CFPB Director Decries "Creep of Concentration" in Banking
Commentary by Steven Lofchie
CFPB Director Rohit Chopra decried the trend toward bank consolidation and proposed reforms to bank merger policy.
In his remarks at the Peterson Institute for International Economics, Mr. Chopra described the historical trend towards concentration within the banking sector through mergers and acquisitions. He stated that this trend has led to the top 10 banks controlling a majority of the sector's assets. Mr. Chopra asserted that the "creep of concentration" was driven by (i) the deregulatory fever of the 1990s and (ii) the bailouts of the 2008 financial crisis.
As a result, he said, the consolidation has eliminated many small and relationship-based midsized banks and has negatively impacted access to credit for small businesses. He stated that third-party analyses of mergers in the banking sector suggest that many of the purported efficiency gains are not passed through to customers highlighting that "cost of products often increases, and quality of service tends to erode." Chopra proposed a comprehensive overhaul of the bank merger review framework, emphasizing the need for a more rigorous analysis of competitive effects, the benefits to communities and the potential risks to financial stability. He advocated for reforms that ensure mergers serve the public interest, proposed stricter scrutiny of large mergers and suggested legislative and regulatory adjustments to curb the growth of "too big to fail" institutions.
Mr. Chopra argued that the FDIC’s proposed Bank Merger Act Policy Statement would bring analytical rigor to merger review and better align the agency’s framework with the statute. (See related coverage.)
Mr. Chopra specifically recommended:
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adoption of size and growth caps for federally insured depository institutions.
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revision of the "failing bank exception." Mr. Chopra argued that the exception (which should be revised) allows large banks to acquire failing ones under certain conditions.
- addressing the "chaos" that consumers may face during a merger, such as the inability to access funds or key account information.
- a reduction of the "too big to fail" subsidy.
Commentary
The purpose of the CFPB, as provided by statute, is to "regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws." It is a stretch to get from that purpose, as set forth by Congress, to regulating bank mergers. A recurrent theme in financial regulation is the tendency for financial regulators to interpret their mandates broadly, and perhaps dedicate fewer of their available resources to the matters actually within their purview. None of the suggestions made by Mr. Chopra seem within the direct purview of the CFPB.
Mr. Chopra's analysis of the reasons behind bank consolidation and on the level of services provided by banks is open to question. Is it really the case that deregulation in the 1990s resulted in the merger of banks? Might there not be other economic and legal factors that are driving mergers, such as the benefits of economies of scale or the increased fixed costs resulting from increased regulatory burdens?