The Federal Reserve is pushing large U.S. banks to forget about all but the smallest acquisitions for a while amid a raging debate over the risk big lenders pose to the financial system.
The Fed this year told Capital One Financial Corp. not to pursue more major deals in the near term after its $9 billion purchase of ING Groep NV’s U.S. online-banking business, said people familiar with the conversations. The deal made Capital One, McLean, Va., the nation’s fifth-largest bank by deposits, according to Federal Deposit Insurance Corp. data.
Other lenders also have been informally waved away from acquisitions, said people involved in the discussions. U.S. banks interested in buying Bank of America Corp.’s non-U.S. wealth-management operations decided against pursuing a deal after informally consulting the Fed, according to a person close to the banks. Fed officials said they could offer no assurance on how much capital an acquirer would have to hold after a deal, this person said. Swiss bank Julius Baer Group Ltd. purchased the unit for $882 million.
Now, there’s a part of this that looks like closing the barn door after all the horses have left. The big mergers and acquisitions took place during the crisis, from Wachovia to Merrill Lynch to Washington Mutual. The mega-banks only grew in size, to the point where they are sufficiently too big to fail. The five largest banks in America hold 43.7% of the nation’s deposits, up from 37.1% five years ago, before the crisis. Even in this case, we see the Fed warning Capital One on mergers only AFTER they merged with ING.
But there has been of late at least some thinking about this problem in the halls of the Fed. In particular, Fed Governor Daniel Tarullo has been vocal about the need to minimize risk to the system by reducing bank size. And so the first step to that is to prevent the biggest financial institutions from getting any bigger.
I don’t think drawing a line in the sand at, say, 10% of all US deposits is necessarily good enough. And I don’t think the parts of Dodd-Frank which make it mildly uncomfortable for a mega-bank to maintain its size go far enough. But admitting the nature of the problem isn’t a bad start.