Small Government, Big Banking

The obvious absurdity of this rule can be traced back nearly thirty years to another Jeffrey Epstein associate, the forty-second president of the United States. The 10 percent deposit cap and its attendant loophole was put in place by the Riegle-Neal Act, a piece of deregulatory bank legislation signed into law by Bill Clinton in 1994 that aimed to end restrictions on interstate banking that had been in place since before the Great Depression.

While today, customers of Bank of America, Chase, Wells Fargo, and other large institutions can be certain they will find one of their bank’s branches just about wherever they go, this wasn’t always the case. Since the McFadden Act of 1927, US banks had strict limits on their ability to operate across state lines, partly due to fears that doing otherwise would spur a dangerous concentration of the financial system and make regulation harder. Banks chafed at the restrictions, but they caused frustrations for customers too.

The process of chipping away at these rules started under Jimmy Carter, the first neoliberal US president. Acting on complaints that foreign banks, which weren’t covered by these restrictions, had a competitive advantage over US banks, Carter and a Democratic Congress passed a 1978 law ending this privilege and mandating a general review of banking laws. The decades-old interstate banking limits were “ineffective, inequitable, inefficient, and anachronistic,” concluded the resulting report in the final moments of Carter’s presidency, recommending that “interstate banking be ratified and further liberalized through a phased relaxation of current geographic restraints.”

While several aborted attempts at this would be launched over the following decade, it was state governments that led the way. Forty-six states relaxed limits on out-of-state acquisitions of banks within their borders by 1990, and by 1994, nearly every one of them had signed compacts, reciprocal interstate banking agreements that allowed banks to cross state lines.

The federal effort to end interstate banking limits was led by Sen. Donald Riegle, the Michigan Democrat who chaired the Senate Banking Committee. Representing a state whose auto industry had been devastated by foreign imports, Riegle worried about “the ability of the United States to compete effectively in the international marketplace,” he said.

There may also have been another motive. Riegle was known as the darling of and champion for a financial sector that showered him with tens of thousands of dollars of campaign donations, in particular from the savings and loan industry whose implosion necessitated a pricey taxpayer bailout in 1989. Riegle’s closeness with finance reached its peak in his embroilment in the “Keating Five” scandal, in which the Senate Ethics Committee concluded that he had given “the appearance of being improper” by intervening with regulators on behalf of a collapsed savings and loan association (S&L) while taking money from it.

Starting in 1991, Riegle used his perch at the Banking Committee to hold thirteen hearings about the US banking industry’s competitiveness on the world stage, in which a parade of Wall Street representatives — including the Chase Manhattan Bank CEO, speaking on behalf of the American Bankers Association — urged the lifting of interstate banking limits to unleash the put-upon US financial sector. The government report that followed those hearings bitterly noted that while three US commercial banks had been in the world’s top twenty by asset size in 1983, not a single one was still on the list by 1989.

While earlier federal efforts to end interstate banking limits had been beaten back by opposition from community banks and insurance companies, by 1993, the stars had aligned. The just-elected Clinton was as bullish on bank deregulation as his Republican predecessor, and his Treasury secretary made clear the administration wanted the restrictions lifted, telling a Democratic think tank, “We’re operating with laws and regulations made for another time in America.” Lawmakers in Florida, Georgia, and South Carolina pushed their own, state-based versions of interstate banking liberalization, while the Clinton administration used a loophole to let First Fidelity Bank operate in two states, putting pressure on Congress to pass the bill.

“The world has changed,” lamented a defeated Kenneth Guenther, executive vice president of the Independent Bankers Association of America. “For the first time in many years, the chances look pretty good” for a bill to pass, remarked a much happier Richard Thomas, chair of the Bankers Roundtable that represented the top executives of the country’s biggest banks.

Those chances were helped by a concerted push from that same industry. Representatives of six of the country’s major financial trade groups wrote Clinton a letter before his inauguration in 1993 urging banking deregulation, including ending the “micromanagement of bank operations.” They hired lobbyists with close ties to both Clinton himself and the wider Democratic Party and launched a large-scale lobbying effort they called “National Cut the Red Tape Week.”

In the end, though, Riegle can’t fully take the credit for the “failing bank” carveout in the law that carried his name. That provision was absent from the Senate legislation he introduced, which included the 10 percent deposit cap. The loophole could instead first be found in the bill introduced into the House by its other namesake, Rep. Stephen Neal (D-NC), who like Riegle was a leading recipient of S&L cash known for voting in line with the industry’s wishes.

Neal’s state was home to the country’s fourth-largest bank, NationsBank, a particularly vocal supporter of unshackling interstate banking which in a few years would swallow up and officially become today’s Bank of America. A few months earlier in a speech in Clinton’s hometown of Little Rock, Arkansas, its CEO Hugh McColl had cheered on the idea of bank consolidation, calling for “let[ting] the strong take over the weak so that we can move forward.” Under Neal’s shepherding, the bill cleared the House Banking Committee — whose ranks counted Maxine Waters, Chuck Schumer, and Barney Frank — on a lopsided fifty-to-one vote, with then first-term congressman Rep. Bernie Sanders the sole no vote. When it eventually cleared the Senate, ninety-four members voted in favor, including Joe Biden.

