It's ironic that in an election year when Democrats have swept to power promising a stronger regulatory hand across financial services, in a year when the reality of too-big-to-fail and systemic risk has been felt keenly, that the law capping national retail deposits at 10 percent is likely to be overturned, allowing the nation's big banks to grow even bigger through M&A. The Independent Community Bankers of America, for one, is not happy and CEO Camden Fine is lobbying to have Congress lower the cap to five percent; he and others argue that the dangers of concentrating power in a few national banks has been made plain and overturning the cap is foolhardy.

But the ICBA faces long odds. The fast moving events of the last few months have altered the on-the-ground reality and made the rule effectively dead, just as the Travelers/Citicorp merger forced Congress to overturn Glass-Steagall, which had for decades separated commercial banks and investment banks. By late October three banks had surpassed the 10 percent barrier after buying weak competitors. Bank of American held the top spot with 11.31 percent market share, Wells Fargo had 11.18 percent, and JPMorgan Chase had 10.2 percent, according to SNL Financial. That brings the top three banks' marketshare to 32.69 percent, compared to a year ago, when the top three banks, BofA, JPMorgan Chase and Wachovia, held just under 23 percent.

Given the precarious state of the financial industry, and the steep discount of virtually all bank assets, "This is not a time to tell banks to shed branches," says Gerald O'Driscoll, senior fellow at the Cato Institute and former vp at both the Federal Reserve Bank of Dallas and Citigroup. "The statute will be adjusted to reality. It's the pragmatic thing to do."

James Barth, a senior fellow at the Milken Institute and a finance professor at Auburn University, says that fears about raising or eliminating the market cap are based on outdated thinking. The notion that a concentration of deposits limits competition and will lead to fewer financing options and higher interest rates on loans is not true. More important than concentration of assets is competition, which he says is alive and well, both from global banks and the ability of new banks to form. "I don't think caps make any sense in this day and age."

But Karen Thomas, evp for government relations at the ICBA, strongly disagrees. "The strength of the economy has always been diversity, and we need public policy that promotes diversity, not consolidation." When banks get too big to fail, the market is skewed by assuming the bank has the backstop of the U.S. government, plus the larger they get the more difficult they are to manage. "At that point you no longer have fair competition, and it increases the danger those institutions pose to the system as a whole."

She points to testimony Fed Chairman Ben Bernanke gave on Capital Hill this fall. "There has been - not just recently but for a number of years a great deal of consolidation, for example, in the banking system, and greater concentration, greater size, in financial institutions. We continue to have in this country thousands of smaller institutions, community banks and regional banks. So, we have a very diverse credit system, including banks, non-banks, and other markets. And I think that's very important to maintain. I don't want to see this country go to the point where we have six large banks and that's basically the credit market. ...

"The real concern is that we have developed in this country a very serious too-big-to-fail problem. ... There are too many firms that are in some sense systemically critical. And that creates problems both for the system itself, because if one fails, it creates tremendous problems, but it also creates distortions in that market discipline will break down if everyone believes that if firm X is not going to be allowed to fail, therefore why should we monitor that firm, why should we care about what they do with the money we lend them, because we know we're going to get it back? So that too big-to-fail problem is a very serious problem, and I do believe it is going to be an important thing to address as we go forward."

So it will be interesting to see how Congress responds. As noted before, the last time market developments forced a policy change was the passage of Gramm-Leach-Bliley to accommodate the merger of Travelers and Citicorp., the outcome has been questionable. Certainly shareholders did not benefit, and in fact Citigroup has since sold off many of the units that made the change in rule necessary.

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