May 13, 2022
On May 5, The Capitol Forum hosted a conference call with Patrick Rucker to discuss our recent article on TD Bank, and Basel Musharbash, rural and community development lawyer and founder of Basel PLLC, to discuss his recent paper “To Stem the Tide of Rural Decline, Stop the Bank Merger Wave.” The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Thank you. And good morning, everyone. Thanks for joining The Capitol Forum’s conference call today on bank mergers. We’ve got a great call lined up. It’s got two parts. First, I’m going to talk with Patrick Rucker to discuss yesterday’s article on TD Bank and then we’ll chat with Basel Musharbash, who is a rural and community development lawyer and Founder of Basel PLLC. He recently published a paper titled “To Stem the Tide of Rural Decline, Stop the Bank Merger Wave.” And we’re excited to get to chat with him.
If you have any questions for us, please email them to firstname.lastname@example.org. That’s email@example.com and we’ll work them into the discussion. Patrick, thanks. Thanks for hopping on the call today.
PATRICK RUCKER: Morning.
TEDDY DOWNEY: So let’s just chat quickly about your article. What would you say are the key takeaways from the piece?
PATRICK RUCKER: Yeah. Well, so, we, of course, were, as we do, looking at things about these banks that aren’t known in the context of enforcement actions, bad behavior, anything that might catch a regulator’s eye as they’re deciding whether or not it’s wise to allow TD Bank to make this acquisition. And I did what you would expect a reporter to do, which is talk to people who have more wisdom than me and know what was happening within TD Bank, what was happening within these agencies that we rely on to examine TD Bank. And two things came out of that reporting.
One was that in the wake of the Wells Fargo scandal from 2016, when it was discovered that the bank had encouraged account openings and had these hard driving incentives that pushed employees, low level employees, to create phony accounts that the regulators had examined the entire industry and said, well, are there any other trouble spots? And TD was on their radar at that time in the context of what are their incentives? What kind of goals are they setting for their employees? The kind of pressure these employees were under to, if someone kind of consents to open an account, did they push them a little further and just get them to consent? Are their products like overdraft protection that generate revenue that the bank, of course, wants to have the customer get into? And what kind of disclosure—is the employee doing anything to push that customer into that product?
So we knew that TD Bank was on their radar at that time and nothing happened publicly. The bank was not sanctioned. They got a private reprimand, what in the industry is called a matter of requiring attention, which is just a formal note that says, look boys, you better solve this problem or at least address this issue.
So fast forward several years later, here we are. TD Bank wants to make this acquisition. And with that tip as my lead, I made some phone calls and said, all right. Are any of these problems still happening at TD Bank? And having talked to enough mid-level—I would even say low level—branch employees on some of these hundreds of branches across the Northeast, what was their experience as an employee? Was there pressure to get these accounts opened?
And I have to say, as someone who covered Wells Fargo pretty closely, there were some things that were similar. This wasn’t just, boy, Patrick, we really want you to try to get people into these credit cards or sign them up for overdraft protection. But the pressure was really acute. And that if employees were going to thrive at TD Bank at the branch level, they were going to be very aware of what their goals were and make sure that they hit those numbers anyway they could. And then, as the story explains, these people pointed to several specific ways that pressure could lead to harm to consumers.
TEDDY DOWNEY: So I want to stay on this for a second because it seems like a big deal. You found not just that TD Bank got this notice, but that other banks were actually caught up in the regulatory sweep after Wells Fargo. How well known is it that there were these other banks like that this sort of [break in recording] All right. Sorry for that. Apparently, the banks and the telecom companies, they don’t want us doing this call. So we got cut off.
But we were just talking about how some of the findings that Patrick came across in his interviews with the former employees might be something that regulators would want to see resolved before they allow a transaction to go on. And also, is it consistent with things that Congress might be interested in terms of oversight? That was the question. I’ll just let Patrick go through that again. We talked about it a little bit, but we’ll do it again.
