WASHINGTON — Lawmakers are poised to reverse a policy that permitted the two biggest thrift deals of 2008.
A provision tucked in the massive regulatory reform bill by House Financial Services Committee Chairman Barney Frank would require regulators to consider thrift deposits when calculating whether a merger violates the federal ban on any one institution from controlling more than 10% of the nation's deposits.
Frank said the measure would close a "loophole," and observers noted that the policy, had it been in place, would have prevented the purchases of Countrywide Financial Corp. and Washington Mutual.
If lawmakers adopt the change, some sources urged Congress to adopt a regulatory exception.
"The question is: Are there any safety valves in the legislation that if there really were an emergency, where nothing else could be done?" said Ernest Patrikis, a partner at White & Case LLP. "Is there going to be an 'out' for cases where it's agreed by the powers that be that this transaction should take place and is in the national interest?"
The regulatory reform bill is still being debated in the House, but it is expected to be approved by Friday.
In 2008, Bank of America Corp. bought Countrywide to prevent the thrift's failure, and JPMorgan Chase & Co. bought the banking operations of Wamu, which had failed, in a transaction that cost the government nothing. In both cases, the exemption was necessary because the buyers were near or at the deposit cap.
Some observers argue that, with the demise of Countrywide and Wamu, the number of other big thrifts that would potentially be affected is minimal.
"There just aren't that many big thrifts left that you would have to worry about that," said Ralph "Chip" MacDonald, a partner in the Jones Day law firm in Atlanta.
At Sept. 30, nine thrifts had $20 billion or more of assets, the largest being $90 billion-asset ING Bank in Wilmington, Del., and the $73 billion-asset Sovereign Bank in Philadelphia.
Several observers said a tighter deposit cap would also be consistent with lawmakers' clear intent to control the size of institutions whose failure could have a systemic effect on the economy.
"The mood of Congress is to try to maintain a limit on how large banks can get. This is one way of enforcing that," said Frank Bonaventure, a principal at Ober, Kaler, Grimes & Shriver. "I'm not sure if there are any super-large thrifts out there that could negatively impact the economy."
Under the current national deposit cap, a takeover of a commercial bank is not allowed if the buyer's subsequent deposit base would exceed 10% of U.S. deposits. Banks are allowed to exceed the deposits cap through organic growth, and thrift acquisitions are allowed even if the buyer is already above 10%.
But Frank's amendment would effectively prevent further thrift acquisitions by the three banking companies with the biggest deposit shares. B of A already exceeds the cap, with $909 billion in deposits and a 12% market share; Wells Fargo & Co.'s $734 billion in deposits give it a 9.7% share, and JPMorgan Chase's $621 billion in deposits are 8.2% of the nation's base.
If it had been law two years ago, the amendment would probably have prevented the Countrywide and Wamu takeovers. B of A's purchase of Countrywide, which had about $57 billion in deposits, left the banking company with 10.9% of the nation's deposits. JPMorgan Chase's Wamu purchase left it with 11% of the deposit base.
"Both transactions would likely have been problematic if the thrift deposits were applied toward establishing the caps," said V. Gerard Comizio, a partner in Paul, Hastings, Janofsky & Walker LLP.
On Tuesday, Frank said there was never any good rationale for leaving thrift acquisitions out.
"Why are thrift deposits different from all other deposits? The answer is: They are not," he told reporters. "There was not a policy decision" to exempt thrifts. "It was a loophole."
Still, reversing the exemption could have significant competitive implications for the nation's largest banks, some observers said.
"What you could end up seeing is something that's not dissimilar to what happened in the more active days of banks' being subjected to the antitrust laws — that is, you're going to see situations where banks may have to divest branches or parts of operations … so that they don't go over the cap," said Comizio.
MacDonald said the amendment could give regional players a leg up on competing with the biggest banks, through thrift acquisitions that the largest institutions could not touch.
A thrift acquisition is "going to create a bigger bank somewhere, but it won't be one of the biggest banks buying it," he said. "If you gave a regional bank the ability to buy a large thrift, that would be a really nice platform to be competitive nationally. … It would give them the ability to diversify funding sources and loan sources, as well as geographic diversification that might be useful in reducing risk."
MacDonald added that the measure could also motivate large banks that have considered but not executed a retail operations downsizing.
"Large banks have been looking to rationalize their branches for awhile," he said.
"This may give them some impetus to do that. But they'd have to do a lot of branch rationalization to make a difference on their cap."