ICYMI: At Subcommittee Hearing on Economic Policy, Experts Agree with Senator Warren on the Risks of Consolidation in the Banking System, Need for Stronger Merger Guidelines
Hearing
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 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 American history -- two things have become obvious.
First, bank failures remain a serious threat to our economy, putting taxpayers at risk for footing multi-billion-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 can't 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 increases.
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.
The problem seems obvious -- and it 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 or 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 more than 18,000 down 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 this country held a total -- altogether -- of 15% of all bank assets. Today, the top 20 hold more than 65% 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 "raises costs for consumers, restricts credit for small businesses, and harms low-income communities," 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's 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'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 give a clear answer.
But the overall picture is even 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 "open-minded" while considering merger proposals. And then earlier this week, he said, "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."
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 "open to" them. Then the New York Times also reported that Secretary Yellen privately told big banks that she would "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 bank concentration puts a damper on small business growth all across this 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 with us to discuss how we can do that.
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So I'm 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%. 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.
Ms. Harper, let me ask you, what happens to a community when the last small bank in town closes up shop?
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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. 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, the Wells Fargo that just moved into town?
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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're telling me, do the numbers one more time?
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So 82% are coming from the smaller financial institutions, community banks, Credit Unions, others?
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Alright, very interesting, so I try to think about when community banks are gobbled up by bigger banks, small businesses -- which generate about 44% 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's 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?
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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 number of, dollar number of deposits is affected? Is that right?
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Okay. So I also understand from what you're 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's 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?
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And how about you Ms. Philo?
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Okay. 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're 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.
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Thank you. Appreciate it, Senator Reed.
So, I want to take a look at another issue. And that is, the rapid consolidation of our banking system isn't 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 those 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've seen this process up close. And 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've got the money, I can just go buy the other bakery. Right, 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?
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So they have to go to their regulator?
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You have to tell the regulator what they want to do, fill out an application to be able to do it. Okay.
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Okay. 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's 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 look through before there is any approval of going forward with this bank merger? Is that right?
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So there's more! That's not even enough by itself. Go ahead.
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Okay. All right. So a lot going on here.
So the DOJ Antitrust Division takes a look at it after the banking regulators have, and they both have to sign off before you can go forward. Okay, so we have established that banks are a little different than bakeries. Okay, got it. So banks file their application to merge. And both the 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, the purchasing bank, the bank that's doing the buying's main federal regulator, that is their banking regulator, is ultimately responsible for approving or denying a deal. Is that right? So (DOJ) 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?
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Okay, just to make sure I've got this.
So here's what I want to focus on. Since it's the banking regulators that have both the initial information and the ultimate say so on this. What are the banking regulators looking at?
You've been in this world. What is it 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?
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So, you'd look at deposits?
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Okay, so what you're supposed to look at is actually set out in these merger review guidelines. Right? And, as you say, it's 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 regulator's believe that any of those harms could be caused by the merger, what are they supposed to do?
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Factor, and then do what?
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And at least in theory, if there are problems are they supposed to approve?
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I want to make clear, this is what the guidelines were about. At the end of the day, they're not about saying, "Boy, there's a lot of problems, but go ahead. Right, have a great time."
Okay, so they're supposed to deny. You know, so outline this process that is designed to make sure that when a bank merges with another bank, that it doesn't endanger our financial system, it doesn't harm consumers, it doesn't 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 take a look at the data.
Somehow the FDIC, the OCC, and the Fed -- the three regulators here -- have basically never seen a merger they didn't love. Since 2013, the FDIC has received more than 1,100 bank merger applications. And how many did they formally deny? 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 don't 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 one -- 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 years, 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?
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And are we confident that that's exactly what's happened?
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So I think that's a very important point Dr. Faulkender, and is certainly something that I'm 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's not much time to talk about how you spend energy and resources building up your technology when you're 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?
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Yeah, you know, and I get it. People make mistakes, regulators make mistakes, human beings make mistakes. I understand that. But notice, if they're just random mistakes they'll be mistakes in both directions. There will be some times when mergers will be disapproved that maybe would have been okay and not posed risks. And there will be sometimes 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% 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'll 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's a rubber stamp. Sure, there may be a little bit of song and dance around, "Oh, we promised to do this in the local community," or, "We promised to do that." But no indication there's 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?
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That they're actually going to follow the law?
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There we go. So Miss Philo, how about you? Do you agree with President Biden on this?
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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'm 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's clear our bank merger rules need to be tougher. That's why I will soon reintroduce my Bank Merger Review Modernization Act to check consolidation. I'll keep pushing Congress to pass this bill, but this is one time that regulators don't 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.
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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 bank. 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 a rerun of the get bigger through marriage show, the regulators approved J Morgan's purchase of First Republic so that America's biggest bank got $200 billion 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?
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So what else could it have done?
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So it could liquidate the bank?
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It could sell it for parts.
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Or it could sell it in whole to another bidder.
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And when it's choosing among those options, what's it supposed to consider?
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Okay. 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 banks' bids, is that correct? That's what the least cost test means?
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Okay. So Ms. Philo, if a bank, let's just say Bank A, will take over the failed bank assets with a bid. We kep talk about these in bids, like someone's going to make money here. That's not actually what's 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, that FDIC by law has to accept which bid?
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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?
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Okay. 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's going to happen in this purchase.
Okay, so the FDIC, the question is, does the FDIC need more flexibility to evaluate options during the resolution process? And that's what I'm 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 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 is going to cost 11 billion?
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Oh, I love that. Oh, yeah, only the appropriate assumptions.
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Okay. So throughout this, though, it sounds like depending on what assumptions you make on each one of these, you're going to end up with somewhat, 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're going to do.
The FDIC may not have all of the information that it needs to accurately estimate the failing banks assets, its liabilities, get them appropriately evaluated. And any tweaks 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, and, or are these estimates, do they turn out to be pretty precise? What's your sense?
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Yeah, I was thinking about the example, I don't know if you remember that 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's a $1.6 billion, that's a lot of money in that range. So that's 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?
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Yeah. So that's the position we're in, it just kind of turns into, into black box at the end of the day.
You know, I don't 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 us into trouble in the first place. More big bank mergers is not the solution here and we need regulators who understand that.
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I want to thank our witnesses for being with us today, for participating in our hearing.
Questions for the record are due one week from today, that's Wednesday, July 19th.
For our witnesses: once those questions are in, you'll have 45 days to respond to any questions. Again, thank you and before I close, I'd 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's happening right now with bank mergers and where we need to strengthen the bank merger guidelines. So with that, this hearing is adjourned.
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