Congress's scrutiny of tech giants could be blessing and curse for banks

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WASHINGTON — A Democratic proposal to reform antitrust law to limit the reach of the largest technology firms may hearten banks, but analysts say the financial services sector is not immune from a revived focus on breaking up megacompanies.

In the sweeping 400-page report by the House Judiciary Committee’s antitrust law subcommittee, lawmakers laid out a sweeping case for reforming laws that allow the colossal growth of just a handful of tech giants: Amazon, Apple, Facebook and Google.

“To put it simply, companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons,” the report said, adding later that “the totality of the evidence produced during this investigation demonstrates the pressing need for legislative action and reform.”

The U.S. banking industry has long worried about the financial ambitions of leading tech firms and even the possibility that one of the four Big Tech giants could charter or acquire a bank with significant competitive advantages at the expense of traditional financial services firms. While none of the four companies have applied for banking powers, past reports have circulated of Google and Amazon being among those having engaged with bank regulators.

The report authored by subcommittee staff did not specifically focus on the tech giants' financial services aims, but rather on how their global reach and impact on sectors like the news media could threaten democratic norms.

In the sweeping 400-page report by the House Judiciary Committee’s antitrust law subcommittee, lawmakers laid out a sweeping case for reforming laws that allow the colossal growth of just a handful of tech giants: Amazon, Apple, Facebook and Google.
In the sweeping 400-page report by the House Judiciary Committee’s antitrust law subcommittee, lawmakers laid out a sweeping case for reforming laws that allow the colossal growth of just a handful of tech giants: Amazon, Apple, Facebook and Google.

But observers said tighter restrictions on acquisitions by tech leaders could put them on more equal footing with banks and even discourage their potential interest in acquiring financial technology startups. The report also appears to validate the regulatory regime for bank parents as a potential model for reining in growth of the tech sector.

“A more aggressive antitrust stance would reduce the likelihood that those companies get even deeper into financial services, so it protects some turf for banks that don't have to compete with a Bank of Amazon or an Apple Bank,” said Jeremy Kress, an associate professor of business law at the University of Michigan.

But analysts say that the approach apparently being considered by House Democrats represents a significant change from the past several decades of antitrust policy, raising concerns U.S. businesses across several sectors, including banking. Antitrust policy as it relates to mergers has traditionally focused on how a firm's expansion will affect consumer access to services.

The report suggested that antitrust law should also weigh more global concerns resulting from market concentration by a handful of colossal firms. Although an expansion of antitrust laws would be uphill battle in Congress even if Democrats take control of the Senate and White House in November, such a shift could revive calls to break up the biggest banks.

“For the past 40 years, antitrust law has been concerned with one thing — consumer welfare,” said Mark Ryan, a partner at Mayer Brown and former director of litigation for the U.S. Justice Department’s antitrust division. “What I see in [the congressional report] is something else. There’s a lot in here about concerns over the impact of these megafirms on democracy — the political power that is being accumulated by the wealth and market position of certain tech companies.”

“I think, yes, there could potentially be ripple effects to other industries,” Ryan said.

To some extent, analysts say it is possible that large banks will be inoculated from any push to expand antitrust laws given their longstanding regulations and restrictions, particularly under the Bank Holding Company Act. In fact, the authors of the report explicitly point to the regulatory structure of bank holding companies as a possible model for tech firms.

“If you have that model among tech companies, it obviously changes the competitive dynamic,” said David Portilla, a partner at Debevoise. ”With a system using the Bank Holding Company Act as a model, expansions into new lines of business from a regulatory point of view would require deliberative, complicated analysis.”

The Department of Justice has begun looking at narrower changes to bank merger antitrust policy. A report last month by the department's antitrust unit said it was considering revisions to the bank merger review process, in part to address questions about transactions involving nontraditional firms.

Under a bank holding company model for tech firms, designated companies would likely have new restrictions and scrutiny placed on the types of firms and businesses they can acquire. That shift could force large tech companies to face a similar dynamic as banks and fintechs do today. Historically, fintechs wanting to avoid bank-caliber supervision have typically opted for partnerships, rather than acquisitions.

“It's usually easier for these [fintech] firms to find a partnership with bank holding companies rather than be acquired,” said Portilla. “If you think about that model being applied under a separation regime for data platforms, it may be that we have similar dynamics that would follow.”

Banks may also take refuge in the fact that, although the U.S. global systemically important banks hold a huge chunk of the industry's assets, that market concentration is not as extreme as it is in the four tech giants.

“There are more than 5,000 banks and other commercial financial institutions in the U.S., including many large firms that compete fiercely with one another,” said Ryan. “It's hard for me to imagine that any banks would have the same market position that these tech companies do.”

At the same time, other analysts argue that anti-competitive dynamics — particularly around bank mergers and acquisition — remain a problem for significant parts of the banking system.

“Just in terms of price effects, we know that bank mergers often have really bad consequences for customers,” said Kress, who argued in the past for reform of bank merger oversight. “Pricing for products goes up, availability of loans goes down, costs of transactions go up. And the worst of those effects are felt in low- to moderate-income communities and among small businesses.”

“A lot of bank regulation is built around safety and soundness. But counterintuitively, we know that monopolies and anti-competitive practices can be good for safety and soundness,” Kress added. “In an anti-competitive market, when banks can charge above-market prices, that enhances their stability because they have monopoly profits. So it's just not sufficient to rely on safety and soundness regulations to address anti-competitive conduct. It's not what they were built for.”

Other analysts say such concerns are largely overblown in the modern economy. “Banks simply are not in the same competitive position than they were in the 1980s,” said Thomas Vartanian, a law professor at George Mason University's Antonin Scalia Law School. “They have continually lost ground to other people coming into the financial services who are not regulated as well as they are.”

The staff report points to tech companies that have fueled “conflicts of interest” by “functioning as critical intermediaries that are also integrated across lines of business.”

As a result, the authors recommended that “Congress consider legislation that draws on two mainstay tools of the antimonopoly toolkit: structural separation and line of business restrictions.” “Congress has legislated similar prohibitions in other markets,” the report says later. “The Bank Holding Company Act of 1956 broadly prohibited bank holding companies from acquiring nonbanking companies.”

The authors of the House report made clear that many of their recommendations to reform antitrust authority would require legislation, which would require a Democratic sweep of government.

However, Kress says that if the Justice Department's changes to the bank merger review process weaken antitrust enforcement, a new Democratic administration could take the department's rulemaking process in another direction if former Vice President Joe Biden wins the White House in November.

“If DOJ shepherds in an overhaul in December, January, then it vaults up the priority list for a Biden administration to potentially undo harmful reforms,” said Kress. “ If the Trump DOJ weakens bank antitrust enforcement, it would create a window and an imperative for the Biden administration to come in, undo the damage, and to go affirmatively even farther.”

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