PATRICK RUCKER: Yeah, I would say like let’s imagine ourselves as is Rohit Chopra for a second at the Consumer Financial Protection Bureau. And just before the end of the Trump administration, the CFPB did sanction TD Bank for overdraft protection abuses, pushing customers into this product, not being clear about what they were doing, the cost of the product, which was a big revenue generator. We have Chopra, whose doctrine stated has been he will not tolerate recidivism and repeat offenders.
We have TD Bank which went through this problem with overdraft protection. That’s on the record. Whatever it is that people might find out details past the point I’ve taken this story. But I mean, already we know that these employees still get incentives to push customers into overdraft protection. “If I don’t have my customer in overdraft protection, I’m going to hear about it” is what one employee told me about. The district manager and the pressure they face.
So I don’t think it stretches the imagination to expect that there’ll be questions about, okay, you’ve already found out problems in your overdraft protection. You still have incentives to push people into overdraft protection. That would be something that it wouldn’t surprise us that the CFPB would want to get to the bottom of. And then generally, yeah, if the scope of this problem is big, you would only know that after an investigation. So how long that takes and does that cast a shadow over the approval? I think that’s a fair question.
TEDDY DOWNEY: Yeah, the last thing I’d say and then we’ll introduce Basel is they sort of lucked out that they don’t need FDIC. Or not necessarily lucked out, but the merger approval needs OCC and Fed approval or it’s reviewed by them. That’s ostensibly good for them that they don’t have Chopra weighing in specifically. But he is the only kind of politically appointed bank regulator right now. So that’s not a good thing in terms of influence over a kind of bank regulatory decision-making. And then we’ll obviously have to see who ends up—if the timing of the Fed appointments and confirmation and how the OCC’s views are similar or different from Chopra. So lots to look forward to more reporting from you. Thanks so much for chatting with us, Patrick.
PATRICK RUCKER: Thank you.
TEDDY DOWNEY: All right. Basel, thank you so much for joining us.
BASEL MUSARBASH: No, thank you for having me. I appreciate it.
TEDDY DOWNEY: And so your paper really walks through the decline of community banks. And I was wondering if you could just walk us through how dramatic that decline has been and why that happened.
BASEL MUSHARBASH: Yeah, sure. It has definitely been dramatic. Just to give the scale of the change that’s happened since the 1980s [break in recording] and this decline is accelerating. So we started in 1984 with 14,400 community banks in the United States that controlled nearly 40 percent of industry assets. But by 2011, we had a little over 6,350. And their share of the industry [break in recording].
TEDDY DOWNEY: Sorry about that. Speaking of competition, we may need to put out an RFP for conference call service. But Basel, we were just talking about the decline, the numbers, the sort of dramatic decline of community banks. Sorry to make you talk about it again, but if you could just kind of dig into that, that’d be great.
BASEL MUSHARBASH: Sure, no problem. Yeah, so the scale of the decline in community banks is pretty massive. So we’ve lost about seven out of every ten community banks since the 1980s. In 1984, we had around 14,400 community banks in the United States, and they controlled nearly 40 percent of industry assets. By 2011, that number was 6,350. And they only control 15 percent of industry assets.
Since then, the decline has actually accelerated, at least in proportional terms. So between 2011 and 2019, we lost nearly a third of those 6,350 banks. Today we have only about 4,500 community banks. And their market share stands at about 11.7 percent as of 2019. So we’ve lost a lot of community banks. And what that’s done is really consolidate industry assets in these very large banks with over $100 billion in assets. Those have about 64 percent of industry assets nationwide. The big four, of course, control around 40 percent of industry assets. So that leaves very little for small community banks and even less for small rural banks.
TEDDY DOWNEY: Yeah. And you mentioned that a lot of this is driven by obviously consolidation in the industry. But I really want to spend some time focused on the impact the decline has had on citizens, farmers, small businesses. You spend a lot of time talking about that. Can you tell us a little bit?
BASEL MUSHARBASH: For sure. So I’ll start by talking about the sort of impact on individual consumers. And in some ways the first step to talking about that is to talk about how the consolidation in banking has led to the decline of rural headquartered banks like locally owned banks in rural communities, because absentee ownership leads to a lot of harms for consumers, for businesses and farmers, for communities writ large. And so, do you mind if I talk a little bit about sort of the effect on rural banks first and then the consumers?
