It’s Time to Let Banks (Even Big Ones) Compete

Executive Summary

One would have thought that by now all of the artificial barriers that prevent banks and other financial service firms from competing would have been removed. In the 1990s, Congress enacted two sweeping financial deregulation bills, the Riegle-Neal Interstate Banking and Branching Act of 1994 that finally treated banks like other firms in the economy and let them operate nationwide, and the Gramm-Leach-Bliley Act, which permitted banks to affiliate with a broad range of other financial service firms.

The 1994 Act contained one seemingly minor restriction, however: fearing that interstate authority would lead banks to engage excessively in mergers, Congress put caps on the share of domestic deposits that any banking organization could hold: 10 percent nationwide, 30 percent in any individual state (subject to modification by individual states). These numbers were chosen arbitrarily – the national cap in particular has no rationale in antitrust law or economics – but, at the time, they also seemed relatively innocuous, since no depository institution then had deposits that put it even close to either cap.

That is no longer true today. Several banks have domestic deposits that are nearly at or close to the nationwide cap. This essay argues that now that the caps are binding, or nearly so, they are also counterproductive. They artificially encourage U.S. banking organizations to expand into non-banking businesses and abroad, while giving foreign banks an artificial advantage in bidding for U.S. banks. Furthermore, by limiting the ability of banks to compete and expand, the caps are detrimental to the interests of the consumers they presumably were designed to protect.

Congress can correct this situation, ideally by removing both caps, and subject depository institution mergers to the same legal standards that have long applied to mergers among firms in other industries. As fallback measures, Congress could repeal just the national cap and/or could change the way the nationwide cap is calculated, to make it less inimical to the interest of consumers.