The fact that another financial crisis has hit so soon after 2008 should give us all pause. Today’s crisis is allowing banks that are already “too big to fail” to grow even larger. This week, JP Morgan Chase announced plans for an “unmatched” $15.7 billion spending spree in new investments in an effort to apparently grow even bigger. Who gets left holding the bag if such spending doesn’t work out?
Bank failures are ultimately caused by bad decisions and poor risk management by bank executives. The “solution” regulators are relying on in the face of the recent regional bank failures — merging failing banks with the Wall Street behemoths — paves the way for potential further harm to consumers and utterly disregards laws in place that were meant to prevent banks from growing too large in the first place.
This “solution” puts all of us — but especially communities of color — at risk of even more financial predation and harm, and subjects us to a greater probability of needing to rely on megabanks that have long histories of harming communities of color through racial discrimination in lending, including higher interest rates, and avoiding loans in low- and moderate-income areas.
In 1994, Congress passed the Riegle-Neal Interstate Banking and Branch Efficiency Act, which officially sanctioned the creation of national banks by creating a standard for how banks could expand across state lines. At the time, there was widespread concern that a flurry of interstate bank mergers would lead to banks that were too big to fail, had monopolistic power in local geographies and charged higher fees. To address these legitimate concerns, Congress included a provision that prevented any bank from acquiring another if the resulting merged bank would control more than 10% of total deposits nationally or 30% in any given state. Once banks reached the cap, they could no longer acquire or merge with other banks. These regulations aimed to slow the growth of banks, which ultimately protects consumers.
We knew in 1994 what we’re ignoring today: Massive banks can take the biggest risks with our money, which ultimately puts Americans’ money at the greatest risk and hurts common people.
When JPMorgan Chase acquired the assets of the failed First Republic Bank on May 1, the bank already held nearly 12% of all deposits nationally, well north of Riegle-Neal’s national deposit cap. Not only did regulators allow the deal to go through with an exception to the 10% rule ostensibly because the deal involved a failing bank, but they actually helped arrange the sale.
The JPMorgan Chase acquisition of First Republic’s assets was the first time regulators decided to ignore the national deposit cap since the days of the 2008 financial crisis. That year, regulators allowed Bank of America and JPMorgan Chase to acquire failing competitors even though the deals put both merged banks above the 10% threshold. Subsequently, regulators engineered what was essentially a shotgun marriage between Wells Fargo and Wachovia. There were not any loopholes that justified this. The deal appeared to blatantly violate the national deposit cap. Regulators approved the transaction anyway, presumably because of the urgency created by the financial crisis.
Since then, the banking industry and regulators alike seem to act like the deposit cap no longer exists. It does — and for good reason.
We know consolidation hurts consumers — it’s the base logic behind all anti-trust laws. Consolidation in the banking industry and the rise of megabanks is bad for the economy. However, when customers deposit their money in a community bank, that money goes toward supporting the local economy because community banks are more likely to make loans to local small businesses, which are the real engines of job growth. Meanwhile, big national banks not only fail to offer the same benefit to a local economy, but they are more likely to use customer deposits to engage in potentially risky practices that threaten the global economy and lead to job destruction due to their sheer size.
Furthermore, “too big to fail” national banks — like Bank of America, JPMorgan Chase, Wells Fargo and Citigroup — have a long documented history of predatory and discriminatory behavior, targeting communities of color for wealth and resource extraction. These behaviors are not past problems: In the past decade, each of these banks has faced lending discrimination cases.
Yet, worried depositors are moving their money out of smaller community banks and into big banks because they do not want to risk their deposits in the event of a bank failure.
JPMorgan Chase and Bank of America each now have banking relationships with about half of all households in the United States. Wells Fargo serves one in three American households. A fundamental rule of economics is that as industries consolidate, prices go up. The banking industry is no different. As banks get bigger by buying up other banks, customers have fewer options and fees go up. This hits poor, Black and Latino families the hardest, and who often have less disposable income and, therefore, a lower ability to pay fees.
As we respond to yet another bank-caused crisis, we need Congress and banking regulators to put the interests of customers and taxpayers ahead of bank executives and shareholders.
The 10% deposit cap should not only be enforced but strengthened. Banks that are above the 10% deposit cap are too big to fail and too big to regulate effectively. They should be broken up into smaller banks that do not pose systemic risk. Regulators should rigorously enforce the Volcker Rule that Congress passed in 2010 to prevent banks from making risky and speculative investments with customer deposits.
When banks do fail, regulators should incentivize and arrange mergers with smaller, well-run, community-oriented banks that have a record of investing in local communities, rather than extracting from them like the big Wall Street giants have been caught doing.
Over the past century, federal bank regulators’ appetite for risk in the financial system seems to have returned to Roaring ‘20s levels. Laws and regulations that had been put in place to prevent banks from growing too large or taking on too much risk have slowly been repealed or ignored, and through their actions, regulators are effectively incentivizing the further growth of banks that are already too big.
Congress and regulators can start to fix this crisis by strengthening bank regulations to prevent behavior that makes bank failures more likely, as well as enforcing regulations that prevent the growth of megabanks.