TEDDY DOWNEY: That’s perfect.
BASEL MUSARBASH: Awesome. So it’s important to think about like there’s three aspects to how consolidation affects rurally headquartered banks. And basically what we’ve seen is that primarily—though not only through mergers and acquisitions—we’ve seen lots of consolidation of banking assets in these very large banks. And what that’s done is, first, it’s facilitated unfair competition by those large banks against small banks generally, but also rural banks, obviously. Second, it’s shaped the regulatory environment in ways that disadvantage rural banks. And third, it’s hollowed out the rural business communities that rural banks exist to serve.
So I’ll just go through that really quickly at a high level. In terms of unfair competition, I think we all know about really large banks enjoy too big to fail borrowing advantages. And obviously, that’s unfair. And I think we all recognize that. But beyond that, they also enjoy the benefits of what’s been called too big to prosecute or too big to jail privileges that essentially have allowed the largest banks to engage in lots of deceptive, unlawful conduct with near explicit immunity from serious consequences. And that allows them to accumulate, you know, that allows them to profit essentially off of conduct that’s generally prescribed, something that’s long recognized as unfair competition in antitrust law, in competition law.
And then you take those resources and the largest banks can invest them in product differentiation and things like advertising, consumer technology, perks and amenities, which consumers may enjoy. But historically in antitrust, we’ve considered product differentiation with some suspicion because it’s not necessarily like improving the core product so much as it’s improving how the consumer feels about the product.
But beyond product differentiation, the largest banks can use their resources to, for example, price loans below cost to favored borrowers. They can offer higher deposit or interest rates, and they can especially use that financial power as leverage to enter new markets and in other ways as well. So the size of the largest banks gives them unfair competitive advantages over small rural banks, but small banks generally. So that’s the first bit. I’ll sort of talk about regulatory influence really quickly and the last point, which is the hollowing out of rural banking markets.
In terms of regulatory influence, the issue is not so much that the largest banks are like pulling the strings in agencies. Obviously, that’s not how things work. But like because you have very large banks controlling a large number of banking assets, the regulatory apparatus has to be shaped to respond to the risks that the largest banks create. And in many cases, that requires technocratic rules. It requires a lot of standardization, is useful in that context. And that inevitably is not going to be as well suited to the circumstances of a small bank, and especially a small rural bank that needs – deals with niche businesses like different agricultural enterprises which have their own niche vagaries in terms of how you evaluate those loans and so forth.
So, there’s that sort of broad piece of how the consolidation of banking affects the regulatory environment. But more particularly, and sort of dovetailing with Patrick’s story, we see that like the largest banks do have the resources to play a role in shaping regulations through lobbying, through political influence, et cetera. And then once rules are created, they also have the resources to resist enforcement action, either because they can pour resources into litigation and into lawyers frankly. Or there’s also collateral consequences to going after large banks. And we saw that during the financial crisis when DOJ and the bank regulators had significant hesitancy about going after the largest banks for fraudulent conduct and other illegal actions because of their size.
And so that also creates an unfair regulatory environment. And it really impinges on the business model of small rural banks who really depend on their ability to be able to customize their products for local consumers, for local borrowers. That’s their competitive advantage. It’s that relationship banking. And so when you create a regulatory environment that prioritizes standardization, that sort of crimps their style, crimps their ability to do that. So that’s the second. And then there’s hollowing out rural banking markets, but I’ve talked for a long time.
TEDDY DOWNEY: No, no, go ahead. I like to talk about that because that dovetails with my next question.
BASEL MUSHARBASH: Oh, great. So the last piece about how consolidation harms rural banks is that the largest banks drive financialization and consolidation throughout the economy. I think David Dayen from American Prospect, in his most recent book, he says monopolies in banking are why we have, monopolies in every other industry, using monopolies loosely. And we see that has had its most harmful effects in rural communities. The root of rural distress, as Stacy Mitchell and the good folks at the Institute for Local Self-Reliance would say, is in consolidation. We’ve seen every important sector of the rural economy, from groceries to health care to agriculture to manufacturing, become increasingly consolidated in large urban headquartered corporations over the past four decades. And what that does really is that it hollows out the business ecosystems, the local business ecosystems, that a rural bank exists to serve.
