On June 11, the National Community Reinvestment Coalition (NCRC) hosted a lively discussion on Capitol Hill entitled Beyond Bailouts: Strategies to Achieve a Safe and Sound Financial System for America featuring Simon Johnson, a MIT economist; NCRC’s Jim Carr, and Mike Lutz, Author of Progressive Revolution.  The three speakers hit upon the theme that the largest banks have become too large, creating economic and political risks for the country.

Dr. Johnson asserted that the large banks could no longer manage risks.  His remarks were similar to those earlier in the week by Federal Reserve Governor Daniel K. Tarullo who compared the financial industry to a dense network of opaque relationships in which risk is unknown until one company fails.  The Governor states, “The more apt metaphor is of a dense network whose connections are often obscure to many participants, in which the risk is not simply of counterparty exposure, but of the potential for liquidity problems at a firm with which they have no relationship to affect their own balance sheets and liquidity positions.”

This dangerous state of affairs has prompted numerous discussions of how to avoid “too big to fail” situations in the future.  One policy prescription offered by Dr. Johnson was more vigorous enforcement of the anti-trust laws.  In plain English, place limits on how big any one institution can become through mergers and acquisitions.

Anti-trust law and the Federal Reserve’s current analytical frameworks for considering mergers need to be overhauled.  Currently, a bank cannot acquire another bank if the post-merger bank will control 10 percent of the nation’s deposits.  One bank, Bank of America, is already at the 10 percent limit.  Yet, the question is begged whether a bank of that size can remain safe and sound.   Much ink has been spilled this week discussing the shotgun marriage of Bank of America and Merrill Lynch.  If the Federal Reserve had the power of a do-over, would the Federal Reserve have taken the same course of action in cajoling or coercing this merger?  Was this merger necessary to save the financial industry in this country or did it convert Bank of America into a “zombie” bank.  No one may ever know for sure, but clearly robust discussion and debate regarding industry consolidation is sorely needed.

It is time to revisit other limits on consolidation.  For example, under current guidelines, the Federal Reserve Board cannot approve a merger without ordering divestitures if the post-merger bank has more than 30 percent of the deposits in a state.  Is it wise, however, to allow one bank to own about one third of the deposits at a statewide level.  When a bank becomes that prominent in a state, is it able to exert undue influence over setting bank fees and interest rates?  Is the bank encouraged to take on too much risk when it perceives itself to be immune from competitive pressures?

How should the Federal Reserve measure concentration levels? Are deposits the best measure in today’s financial industry?  Do we need additional data on more types of financial services since banks are also in the insurance and securities business thanks to the Gramm-Leach-Bliley Act of 1999?  Should the Federal Reserve develop and apply separate thresholds for different bank products and order appropriate divestitures if any of the products exceed the established thresholds?

Also when banks become too large, are they less likely to be innovative in terms of meeting their CRA obligations?  Will they be as receptive to local needs and design specialized home or small business products which may need to have different features in various parts of the country.  NCRC has heard over the years from our member organizations regarding how bigger banks can become less flexible and tend to pursue more standardized and uniform products.  Another by-product of consolidation is that fewer mergers occur in future years.  The merger application process is a key time for CRA enforcement.  The recent emergency mergers (JP Morgan and Washington Mutual, Wells Fargo and Wachovia, Bank of America and Merrill Lynch) may have also reduced future opportunities for CRA enforcement.

The Community Reinvestment Modernization Act of 2009 (H.R. 1479) has some important mechanisms to offer alternative enforcement mechanisms to the merger application process.  For example, CRA ratings on a state and local level become more important as lower ratings trigger the requirement for banks to submit improvement plans to their regulatory agency, which must consider public comment on the plans.  Yet, even were H.R. 1479 to pass, it is vital for Congress and the agencies to reconsider and reinvigorate anti-trust policy in the context of regulatory reform.

NCRC’s Jim Carr made the astute observation at yesterday’s forum that policymakers should answer the question whether big banks offer products and services that smaller banks cannot.  If the answer is unclear, either banks should be limited in size or the large banks, which pose significant risk to the taxpayers, should be required to offer extraordinary benefits to the public.  Mr. Carr mentioned a special benefit of providing basic banking services and deposit accounts at cost, with no allowance for profits.  An additional possibility is super-charging their CRA responsibilities; that is creating extra rigorous CRA exams for the largest banks in the country (thoughts in the form of blog posts invited).  Mike Lutz made the point that any victories on the bank policy front will likely to be met with a counter-attack.  Yes, we are in interesting and tough policy times.  Jim Carr repeated the saying, “A national crisis is a terrible thing to waste.” Join us in advocating for a robust anti-trust policy and the passage of the Community Reinvestment Modernization Act of 2009.