A quick thread on Jay Powell and bank consolidation.
Tl;dr: By waving through bank mergers, Powell has undermined the Biden Administration's professed commitment to enhancing competition. The President should replace him as Fed Chair.
Under Powell's leadership, the Fed has been a rubber stamp for bank mergers.
The Powell Fed approved 95% of merger applications in 2018 (up from ~80% under Obama Admin). The Powell Fed also approved contested mergers at record speed: four months, on average (down from ~1 year).
The Powell Fed has also approved increasingly large mergers.
In 2012, Gov. Tarullo announced a presumption against acquisitions by GSIBs. Powell reversed course, approving Morgan Stanley-E*Trade. Powell also approved Truist and PNC mergers, creating 6 & 7th biggest U.S. banks.
Lax bank merger oversight hurts consumers and the economy. Bank mergers increase costs and reduce availability of financial services. They lead to branch closures. Small bus. lending declines. Negative consequences are particularly harmful for LMI areas. theconversation.com/biden-wants-to…
Powell's permissive approach to bank mergers undermines policies promoting full employment.
Bank consolidation has been shown to lead to higher unemployment and lower wages. If you care about full employment, you should care about bank mergers!
The other contender for Fed Chair, Gov. Lael Brainard, has been much better on bank mergers.
She voted against Morgan Stanley-E*Trade and Toronto Dominion-Schwab. She abstained on PNC-BBVA.
In May, she urged the Board to "undertake a broader review" of its merger framework.
The Fed Chair is critical to bank merger policy for two reasons:
1. The Chair sets the agenda.
2. It's a numbers game. The Biden Admin likely needs Powell's seat to have a majority in favor of stronger merger oversight. politico.com/newsletters/mo…
The White House issued an E.O. in July calling on bank regulators to "revitalize" bank merger oversight. That plan is due early next year.
Given Powell's track record, the White House should look elsewhere for a Fed Chair to lead that rethink. whitehouse.gov/briefing-room/…
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The analysis linked above purports to show that SVB would have satisfied the modified LCR that originally applied to banks with $50B-$250B in assets, based on December '22 data.
(The modified LCR was essentially 70% of the full LCR that applied to even bigger banks).
But what the analysis overlooks is that a bank's asset size was not the only trigger for application of the full LCR. The full LCR also applied to banks with $10B or more in on-balance sheet foreign exposure.
Debating whether stress tests, the LCR, NSFR, living wills, or any of the other enhanced prudential standards would have saved SVB/Signature misses the forest for the trees.
S.2155 and "tailoring" sent the clear message that $50B-$250B banks are not systemically important, and should not be treated as such. Policymakers took their eye off the ball.
De-supervision was equally important as de-regulation. We should not expect supervisors to succeed with two hands tied behind their backs. Yet recent constraints on supervisory discretion have shifted the balance of power to banks relative and away from supervisors.
I've seen arguments (in @morningmoneyben and elsewhere) that the Warren/Garcia proposal to give the @CFPB a say in bank mergers is unnecessary because the CFPB Director already sits on the FDIC Board.
I want to explain why these arguments are wrong. 1/
First, the largest banks and bank holding companies are within the OCC's and Fed's jurisdiction - not the FDIC's.
So the CFPB is currently excluded from reviewing mergers involving the banks it supervises (those with >$10B in assets). 2/
Second, even if the FDIC had authority over a big-bank merger, the CFPB Director could be outvoted by the FDIC's other four members, whose primary focus is safety-and-soundness, not consumer protection.
That's precisely the reason the CFPB was created in the first place! /3