Elizabeth Warren Was Right: New Law Is Already Making Banks Bigger

Bipartisan backers of a bill last year swore that it was only helping little tiny banks. Elizabeth Warren warned it was a Trojan horse.

Signage is displayed outside a SunTrust Banks Inc. branch in Washington, D.C., U.S., on Thursday, Jan. 11, 2018. SunTrust Banks Inc. is scheduled to release earnings on January 19. Photographer: Andrew Harrer/Bloomberg via Getty Images
Signage outside a SunTrust Banks Inc. branch in Washington, D.C., on Jan. 11, 2018. Photo: Andrew Harrer/Bloomberg via Getty Images

The proposed $28 billion merger announced Thursday between large regional banks SunTrust and BB&T is the biggest banking tie-up since the financial crisis, creating what would become the nation’s sixth-largest bank. And it’s a direct result of actions taken by the Trump administration and the bipartisan group of lawmakers who passed a bank deregulation bill in 2018.

While Democrats insisted that the bank bill, S.2155, was merely about community bank regulatory relief, critics and industry experts expected that it would lead to consolidation of the sector, which began to occur almost immediately after passage. “I’m concerned about the negative impact of increased consolidation caused by S.2155 on community banks and on customers who benefit from more competition for their business,” wrote Massachusetts Sen. Elizabeth Warren in April 2018, just a month after the bill’s passage.

Warren singled out by name her own Democratic colleagues who were supporting the bill, catching internal blowback from the caucus. But Warren’s warnings have proven prescient, as the SunTrust-BB&T merger represents the latest in a wave of deals in the financial sector. “Once again, big bank deregulation is leading to more consolidation,” said Rep. Katie Porter, D-Calif., a Warren protégé and first-term congressperson who sits on the House Financial Services Committee. “I opposed last year’s bank giveaway bill, and the Trump administration’s loosening of protections, precisely because it would make ‘too big to fail’ even worse. This merger will do the same and end up hurting our nation’s community banks.”

The merger was made possible by a series of gifts granted to banks since Donald Trump took office. The December 2017 tax cut has had perhaps its most dramatic effect in lowering the tax burden for financial institutions. The nation’s 23 largest banks, which include BB&T and SunTrust, paid around $21 billion less in taxes in 2018, according to a Bloomberg analysis. That built up massive cash reserves at these banks, most of which were channeled to investors and executives rather than line-level workers. Dividends and stock buybacks went up 23 percent, while the companies cut around 4,300 jobs, with more firings on the way. Even lending growth slowed at these big banks.

Meanwhile, S.2155 weakened regulatory standards for banks between $50 billion and $250 billion in assets, a category that also includes SunTrust and BB&T. This allowed them to reduce projected spending on regulatory compliance. The combination of this and the tax windfall gave the banks operating funds to devote to mergers and acquisitions.

Experts believed that firms under $250 billion in assets would feel free to grow through consolidation, without concern for a higher regulatory burden. The new bank created by the deal between SunTrust and BB&T would actually breach that threshold, creating a bank with $442 billion in assets. But an obscure — but certainly not accidental — provision of S.2155 enabled the Federal Reserve to provide relief for banks at that level too.

Section 401 of S.2155 changed the authority for tailoring heightened regulatory standards for banks above $100 billion in assets. By changing one word in existing statutes, from “may” to “shall,” the bill required the Fed to assess all its rules to ensure that they’re tailored to each specific bank, based on size or amount of risk.

The Fed took this loophole and drove a truck through it. Last October, it proposed assembling four categories of banks, with different regulatory standards provided to each. Firms between $100 billion to $250 billion would get the lowest scrutiny, followed by those between $250 billion and $700 billion, the category the new SunTrust-BB&T bank would fall into. Those banks would no longer be subject to certain capital and liquidity requirements, which the Fed labels as “advanced approaches.” They also would only be subject to company-run stress tests, where the bank must show how it would fare under adverse economic conditions, every two years, as opposed to semiannually. The American Bankers Association cheered this “right-sizing” of bank regulations.

While none of the specifics were explicitly required under S.2155, the law clearly gave the Fed the excuse to engage in this further deregulation. In fact, Randal Quarles, the Fed’s vice chair for supervision, stated in a speech last July that S.2155 “requires the Board to tailor its framework of supervision and regulation of large firms.”

In its proposal, Fed staff acknowledged that the changes would “slightly lower capital requirements under current conditions and reduce compliance costs related to capital planning, stress testing, and, for certain firms, the advanced approaches capital requirements.” By lowering these barriers for going above $250 billion, the Fed greased the path for SunTrust and BB&T to merge.

Sixteen Democratic senators and 33 Democratic House members voted for S.2155, making the legislation one of the most notably bipartisan efforts of Trump’s first term. At the time, Democrats said the law was narrowly intended to only help community banks. But it appears to be facilitating this big bank merger.

The weak supervision of the Trump administration on banking matters also makes the step up above $250 billion less burdensome and therefore more attractive. For example, SunTrust and BB&T would still be subject to annual supervisory stress tests, administered by the Fed. But the Fed just changed those as well, proposing to give banks more upfront information on the testing process, including the scenarios it uses to probe bank balance sheets and the results of how simulated loan portfolios perform. This is the equivalent of giving banks a cheat sheet before the test, which they can then exploit to ensure a passing grade.

In theory, antitrust authorities will scrutinize this merger before it advances. In reality, there’s been an 18 percent drop in staffing at the part of the Justice Department’s antitrust division that reviews mergers since Trump’s inauguration.

One final hurdle to big bank mergers is the Community Reinvestment Act, which assesses banks for lending into low- and moderate-income areas. The CRA really only has one enforcement mechanism: Regulators examine it when banks attempt to merge. But the lead regulator that would do the examining, the Office of the Comptroller of the Currency, is headed by Joseph Otting, former CEO of OneWest bank, who has expressed his disdain for the CRA both before and while in office.

Otting has cited his experience from when OneWest merged with CIT, previously the largest merger since the financial crisis, as cementing his views on the CRA. “I went through a very difficult period with some community groups … who came in at the bottom of the ninth inning that tried to change the direction of our merger,” he told a banking conference last April.

There is credible evidence that Otting and OneWest submitted fake public comments in support of the merger, which went through in 2015. The text of the fake supportive comments is identical to a sample letter placed on the OneWest website in 2015 encouraging customers to support the merger. Otting, then OneWest CEO, sent emails to his contacts on Wall Street at the time, pointing to the sample letter on the website and soliciting support.

Now at OCC, Otting has proposed “modernizing” the CRA. Critics believe the changes would eliminate bank commitments to low-income residents and local communities. Even if the CRA update is not completed before the merger approval process on SunTrust-BB&T begins, it’s unlikely that Otting, a committed opponent to the CRA, would use it in any way to hold up the merger.

Meanwhile, SunTrust and BB&T have said that the merger would cut costs by $1.6 billion by eliminating jobs in accounting, legal, and bank branches.

The merger combines two “stadium banks,” a moniker that came out of the debate over S.2155, referring to banks that separately aren’t big enough to be global names, but are big enough to have a stadium named after them. SunTrust Park is the home of the Atlanta Braves; BB&T Ballpark houses the Charlotte Knights, and BB&T Field is where Wake Forest University’s football team plays.

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