Senators Urge FRB to Review Approach to Bank Merger Policies
Commentary by Steven Lofchie
Senate Banking Committee Chair Sherrod Brown (D-OH) and Senators Elizabeth Warren (D-MA), Jack Reed (D-RI) and John Fetterman (D-PA) urged the Federal Reserve Board ("FRB") to review its approach to bank merger policies to better assess their impact on financial stability and avoid repeating mistakes that led to recent bank failures.
In a Letter addressed to FRB Chair Jerome Powell and Vice Chair for Supervision Michael Barr, the Senators expressed concern that the FRB has not issued new rulemakings or guidance in accordance with amendments made to the Bank Merger Act under Dodd Frank. They stated that the amendments require "federal banking regulators [to] consider financial stability in evaluating bank mergers." The Senators argued that the FRB "needs a more thoughtful way to consider and explain a merger’s risk to financial stability," highlighting the FRB’s approval of an acquisition made by Silicon Valley Bank ("SVB") two years before its failure. The Senators emphasized that the FRB’s reasoning at the time that "[SVB] would not be a critical services provider or so interconnected . . . that it would pose a significant risk to the financial system" was not supported by a proper financial stability analysis.
The Senators also stated that the FRB, in addition to the OCC, has yet to act on a letter that Senator Brown sent a year ago (see here) requesting that the banking agencies review their approach to bank mergers to address financial stability concerns. The Senators argued that the increase in complexity of the financial services industry underscores the need for an "analysis of competitive factors and market concentration" that reflect the current market.
Commentary
The reason that investors lost faith in SVB is because there was a sudden realization that high interest rates meant that many banks may have material losses in their portfolios, not all of which losses were disclosed. This is not the first time that a jump in interest rates hurt banks. But acknowledging that as a major part of the problem would require the Senators to acknowledge that more regulation is not necessarily the solution to the problem.