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Will Dodd-Frank Prevent New Megabanks?

August 16, 2011 - by Donny Shaw

Last year’s Dodd-Frank financial reform bill didn’t directly fix the too-big-to-fail problem that necessitated the 2008 bailouts. Instead, it allowed the big banks to grow even bigger, but gave regulators new authority to require the big banks to report more information to the government and force them to follow stricter rules. It also gave regulators new guidelines to consider when deciding whether or not to allow bank mergers that could create new too-big-to-fail entities. Basically, the bill took a noncommittal approach to addressing issues of bank size and interconnectedness. Congress punted the big decisions off to regulators and made it possible for regulators to take drastic action, but gave them a lot of leeway to maintain the status quo if they so choose.

These provisions of the bill are about to get their first big test. Capital One, currently the ninth largest bank-holding company in the U.S., has reached an agreement with the Ducth ING Groep to purchase their U.S. arm, ING Direct. They are planning to then turn around and leverage assets gained in that deal to purchase HSBC’s subprime credit card division. The acquisitions would make Capital One the fifth largest bank in the U.S., right behind such infamous too-big-to-fail giants as Bank of America, Chase, Citigroup, and Wells Fargo. It would mean that financial assets and power in the U.S. would become even more concentrated in a small group of top corporations.

In Section 163 of Dodd-Frank, the Federal Reserve Board of Governor’s is given new guidelines to consider when deciding whether or not to approve the acquisition of one large bank by another large bank. “The Board of Governors shall consider the extent to which the proposed acquisition would result in greater or more concentrated risks to global or United States financial stability or the United States economy,” the bill states.

This language is typical of the bill. Far from being a dictate from Congress (i.e. no mergers that will create new banks with more than $xxx in assets), it doesn’t even give the Fed a specific directive to reject an acquisition that would result in more concentrated risks. But it clearly does provides them with justification to reject it on those grounds.

In June, Fed Board of Governors member Daneil Tarullo said that regulators should oppose mergers that increase risk in the financial system unless there is a significant public benefit. “The regulatory structure for SIFIs [systemically important financial institutions] should discourage systemically consequential growth or mergers unless the benefits to society are clearly significant.” So far, though, it’s not clear what the public benefit of a bigger Capital One might be. Recent research from the New York Times shows that Capital One has basically eliminated their small business lending in recent years. In 2006, they approved $228 million in small business loans, but by 2010 that lending had been reduced to just $600,000 nationwide. It’s by far the most dramatic drop-off in small business lending by any of the top-25 banks the Times looked at.

The National Community Reinvestment Coalition is running a letter-writing campaign asking the Federal Reserve to extend the public comment period on the acquisition by 60 days and to hold public hearings in at least 5 major cities before the deal is approved or rejected. “If the Capital One acquisition is approved without substantial regulatory review, it will signal a continuation of a regulatory culture that brought us the foreclosure crisis, the financial crisis and financial institutions that were Too-Big-to-Fail and are even bigger today,” they write. They’re asking for letters to be submitted by August 22nd.

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