And so their reason for existence in many ways is evaporating as the largest banks drive consolidation throughout the economy because that is financially beneficial for the largest banks. And in many ways, large metro headquartered banks are not necessarily harmed by this kind of consolidation just because they can serve larger customers that are also headquartered where they’re headquartered. But it definitely hollows out the market for rural banks and it harms their communities more broadly, which is what we’ll get into.
TEDDY DOWNEY: Something you say locally owned banks do in the report is provide a lot of commercial real estate loans in the community. I’m wondering how has COVID—is it exacerbating this community bank decline? Is affecting what you’re looking at all?
BASEL MUSHARBASH: I don’t have like any general data on this. But speaking from like looking at northeast Texas, we have seen like lots of real estate activity in the past, like real estate activity pick up in the last year or two. And I know the local banks in the region—Paris, Texas is where we’re located. It’s sort of a sort of against the trends I talk about in the report. Because we have four locally owned banks and they’ve all expanded real estate lending in this environment.
What I would say is that the effect of absentee ownership on real estate lending is that it makes it so that you have, especially in these smaller markets, you have less access for local developers who are seeking commercial development capital. And you also have, on the flip side, increases in the willingness to foreclose on delinquent loans.
And so I guess to get back to your question about how is this affecting real estate activity in the COVID environment, I would imagine that it may have a sort of perverse effect of that if you’re an out-of-town developer who’s looking to build 100 new or 200 new unit housing developments, you might not have any trouble accessing capital because the real estate market is hot and money is cheap. But if you were a local developer who’s just trying to rehabilitate an old building in downtown Paris, Texas, assuming Paris didn’t have these locally owned banks, then you might have a lot of trouble getting loans. I tried to get a loan to rehabilitate a building in downtown Paris from a larger bank in Dallas, and there is no way that could happen. And I think that’s a generalizable experience. So that maybe an effect of the current environment. I hope that answers your question.
TEDDY DOWNEY: Yeah, that’s perfect. I want to get into what you think the antitrust enforcers and the changes should be in the merger guidelines in a second. But I wanted to touch on an analogy made to the Great Depression as the last time DOJ ignored the antitrust laws. Maybe you could share that kind of little analogy that you made in the report.
BASEL MUSHARBASH: Sure, sure. The antitrust laws, as lots of people on the call will know, like the Sherman Act was passed in 1890. The Clayton Act was passed in 1914. And then World War I happened and we sort of just forgot about the antitrust laws. Not that we were particularly good about enforcing them before 1914, but we were definitely bad about enforcing them after 1914 and before the Great Depression.
And in that time, according to Thurman Arnold, who was the Assistant Attorney General for antitrust from the late thirties through World War II, he said the first victims of the failure to enforce the antitrust laws were the farmers. He traced how, as consolidation grew, you saw rural communities, agricultural communities, become essentially colonies of the—in his telling—of the industrialized east. And he saw how wealth was being extracted from those communities.
Banks failed in the west and the south, according to him as farmers experienced the consequences of this consolidation. And you saw these agricultural areas steadily losing purchasing power and economic independence. So in many ways, it parallels what’s happened over the last 40 years, as we’ve seen consolidation, both in industry and in banking, really extract resources from rural communities and also have a harmful effect on farmers and businesses in those communities.
TEDDY DOWNEY: And you link a lot of this consolidation, I mean, obviously, directly to a merger wave and of lax antitrust enforcement. And you have thoughts on what antitrust enforcers and policymakers should do to improve those. Can you tell us what’s the solution here? What do they need to change to capture the harm or address the harm that you’re seeing?
BASEL MUSHARBASH: Sure. So, I would say there’s no like technocratic, parado[?] optimal solution here where like no one loses. It’s more about we just really have to stop a lot of mergers. And I think that’s not necessarily a policy argument so much as it’s a legal argument. Because it’s about returning to the text and original intent of the Bank Merger Act. And that’s what I would recommend. If you want, I can sort of dig into that a little bit about like why that would be a useful thing to do here.
