Bank merger

Warren, Brown raise alarms about biggest bank merger since crisis

By VICTORIA GUIDA

The biggest proposed bank merger since the 2008 financial crisis is drawing flak from Sen. Elizabeth Warren and other key Democrats, who warn that it could create another institution so large that its failure would threaten the economy.

The potential deal between BB&T and SunTrust, which would create the nation's sixth-largest retail bank, has also sparked fears about branch closings and whether the marriage will reduce consumers' access to credit, concerns that were voiced on Thursday at a public hearing in Charlotte.

While it's unlikely that Warren or other lawmakers like Rep. Maxine Waters could block the merger, the timing of the deal gives Democrats more 2020 campaign fodder against President Donald Trump, who has overseen a sweeping bank deregulation agenda despite the populist message of his 2016 campaign.

“Legislative giveaways and regulatory rollbacks have already amplified the potential for the biggest banks to threaten our financial system,” Sen. Sherrod Brown (D-Ohio) said in a letter to Federal Deposit Insurance Corp. Chairman Jelena McWilliams this week. “Further consolidation by large banks would make matters even worse.”

Waters, a California Democrat who chairs the House Financial Services Committee said the proposed merger “raises many questions and deserves serious scrutiny from banking regulators, Congress and the public to determine its impact and whether it would create a public benefit for consumers.”

The banks and their supporters argue that the deal would increase their ability to compete with megabanks like JPMorgan, which has more than $2.6 trillion in assets. The newly merged bank would have about $442 billion in assets.

SunTrust CEO William Rogers, at the hearing in Charlotte, argued that his bank and BB&T don’t engage in the kind of complex activities found in their largest competitors, so the new lender’s size should not cause concern.

“Some have suggested this transaction will create an institution that’s too big,” Rogers said. “Let me assure you, in the case of this merger, bigger does not mean riskier. Each company has a conservative risk profile now and will maintain such as a combined entity.”

The merger “will actually increase competition by creating a stronger regional bank that reduces the concentration of systemic risk at the top of the market,” he added.

The Federal Reserve and FDIC will determine whether to approve the proposed deal, looking at a number of factors, including financial stability, effects on competition and community needs.

At the hearing hosted by the two agencies, the banks heard a slew of complaints from community groups about the potential impact of the merger, though there was also praise — particularly for BB&T — for prior community investments.

SunTrust also faced blowback for helping to finance private prisons, a major focus of progressive Democrats like Rep. Alexandria Ocasio-Cortez (D-N.Y.), who earlier this month personally thanked JPMorgan CEO Jamie Dimon for ending his bank’s ties to that industry.

But there’s no sign yet of any deal-breaking factors for the merger. Warren, a Massachusetts Democrat and 2020 presidential contender, has chided the Fed’s board for approving 87 percent of merger applications between 2006 and 2017.

“The Board’s record of summarily approving mergers raises doubts about whether it will serve as a meaningful check on this consolidation that creates a new too big to fail bank and has the potential to hurt consumers,” she wrote to Fed Chairman Jerome Powell when the deal was announced.

And Brown, the top-ranking Democrat on the Senate Banking Committee argued this week that the merger should not be approved until the FDIC has a full board. One seat reserved for Democrats is empty while Martin Gruenberg, the sole remaining Democrat at the agency, is serving on an expired term. The FDIC would be on the hook to cover depositors if the bank were to ever become insolvent.

Jeremy Kress, a business law professor at the University of Michigan, said he wasn’t sure the “too big to fail” label — a term applied to institutions that the government would bail out to avoid widespread economic pain — would apply if the banks were to merge. But the deal “would result in greater or more concentrated risks to U.S. financial stability,” he said.

“There is strong empirical evidence that the collapse of a combined BB&T-SunTrust would be worse for the economy than if both banks failed separately,” Kress said, pointing to a Fed research paper showing a large bank failure hurts the economy more than if several smaller banks of equivalent size were to collapse.

“Not only that, but the combined BB&T-SunTrust … would be considerably bigger than firms like Washington Mutual, Countrywide and National City — all of which proved systemic during the crisis,” he said.

But Karen Petrou, managing partner at Federal Financial Analytics, said the notion that the merged bank would be considered by regulators as too big to fail is a “big stretch.”

“It would be a big drain on the FDIC, but manageable because the bank, while big, is relatively simple and traditional,” she said.

Regulators look at risk indicators to determine the extent to which a bank is entrenched in the financial system. BB&T and SunTrust each had a score of 14 in 2015, according to the Office of Financial Research. In contrast, Wells Fargo had a score of 250 and JPMorgan had a score of 464.

At the hearing, National Community Reinvestment Coalition CEO Jesse Van Tol argued that in the face of the reality where very large lenders continue to operate, a bank’s obligations to the communities it serves should increase the larger it gets. The public benefit it provides should be weighed against the prospect of reduced competition, he said.

“The problem with so-called ‘trust busting’ is that practically speaking, once a bank reaches a certain size many people consider it impractical, disruptive and perhaps politically unfeasible to break them up,” he said.

“We believe this type of analysis should be considered along the way, as banks grow, with a larger obligation the bigger they get,” he added.

NCRC will soon close negotiations on a community benefits agreement with the two banks, “detailing lending, investments and services for low and moderate income people and communities of color,” at which point, Van Tol said, his group could support the merger.

“It is your job, additionally, as the regulators, to ensure that the banks' forward-looking statement creates a clearly significant public benefit,” he said.