For more proof that tough times are prompting regulators to get creative, look no further than the Federal Reserve Board's approval of Wells Fargo & Co.'s deal for Wachovia Corp.
The central bank, looking at June 30 data, conceded that Wells would hold 10.12% of the nation's deposits after buying Wachovia. But the Fed argued that the purchase would not violate the federal law barring any company from controlling more than 10% of the nation's deposits, because industry deposits have swelled as investors have fled money market funds.
"If total deposits … are adjusted to account for this level of growth, the combined deposits of Wells Fargo and Wachovia" as of Sept. 30 "would be below 10% of nationwide deposits," according to the Fed's approval order, released late Tuesday.
This is not the first time the Fed has interpreted its way around the 10% cap to approve a deal.
In July, when Bank of America Corp. bought Countrywide Financial Corp. — a company that, like Wachovia, was shaky — the Fed said Countrywide's deposits did not count toward the cap, because its main depository institution was a thrift, not a bank.
Observers said Wednesday that pressure to relax or repeal the cap is likely to build as the government encourages more acquisitions to save faltering banks.
And it is no longer just B of A making the case. It now has allies in both Wells and JPMorgan Chase & Co., which hit the threshold with its recent purchase of Washington Mutual Inc.'s banking operation.
"The Fed will have to tackle these issues repeatedly, because three top banks are all at or above 10%," said Douglas Landy, a banking partner at Allen & Overy LLP and a former lawyer at the Federal Reserve Bank of New York.
Repealing the cap "absolutely should be on the table," Mr. Landy said. "The regulators and Treasury have called on these banks to buy other troubled banks, … and who's going to make the next purchase?"
In the Wachovia order, the Fed said the industry would report deposit growth of at least 3% for the third quarter, raising the total to $7.4 trillion. It also figured combined deposits at Wells and Wachovia grew 0.4% in the quarter, to $731 billion, so under the Fed's assumptions, Wells would hold 9.86% of the nation's deposits after the purchase. (The deal is expected to close in December).
The Fed provided other rationale for its approval. For instance, the 1994 law imposing the cap said that an acquirer would have until the consummation of a transaction to fall below the limit, so Wells and Wachovia would have time to run off deposits.
The order noted that Wells has committed to dump deposits to ensure compliance.
Running off deposits may not be that difficult, since Wachovia had to strain to keep customers as a barrage of bad news about its condition led many depositors to withdraw funds.
If the deal meant Wells was "going to go to 20%, the Fed would have had a bigger problem," said Ronald H. Janis, a partner at Day Pitney LLP in New York. "But they're close. The Fed knows that dumping time deposits is relatively easy. Wachovia had to blitz people with high rates to get deposits. Wells isn't going to let them keep that rate."
Observers said it made sense for the Fed to use updated deposit figures.
"A lot of things have happened between June and September," said Gil Schwartz, a partner in Schwartz & Ballen LLP.
If the deposit limit proves to be an obstacle to easing the crisis, lawmakers may relax it in broader regulatory reform legislation.
"If a large institution is about to go under, and the only alternative available is an entity that would exceed the cap, it seems to me that's where Congress needs to do something," Mr. Schwartz said. "It may be something that Congress is thinking about now by virtue of the fact that we are in potential emergency situations."
Mr. Landy said the Fed's order is not without precedent.
"Prior orders have taken into account the fact that deposits are a moving target, because you don't know what date parties will consummate a deal on," he said. "It's not an unfair assumption to assume a flight to deposits from money markets and other industries right now. In times of low returns on securities, deposits generally rise."