Fix CRA before cracking down on bank mergers

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Presidential hopeful Elizabeth Warren thinks bank mergers get “rubber-stamped,” and that the approval process is too secretive.

The legislation that the Massachusetts senator and Rep. Jesús “Chuy” García, D.-Ill., recently introduced — the Bank Merger Review Modernization Act — does not begin to modernize the outdated, costly and time-consuming review process that was created more than half a century ago. In fact, the proposal enlarges it.

Bank mergers, like any other corporate combination, are driven by the market as well as the efficiencies and economies of scale that can be achieved. Meaning, the merged bank should be able to provide more products and services more efficiently to its customers. And in so doing, be more profitable.

The underlying boogeyman in this debate is the fear that mergers will create more big banks that can fail and have catastrophic effects on the economy. Several titles of the Dodd-Frank Act of 2010 addressed those risks. So is there still a problem?

Most of Warren’s proposal seems to simply repackage, repeat and add more detail to the requirements of current law. For example, it would require the Consumer Financial Protection Bureau to approve bank mergers. Yet the CFPB already has an approval role in bank mergers since the agency’s head sits on the board of the FDIC, which decides on many bank mergers.

Given the ongoing cooperation between the CFPB and the prudential bank regulators, creating another 30-day public comment period and regulatory process seems terribly inefficient, with little net benefit.

The Community Reinvestment Act would also become an even larger leverage point than it is today. Under the Bank Merger Review Modernization Act, banks that did not earn the highest CRA rating in two of the last three years would be prohibited from merging with any bank smaller than themselves.

This drastically reduces the number of banks that would be eligible to merge, and would negatively impact the availability and cost of capital for those banks. In turn, it would increase their operating expenses and the price of consumer products.

The bigger problem is that the CRA needs modernization itself. When the CRA was enacted in 1977, most banks couldn’t branch outside their home state and, in some instances, outside their city limits.

In the current borderless world of online transactions involving an increasing number of unregulated fintech companies, there’s a pressing need to reevaluate the most effective ways to serve the financial needs of low- and moderate-income communities. Federal bank regulators are wisely studying that issue, so it makes sense to fix the CRA first before giving it a gatekeeper role in the bank merger process.

Warren finds it peculiar that most bank mergers are approved. She also dislikes the fact that banks and regulators routinely have pre-filing meetings. She suspects something sinister, based on recent comments. But these conclusions seem to misunderstand the process.

There is very little that regulators don’t know about the merging banks before they propose to merge, given how closely banks are regularly examined. Mergers that are not likely to be approved are rarely proposed since there is continuous back-and-forth between banks and their regulator. That is efficient.

Warren’s proposal would require more transparency about those suspicious pre-filing meetings. Fair enough. But if that transparency discourages mergers from happening, those in favor of safer banking practices and consumer protection will have shot themselves in the foot.

These meetings provide an opportunity for banks to be frank, and regulators to leverage the situation by requiring improvements in performance and compliance before the merger can be filed.

Discouraging candid, pre-filing meetings by taking it public will increase the number of bank merger disapprovals because applications that might not have otherwise been filed, will be. That hardly seems like progress.

The proposed legislation would also impose the Basel committee’s mathematical standard of evaluating systemic risk on bank mergers. Again, Dodd-Frank imposed extensive systemic stability requirements on financial institutions and their mergers in 2010. And the jury is still out on the effectiveness of many of those regulations.

Making the process more formulaic while further removing regulatory judgment and discretion from it will damage rather than help developments in regulating systemic risk.

Finally, the legislation would require specific capital adequacy findings; antitrust analysis of the impact of the merger on individual bank products; and a review of the risk management skills of the banks’ executives. All of these are already stock parts of the merger review process that has continued for decades.

Warren and García should be given credit for focusing attention on the need to modernize the bank merger process. The proposed legislation just misses the mark on what needs to be modernized.

For starters, it shouldn’t take a year to review a merger in today’s technologically enhanced world.

If some member of Congress believe that bank mergers should be prohibited, the issue should first be studied and subject to debate. Forcing the regulators to scrutinize bank mergers to death by a thousand cuts only increases the cost of credit for American consumers in the end.

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M&A CRA Dodd-Frank Risk-based capital rule Capital requirements Risk-based capital Elizabeth Warren