McColl and Chase Manhattan CEO Thomas Labrecque were among the big bank executives at the September 1994 signing ceremony, where Clinton placed the bill in his wider economic strategy of “reinvent[ing] government by making it less regulatory and less overreaching and by shrinking it where it ought to be shrunk.” Sure enough, Riegle-Neal, viewed today alongside Clinton’s repeal of Glass-Steagall as one of the most significant bits of deregulatory legislation of the past few decades, led to a wave of bank consolidation.

Since Riegle-Neal went into effect, “the number of large bank mergers has increased significantly,” the Federal Reserve Board of San Francisco stated in 2004. Between 1990 and 1998, there were 4,944 bank mergers and the number of US banks fell nearly 27 percent to 9,015. Today, the number is around 4,100, while the four biggest banks hold roughly 40 percent of the entire banking system’s $23 trillion of assets.

All Part of the Plan

The “failing bank” exception tucked into Riegle-Neal wasn’t commented on at the time. But later events give us some idea of what may have motivated it.

In 2011, the Financial Stability Oversight Council (FSOC), created in the wake of the 2008 financial crash to keep an eye on risk in the financial sector, produced a report on “concentration limits on large financial companies” in which it expressly endorsed the loophole. In fact, the FSOC recommended that the hole get bigger and cover all insured depository institutions, not just “banks.”

There was a “strong public interest in limiting the costs to the Deposit Insurance Fund that could arise if a bank were to fail,” the report stated, “which might be partly or wholly limited through acquisition of a failing bank by another firm.”

It would save the taxpayer money, in other words, by putting the private sector on the hook for taking care of collapsing financial institutions. There was no mention of the public interest in stopping too-big-to-fail mega-banks from coming into existence. (Senior Treasury advisor Amias Gerety, one of the staffers who presented the report to the FSOC for approval, now works for QED Investors, a venture capital firm that invests in and promotes fintech to banks.)

It wasn’t without its critics. The Federal Reserve board had partly used Riegle-Neal’s various loopholes to sign off on several big bank acquisitions in the wake of the 2008 crash, putting JPMorgan Chase, Bank of America, and Wells Fargo all over the 10 percent deposit cap by October that year. “All of the resulting entities needed subsequent bailouts through various means,” Duke law professor Lawrence Baxter later wrote, suggesting “that perhaps the banking agencies headed in precisely the wrong direction by creating even larger, weaker banks as a means of extricating the financial system from its crisis.”

George Washington University law professor Arthur Wilmarth, who had served as a consultant to Congress’s Financial Crisis Inquiry Commission in 2010, had that year recommended closing several Riegle-Neal loopholes. That included narrowing the failing bank exception by forcing regulators to make a “systemic risk determination” in exactly the kind of scenarios that JPMorgan and First Republic found themselves in this month.

In Wilmarth’s vision, regulators would have to show that such a merger needed to happen to avoid “systemic injury,” and would subject that decision to an after-the-fact review by, among other things, Congress. But while Dodd-Frank, the Obama-era Wall Street reform law, closed one major Riegle-Neal loophole, it left that one and several others in place. As late as February last year, the Independent Community Bankers of America complained to the Biden administration that the limits in Riegle-Neal and Dodd-Frank “still permit mergers among the nation’s largest banks to occur,” producing “anticompetitive effects” and “creating downstream pressures for other smaller institutions to grow larger to compete,” feeding ever more bank consolidation.

If these concerns are shared by the country’s top regulators, they’re keeping up a strong poker face. Asked in the wake of the JPMorgan/First Republic merger if he was worried about consolidation, Fed chair Jerome Powell simply answered, “It’s probably good policy that we don’t want the largest banks doing big acquisitions.”

“But this is an exception for a failing bank,” he added. “And I think it’s actually a good outcome for the banking system.”

All Roads Lead to Consolidation

Powell’s confidence may well be put to the test in the coming years. First Republic was only the latest bank to collapse thanks to Powell’s series of interest rate hikes the past year, following the failure of Silicon Valley Bank and Signature Bank this past March.

There’s little sign Powell and the Fed are going to pause, despite the fact that inflation has been slowing for months, and despite it being far from clear that the rate hikes are the reason for that. That means potentially numerous more bank failures to come, and so, numerous more chances for the country’s mega-banks to get even bigger by invoking the “failing bank” loophole to leapfrog regulations. And in the long run, that concentration could pose all manner of problems for working Americans, from more consumer abuses at the hands of large financial firms, to a growing risk of big bank criminal impunity and a 2008-style financial meltdown.

There’s many things in this three-decade-long Rube Goldberg machine of corruption and neoliberal policymaking you could blame this state of affairs on — from the deregulatory zealotry fed by Wall Street’s Herculean campaign of lobbying and political bribery to the legal loopholes planted like landmines by elected officials (some of whom remain in power today) that have let big banks take advantage of the resulting failures to get bigger and bigger. But part of it is also that, as Baxter wrote, regulators see mega-banks as “serv[ing] a public, quasi-governmental purpose in assisting the government to maintain stability in financial crises in a way that reduces, in the short term at least, the cost to the public.”

Whatever short-term savings this practice has secured for the public could well pale in comparison to the costs that growing financial concentration and everything that comes with it poses. We may be alarmingly close to finding out.