Thirteen years ago, I argued that Washington Mutual was too big to regulate under the Office of Thrift Supervision. Today I must raise a similar concern about BB&T and the Federal Deposit Insurance Corp. I believe the Office of the Comptroller of the Currency or even the Federal Reserve is in a better position to effectively oversee the Winston-Salem, N.C., bank.
BB&T is by far the largest bank regulated by the FDIC and the largest state-chartered bank in the nation that is not a member of the Federal Reserve System. Of the roughly 4,000 bank and thrifts for which the FDIC acts as primary federal regulator, BB&T is the only one with more than $100 billion of deposits and the only one to crack the ranks of the nation's top 10 largest banks. BB&T's deposits are nearly three times the size of the next largest FDIC-regulated bank, whereas the biggest OCC- and Fed-regulated banks are closer in asset size to their second-largest institutions.
The FDIC is primarily known as a regulator of small banks, whereas OCC is much more experienced in overseeing very large banks. Under the supervision of either the OCC or the Fed, BB&T would just be another large bank rather than the dominant one under the FDIC.
Moreover, with recent M&A deals in Pennsylvania, Kentucky, and Texas, BB&T is now the most rapidly growing big bank, increasing both its footprint and level of complexity. This presents new regulatory challenges to the FDIC. But the OCC and Fed are well-prepared to handle such developments.
The most serious concern when one bank is far and away the largest regulated entity at an agency is the possibility of regulatory favoritism. This appears to have been the case with the FDIC during BB&T's 2009 acquisition of the failed Colonial bank—the largest and most important merger in BB&T's history.
The FDIC did not make public in a timely fashion relevant data about BB&T's fair lending and Community Reinvestment Act performance. Had the agency done so, the public response might have scuttled the merger.
BB&T was one of only two top 10 retail banks without an "outstanding" CRA rating at the time of the merger. In fact, it was downgraded from outstanding in 2004 to satisfactory in 2008 because of a serious fair lending violation.
Specifically, BB&T was found to have a pattern or practice of discrimination on the basis of race in violation of the Equal Credit Opportunity Act and the Fair Housing Act. Although the discriminatory violations were isolated to one of the bank's lines of business in certain regions, they were nonetheless serious, substantive rather than technical, and "pattern or practice" as opposed to a one-time issue.
The problem is that the FDIC withheld public notification of its downgraded CRA rating and finding of serious racial discrimination until well after BB&T acquired the failed $22 billion Colonial Bank in August 2009. The information was not made public until September 2010, nearly three years after the exam had been completed.
By contrast, according to my analysis, the FDIC released BB&T's two previous CRA exams in 2004 and 2001 just eight months after they were completed. The two exams before that were released within four and five months.
Why did the FDIC delay releasing BB&T's 2008 CRA exam to such an extent? Would the OCC or Fed have released them in a more timely fashion?
It's likely that the predictable outcry from community groups, Congress and the general public could have interfered with BB&T's bid on the failed Alabama bank or inhibited the FDIC's ability to accept that bid. In that case, Colonial would have gone to the runner-up, TD Bank, which had put forth a fairly close bid .
I formally made these arguments to both the FDIC and the Fed in a 2012 comment when BB&T bought Florida's BankAtlantic. BB&T chose not to respond to my comment. But the FDIC acknowledged the comment by saying they "conducted a review and the results did not substantiate the issues raised." This response is to be expected, considering my recommendation that the OCC or Fed take over the regulation of the FDIC's largest bank.
It's possible that BB&T will switch charters someday. Giving up its dominant position among the ranks of FDIC-regulated banks might not be in the bank's best interests. But it would certainly be in the public interest. Both the OCC and the Fed have much more experience regulating big banks and would therefore be much less likely to display any regulatory favoritism.
Kenneth H. Thomas, an independent bank consultant and economist, is the author of The CRA Handbook and was a lecturer in finance at the University of Pennsylvania's Wharton School for over 40 years.