Essay

I. Introduction

“What’s Happening to All the Banks around Here?”

It seems to be happening all the time, and everywhere. You can’t help but notice. It has probably already occurred in your town. You open the newspaper one morning, and the headline glares at you: “Another Local Bank Is Sold!” Sometimes you recognize the buyer—a bank in town that you’ve heard of or an out-of-town bank that, well, everyone has heard of. Other times, though, the buyer is unfamiliar. All you know is that yet another bank is going to have a new owner.

 

You read further into the article. It says that the same buyer bought another bank in town a little more than a year ago. You ask yourself, “What’s happening to all the banks around here?”

You recall a litany of other recent headlines—other transactions. You remember that Magna Bank became Union Planters, which then became Regions. Boatmen’s became NationsBank, which became Bank of America. Mark Twain became Mercantile, which became Firstar, which then became U.S. Bank. Allegiant became National City; National Bank of Commerce and NBC Bank both became SunTrust …

You begin to wonder if competition among banks is disappearing. And, by the way, isn’t the government supposed to do something about this?

“Government,” in this case, actually refers to the Federal Reserve System, which has jurisdiction over many of the banking industry’s merger and acquisition proposals. The St. Louis Fed is one of the 12 banks in the Federal Reserve, which is one of four primary federal regulators of depository institutions. The other regulators are the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision. Another federal agency, the National Credit Union Administration, regulates credit unions, which are very similar to depository institutions in some ways. Beyond the four primary regulators, the Department of Justice and the Federal Trade Commission are also responsible for enforcing the nation’s antitrust laws.

So, is the Fed doing anything about all the banking mergers and acquisitions that are taking place? Yes. We thoroughly review and analyze proposed banking combinations, whether or not they make front-page news, to ensure that they satisfy all of the requirements set out in the antitrust and banking laws. The provisions cover financial condition, managerial resources, anti-money laundering safeguards, community convenience and needs, and competition, and they are spelled out in detailed regulations so that everyone knows what they are up-front. Only after all of these requirements have been met to our satisfaction can we approve any deal.

Why do we go through such a thorough process for each transaction? Why do we care? On one level, we do it because the law requires us to. But there is a deeper reason, a more fundamental financial reason that explains why we should be, and are, involved. As the nation’s central bank, the Federal Reserve is responsible for maintaining financial stability—that is, ensuring both the ongoing and smooth functioning of the nation’s payments systems and financial markets, and a steady supply of credit to qualified borrowers—and the banking system plays a vital role in such stability. We pay attention to any shock that potentially affects the banking industry’s normal operations in the financial and payments markets. It should, therefore, not be surprising that the Fed is heavily responsible and accountable for monitoring, evaluating and overseeing the banking industry’s consolidation process.

This essay will examine the methods we employ to ensure that this process takes place in a regulated and orderly manner. We will demonstrate that the Federal Reserve operates as a checkpoint on the road of consolidation. But first, let’s take a closer look at exactly what banking consolidation is and how it has changed the nation’s banking landscape.

Federal Banking Regulators Agency   Regulates Federal Reserve System Fed Bank holding companies and state-chartered commercial banks that are Fed members Office of the Comptroller of the Currency OCC Commercial banks with national charters Federal Deposit Insurance Corp. FDIC State-chartered commercial banks that are not Fed members Office of Thrift Supervision OTS Thrifts National Credit Union Administration NCUA Credit unions Department of Justice DOJ Enforces all of the nation’s antitrust laws Federal Trade Commission FTC Enforces all of the nation’s antitrust laws

back to top | next>>