[Senate Hearing 118-458]
[From the U.S. Government Publishing Office]
S. Hrg. 118-458
BANK MERGERS AND THE ECONOMIC IMPACTS
OF CONSOLIDATION
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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
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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
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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
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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.
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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.
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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.
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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.
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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\
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\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.
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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.
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\25\ `` `First Republic (FRC) May Be Best JPMorgan (JPM) Deal in
Decades', Dick Bove Says''--Bloomberg, Breanna Bradham, May 1, 2023.
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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.
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\26\ `` `First Republic (FRC) May Be Best JPMorgan (JPM) Deal in
Decades', Dick Bove Says''--Bloomberg, Breanna Bradham, May 1, 2023.
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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.
Additional Material Supplied for the Record
STATEMENT SUBMITTED BY BETTER MARKETS
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY THE BANK POLICY INSTITUTE
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LETTER SUBMITTED BY CUNA
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STATEMENT SUBMITTED BY THE MASSACHUSETTS BANKERS ASSOCIATION
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
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