CEI comments on destructive anti-merger regulations introduced by the troubled FDIC

The Federal Deposit Insurance Corporation (FDIC) has been the subject of recent hearings and news reports regarding findings of a toxic workplace environment characterized by pervasive harassment and discrimination. Current Chairman Martin Gruenberg, who also served as head of the FDIC in the Obama administration, was accused in a recent report of worsening this atmosphere by “losing his temper and interacting with staff in a demeaning and inappropriate manner.” After sharp criticism of his actions from legislators of both parties, Gruenberg agreed to resign after the Senate confirmed a new chairman.

In this toxic atmosphere in which FDIC employees felt intimidated from top to bottom, the FDIC proposed destructive regulations that created great uncertainty about bank mergers. On behalf of CEI, I submitted comments explaining how the regulation – referred to by the FDIC as a “policy statement” – would be detrimental to both consumer welfare and the financial stability the FDIC was designed to ensure.

I opened the comments by explaining that “CEI has a long history of supporting competition by emphasizing consumer choice and consumer welfare, and calling attention to government regulatory barriers that inhibit competition.” I discussed my writings and congressional testimony calling for the removal of regulatory barriers to the creation of new – or de novo – banks, as well as CEI’s highlighting of government mandates such as the Sarbanes-Oxley Act, which have been shown to create barriers to internal corporate growth, and thereby distorting the market in favor of mergers and acquisitions.

However, I added that “we do not consider mergers and acquisitions, or M&A as the process is often called, to be problematic or anti-competitive in itself.” I explained:

Mergers and acquisitions are actually in many cases a healthy part of capitalism’s competitive process, bringing innovation and dynamism to industries, and consumers the benefits of greater choice and lower prices… While small startups create many innovations, it is a process of smaller ones getting bigger players – both through organic growth and mergers and acquisitions – is often necessary to provide meaningful competition to the largest players

I then noted that, unfortunately, “this is exactly the kind of significant competition that FDIC policy in the banking industry would discourage.” I cited comments by former FDIC Chair Sheila Bair and former FDIC Vice Chair Thomas Hoenig that the policy statement “will have a chilling effect on positive banking M&A activity, including among regional banks where consolidation could strengthen their ability to compete with megabanks . ”

In their comments, which I quoted, Bair and Hoenig noted that “rather than improving and clarifying the review process” for bank mergers, the policy statement “introduces confusion and uncertainty into the process.” They concluded that the effect of the policy statement would be to “leave the outcome of the proposed merger unclear and primarily at the discretion of the FDIC, making the process increasingly arbitrary and uncertain.”

I concluded my comment by saying that the FDIC’s toxic workplace was not the best environment in which to consider a sweeping regulation such as this. Citing the admonishment of Supreme Court Justice Abe Fortas w NLRB v. Wyman-Gordon Co., 394 US 759, 764 (1969) that “the regulatory provisions of the Administrative Procedure Act “were intended to ensure fairness and mature consideration of rules of general application” – I pointed out that “the work environment at the FDIC was not conducive to mature consideration of proposed rulemaking.” I concluded that the regulation “should be withdrawn and reconsidered when more favorable conditions exist for a reasoned public policy analysis.”

CEI Research Associate Ari Patinkin contributed to this post and comments to the FDIC.