The world’s largest bank merger in more than a decade has been proposed, and poses concerns many are saying we need to pay attention to.
This proposed merger, with BB&T Corp purchasing SunTrust Banks Inc. for $28.2 billion combines two regional lending powerhouses and creates the sixth-largest U.S. retail bank in the U.S.
This is raising red flags on many levels with many key Democrats on Capitol Hill concerned that the deal merging the two bank giants will create another “too big to fail” bank.
Elizabeth Warren has commented, “The Board’s record of summarily approving mergers raises doubts about whether it will serve as a meaningful check on this consolidation that creates a new too big to fail bank and has the potential to hurt consumers.” She believes regulatory changes could “make matters even worse” and cited Yahoo Finance’s reporting on favorable conditions in the bank M&A space that could spur more industry consolidation in 2019.
Our present administration and its appointees at the Federal Reserve Board have eased regulations and signaled a more relaxed approach with the country’s biggest banks; so the merger would create a new bank, with more than $400 billion in assets.
“This will be a meaningful gauge of regulatory comfort with bank mergers,” said Isaac Boltansky, policy research director for Compass Point, an investment bank. For the biggest banks, he said, “my sense is that there is still a regulatory hesitancy.”
Many are concerned that this merger could signal the start of a wave of consolidations that leaves customers with fewer choices, regardless of the merging bank’s executives claim that the new institution would be able to save money by shutting side-by-side bank branches and cutting overhead costs, and thus investing in new products and services for customers.
“The Fed will look at how they have been operating in their communities, have they done the right thing to help all groups of people,” said Stephen Nielander, an adjunct lecturer at San Diego State University and a partner at financial services firm Cerity Partners. The Fed will also focus on the firms’ financial capability and management capability.
Jaret Seiberg, an expert on financial regulation at WRG Financial Services, said he expected the deal would win regulatory approval, although “It’s certain this will trigger some political criticism on Capitol Hill … We’re in uncharted waters with Rep. Maxine Waters, now at the helm of the House Financial Services Committee,” he said in a note to clients. “Waters might ask so many questions that it slows down the evaluation of the deal.”
The weakening of Dodd-Frank last year by raising the threshold for stricter capital requirements and regulatory scrutiny – from $50 billion in assets to $250 billion – caused me some concerns. In 2015, Jill Castilla, President and CEO of Citizen’s Bank of Edmond (Ok), says, “There is a lot of regulatory fatigue. I think there’s maybe a greater temptation to merge because of compliance costs and the economies of scale you’re able to gain when you combine.”
This merger raises the issues of the unfair competitive advantage that the too big to fail banks have.
The irony is that Dodd-Frank, in an attempt to reign in the abuses of the TBTF banks increased the costs of compliance for all banks, such that only the very largest of the TBTF have the scale to handle the increased compliance costs and make the required investment in new technology, products and services to have a competitive advantage in the marketplace. In fact, over the last decade, the largest of the TBTF banks have dramatically increased their market share, with J.P. Morgan Chase, Bank of America and Wells Fargo increasing their deposit base by over $2.5 trillion. Thus it is increasingly difficult to effectively argue against further banking mergers when it can be demonstrated that only the larger banks have the economies of scale which can accommodate both the higher costs of compliance as well as the technological investments to compete with the very largest banks in the market place.
This is why I and many others have called for the breakup of the large banks, followed by significant deregulation of banking to restore free competition and eliminate the increasing dependence our country has on maintaining the banking dominance at all costs.
If banks continue to consolidate, will the economy become too dependent on large banks thus guaranteeing we will have to bail them out once again if there is another financial crisis?
Are we moving toward another too big to fail crisis? Even as the Wall Street Journal notes, “The real worry is that bank consolidation will make the financial system less resilient during a panic.”
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
