I wrote a column recently in which I argued that the Bank Holding Company Act should be repealed. Ken Guenther, executive vice president of the Independent Bankers Association of America, took exception in a letter to the editor.
One premise of my column was that the Bank Holding Company Act's original purpose was to prevent the spread of interstate banking by Bank of America and others. Since Congress has now declared that interstate branch banking is the preferred national policy, a fundamental underpinning of the Bank Holding Company Act has been removed.
Mr. Guenther argues that "prohibiting interstate banking was only one of the reasons for enacting the Bank Holding Company Act." He states that "the act also protects the banking industry, and ultimately the U.S. taxpayer who backs the deposit insurance funds, from significant safety and soundness concerns and restricts undesirable financial concentration."
One would be hard pressed to discern any reason for Congress to be concerned about the safety and soundness of the banking system in 1956, when the Bank Holding Company Act was put on the books. There were virtually no bank failures or even problem banks during the 1940s and 1950s, much less any caused by the ownership of banks by nonbanking companies.
My experience with Congress over more years than I care to remember is that it usually requires a full-blown crisis before springing to action. On what basis are we to conclude that Congress in 1956 acted to prevent abuses that showed not the slightest inclination of occurring?
It wasn't until 1970 that Congress amended the Bank Holding Company Act to prevent nonbanking companies from owning a single bank. Again, there were virtually no bank failures or even problem banks in the 1960s, much less any caused by the ownership of banks by nonbanking companies.
The Bank Holding Company Act amendments of 1970 grandfathered nonbanking companies that already owned a bank and gave the Federal Reserve Board the authority to revoke the grandfather rights of any company it believed might abuse the privilege. The board subsequently reviewed the ownership of banks by dozens of nonbanking companies, and I am aware of no instance in which it revoked the grandfather rights.
Mr. Guenther goes on to say, "Congress correctly recognized that transactions between banks and affiliated commercial firms can be dangerous." One suspects Mr. Guenther wishes he could retrieve his next words: "What bank would not bend over backwards to arrange a credit for an affiliated entity, even if it meant discriminating against nonaffiliated businesses? What bank would not do everything it could to support a troubled affiliated business entity, knowing that the failure of the business entity would severely damage the reputation and public perception of the bank?"
There are laws on the books that either prohibit or tightly restrict a bank from engaging in either of the hypothetical transactions Mr. Guenther postulates. I know of no bank of any consequence that would knowingly violate any law - nor, I suspect, does Mr. Guenther. If the current laws and regulations are not strict enough, they can be amended.
Which takes us to Mr. Guenther's next argument. "Eliminating the barrier between banking and commerce," he states, "would lead to massively increased financial concentration. It would open the door to Merrill Lynch buying Chase, and then this conglomerate could be bought by Honda. And if this structure failed, the Congress and the American taxpayer would have to belly up to the cash bar."
One might add that if frogs had wings they could fly. Elimination of the Bank Holding Company Act would not automatically allow any person or company to buy any bank, no matter how large or small.
We would be left with the Change in Bank Control Act, which prohibits the acquisition of a bank unless the regulators are satisfied with the integrity, experience, and financial wherewithal of the acquirer. Moreover, the bank and its owner would thereafter be subject to the most intensive supervisory regime known to mankind. Then there is the matter of the antitrust laws, which prevent anticompetitive combinations and business practices.
Mr. Guenther concludes that "all of this concentration would occur among the large banks and commercial entities, to the detriment of community banks and Main Street America. Yet these large conglomerates would not offer many of the services and products offered by community banks, thus causing Main Street to suffer."
On what basis should we conclude that only large banks would benefit from repeal of the Bank Holding Company Act?
There are more than a few owners of community banks that would dearly love to be freed from the restrictions of the act. They own insurance agencies and other businesses that they would like to put under the same corporate umbrella as their bank. It would make life easier for the regulators to have these affiliations formalized.
Repeal of the Bank Holding Company Act is one of most important banking issues that will be debated in this Congress. Everyone is entitled to his or her opinion on the subject, but the debate needs to be based on a common set of facts.
Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is chairman and chief executive officer of Secura Group, a financial services consulting firm based in Washington.