Photo by Charlie Gainey
If the OCC’s bank merger symposium had to be summed up in three words, it would be this: more regulation needed. That was the takeaway I got from the speakers last week at the event. (OCC Bank Merger Symposium. Washington, D.C. Feb 10, 2023. )
Benjamin McDonough, the OCC’s chief counsel, put it best when he said that regulators need to “build a better mousetrap,” and that if the current regulations aren’t updated then harmful bank mergers will be likely to pass through. He followed up that “this mousetrap needs to be not only theoretically sound and consistent with our values, but also capable of implementation within the statutory criteria for merger review." Even Randal Quarles, the former supervision vice chair of the Federal Reserve, was quoted as saying that many see the current bank merger regulatory system as “a delphic and hermetic process that is very ad hoc… and then other people see a rubber stamp.”
Another important note from the symposium concerned the impact of the Fed’s monetary policy post-bank mergers. The term “interest rate pass-through” refers to how changes in monetary policy translate to bank lending rates. Because banks tend to reflect the interest rates the Fed sets (if they were any higher, every institution would simply borrow from the Fed), the Fed will likely have to set high interest rates in the near future in order for the banks to do the same and therefore have a significant effect on the economy.
My biggest takeaway is that the country’s bank merger system needs a major overhaul. There hasn’t been a serious merger rejection in more than 15 years* and when you consider everything that’s happened in the worlds of fiscal and monetary policy over that time, the current merger policy makes no sense. I’ll admit my own shortcomings in writing about the issue: among other things, I was only seven years old when the Great Recession hit. I’ll never grasp the full scope like those who were living paycheck to paycheck at the time.
If there is one thing to remember from that time, though, it’s that the term “too big to fail” (which was thrown around a lot during the symposium) has two meanings: either impossible to fail, or if it fails the results would be catastrophic.
Without a more composed and standardized way to regulate bank mergers, we could see more of the latter if we’re not careful.