1583. 2019.
         \24\ Balasubramnian, Bhanu, and Ken B. Cyree. ``Has Market
    Discipline Improved After the Dodd-Frank Act?'', 41 Journal of Banking
    and Finance. Pp. 155, 165. 2014; Acharya, Viral V., et al. Working
    Paper No. 79700. ``The End of Market Discipline? Investor Expectations
    of Implicit Government Guarantees''. February 2016. Pp. 30-33.
    ---------------------------------------------------------------------------
        The mergers that came as a result of the 2023 banking crisis
    further fueled ``too-big-to-fail'' and ``too-big-to-manage'' risks.
    During the 2023 crisis triggered by SVB, the agencies acknowledged
    systemic risks of megabanks getting too big to manage and the
    Government subsidy in the form of an implicit too-big-to-fail backstop
    that the Government provides to the biggest banks when they or their
    key markets are in distress.
        However, too-big-to-fail risk was amplified with JPMorgan Chase's
    acquisition of First Republic, which inflated the size of JPMorgan,
    already the Nation's largest bank, by $200 billion. Financial analysts
    hailed it as the firm's ``best deal in decades,'' estimating the deal
    could hand JPMorgan another $1 billion annually. \25\ While the
    transaction received regulatory approval from the FDIC--required by law
    to accept the highest bid and lowest cost to the Deposit Insurance
    Fund--it also was approved by the OCC, which is legally obligated to
    consider whether the proposed transaction poses a risk to the stability
    of the financial system due to an increase in size of the combining
    institutions.
    ---------------------------------------------------------------------------
         \25\ `` `First Republic (FRC) May Be Best JPMorgan (JPM) Deal in
    Decades', Dick Bove Says''--Bloomberg, Breanna Bradham, May 1, 2023.
    ---------------------------------------------------------------------------
        As a result, JPMorgan's acquisition of First Republic bank was
    approved without reckoning with ``too-big-to-fail'' and ``too-big-to-
    manage'' risks to the financial system and the public. \26\ The
    American public would be better served by the agencies evaluating
    ``emergency'' sales through a lens broader than just the least cost to
    the insurance fund, including the resulting effects on financial
    stability, ability to effectively manage the combined entity,
    anticompetitive impacts, and other negative economic consequences not
    beneficial to communities served or the economy. The least cost
    calculation criteria should also be more transparent.
    ---------------------------------------------------------------------------
         \26\ `` `First Republic (FRC) May Be Best JPMorgan (JPM) Deal in
    Decades', Dick Bove Says''--Bloomberg, Breanna Bradham, May 1, 2023.
    ---------------------------------------------------------------------------
        It is also worth noting that, when the Fed assessed SVB's
    acquisition of Boston Private Bank in 2018, it discussed the risk to
    financial stability only qualitatively, did not disclose any
    quantitative metrics used and did not disclose any assessment of the
    impact of the merger on the communities that the acquired bank served.
    The Fed approved SVB's application and, without having shown its work,
    noted that the resulting ``organization would not be a critical
    services provider or so interconnected with other firms or markets that
    it would pose significant risk to the financial system in the event of
    financial distress.'' This was a conclusion that subsequent events
    proved to be quite wrong.
    Needed Actions
        We strongly urge the banking agencies to act swiftly to strengthen
    the Bank Merger Guidelines and be full-throated and clear that robust
    regulation and competition, not consolidation, will lead to a
    healthier, safer, and more vibrant financial system.
        Those opposed would have us believe that we need deregulation to
    check concentration, pointing to failures to effectively supervise SVB.
    We disagree. A supervisory failure does not, as some would have us
    believe, indict all supervision as being ineffective. It argues for
    stronger regulation and effective supervision. As the Fed's analysis
    noted, specific DE-regulatory choices, urged by banks and their trade
    associations, led to the oversight failures that enabled SVB's
    excessively risky actions and led to its failure. Also regulations to
    promote competition, level playing fields and oversee systemic risk do
    not categorically squelch innovation and heterogeneity of business
    models; they can in fact do the opposite.
        As the recent crisis reminded us once again, banks are profoundly
    subsidized by the public, and they must function to serve the needs of
    the American people and businesses, not the other way around--and it is
    regulators' critical task to ensure this is so. We recommend the
    following actions to reduce the risks of dangerous concentration and
    promote a safer more competitive financial system:
    Banking Agencies
        The banking agencies should pause merger approvals until
            their Bank Merger Guidelines are strengthened.

        The banking agencies should work together to conduct a
            retrospective analysis of the impact of prior banking mergers
            on consumers and communities, including with regard to the
            costs and prices of banking products, the availability and
            quality of credit for households and small businesses.

        The banking agencies should fulfill their statutory
            obligation to determine how a proposed merger will benefit the
            needs of its community with a robust Community Benefits
            Assessment. This assessment should consider other relevant
            factors in addition to a bank's CRA rating such as:
            guaranteeing that a merger is in the public interest by
            requiring CFPB approval if consumer products are involved;
            requiring disclosure of discussions between the institutions
            and regulators pre-filing of a merger application; requiring
            regulators to examine the anticompetitive effects on individual
            products; and requiring an evaluation of merger impact on
            product quality or potential exploitation of consumers.

        The banking agencies should demand evidence during the
            merger review process that mergers will produce measurable
            benefits to impacted consumers such as expanding credit,
            lowering fees, expanding product offerings and increasing
            access to low cost bank products and services, especially in
            BIPOC communities.

        The supervising banking agency(ies) should evaluate, in
            coordination with Federal and State banking agencies, and State
            AGs, the potential negative impact proposed mergers could have
            on systemic risk including wholesale investment banking,
            managerial competence, and compliance with consumer protection
            and other banking laws.

        The banking agencies should apply appropriate skepticism
            for banks subject to enforcement actions or with large numbers
            of consumer complaints at the FTC and the CFPB and coordinate
            to review the consumer protection and fair lending record of
            proposed merging banks, the cost structure and availability of
            account and loan products, the performance serving lower-income
            applicants and applicants of color in providing mortgage, small
            business, and other loan products.

        The banking agencies and DOJ should more rigorously enforce
            and monitor Fintech companies and major tech platforms that
            enter into quasi-banking businesses for anti-trust concerns
            related to product tying, collusion, vertical mergers and
            arrangements as well as horizontal mergers between fintechs.
    Department of Justice
        The DOJ should lower the HHI threshold for enhanced
            scrutiny of proposed mergers.

        The DOJ should determine whether common ownership of banks
            by large asset managers causes competitive harms in ways not
            captured in the current HHI analysis.
    Federal Deposit Insurance Corp
        The banking agencies and Congress should include
            consideration of other criteria such as impact on systemic risk
            and on communities and small businesses. The FDIC should assess
            ways to improve least cost decision criteria, at a minimum, to
            make it more transparent.
    Federal Reserve
        For any firm offering deposit-like obligations via online
            platforms, the Federal Reserve or other relevant agency should
            regulate these products as deposits so they can not be issued
            without the approval of banking regulators.

        To conclude, the above proposals are needed to protect the American
    public and combat the hands-off approach to merger reviews that has
    resulted in increased consolidation and inflicted substantial harm on
    the economy, small businesses and communities, rural and Black,
    Indigenous, (and) People of Color communities.
        Thank you for your time and consideration of these points. We would
    greatly value your support.
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