TEDDY DOWNEY: Yeah.
TEDDY DOWNEY: So if we look at the Bank Merger Act, it says that a bank merger would be prohibited if their effect may be to substantially lessen competition or tend to create a monopoly in any given market. Unless it creates an exception for mergers that are necessary to meet the convenience and needs of the community. And something to consider about that is that the first part, the prohibition, mirrors the language of the CellerKefauver amendment in 1950, which is today Section 7 of the Clayton Act that governs mergers more broadly.
So really what we have to think about is, okay, what did Congress mean in that original prohibition? Because obviously, it just mirrored that for banks and then created this exception. So those are the two parts of the analysis. And if you look at the CellerKefauver amendment, I would argue that fundamentally it prohibited most mergers, any merger involving companies of substantial size should be prohibited under the text of the CellerKefauver amendment.
And I won’t dig into the details of the legislative history in the text and how that works. But if anybody is interested, we actually just wrote a comment for, or my firm helped Farm Action write a comment on the bank merger guidelines that goes through the legislative history of the CellerKefauver amendment and shows how, I would say fairly strongly, that Congress really intended Section 7 to prohibit most mergers.
So taking that into the context of the Bank Merger Act, I would say stronger enforcement is not just about let’s just think more broadly about what harms these bank mergers cause. And more fundamentally, it’s about interpreting the law to give it the fullest effect that Congress wanted, which is to prohibit basically all mergers that involve companies of substantial size. And typically, that would mean companies that are larger than small businesses and that are engaged in interstate commerce. With more details, but that’s the gist of it. So that’s what I would recommend is let’s go back to the law as it’s actually written and as it was actually intended, instead of trying to enforce the law in accordance with our own policy preferences.
TEDDY DOWNEY: Yeah. And obviously there was a big fight at the FDIC about looking at making changes to the bank merger guidelines. Are you optimistic that the current, and potentially future, sort of the Biden administration, policymakers—obviously, stakeholders are expecting, I would say, the merger guideline rewrite, broader merger guideline rewrite in line with sort of the anti-monopoly movement. Because you have Kantor and you have Khan at DOJ and FTC, respectively. What about the bank regulators? Do you think they’ll end up being sympathetic to your arguments? Do you think that the people there are sort of part of this sort of Biden Administration push to crack down? Or is there more of a you’re not sure just based on—it’s not like, I mean, at least from my perspective, banking regulators are sort of the regulators even more lax than the lax ones. They’re sort of on the super lax end of the spectrum. I want to get your take on how do these people think? Are they sort of coming around to this? Are they receptive? Are they optimistic?
BASEL MUSHARBASH: So, I mean, I think I would answer that question in two parts. On the one hand, DOJ has a role to play here because DOJ is supposed to—like when a bank merger notification comes in, DOJ is supposed to do a competition report to the banking agencies. And it also can independently challenge bank mergers within certain restrictions. And that speaks to sort of that twopart analysis that I mentioned.
It’s you have the competition analysis as the broad prohibition. And then you have these exceptions under the Bank Merger Act for when a merger is necessary for the convenience and needs of the community to be served and things of that nature. So I would just say there may be more appetite at DOJ to return to the text and intent of the Bank Merger Act and the Clayton Act. I think Kanter has specifically said on multiple occasions that that is exactly what he wants to do, is he wants to stick closely to the text of this Clayton night.
And so I think so. I mean, obviously the interpretation that my firm and Farm Action proposed is possibly not the only interpretation of the text of those laws. But I would say the text is not too much broader than that. And there’s like a limited playing field for how it can be interpreted. So there may be appetite more at DOJ for that.
Now, as far as the banking agencies, I mean, I don’t have any inside information, obviously. I would imagine that the CFPB is more interested in stronger merger enforcement and going perhaps farther than the other banking agencies would. It seems the Federal Reserve is probably going to be the most really strong merger enforcement. But other than that, I’m not sure. I mean, I think we’ll see where the OCC and where the FDIC would land.
TEDDY DOWNEY: Yeah. And obviously, CFPB Chopra is on the board of the FDIC. We’ve got a few minutes left here. I want to open things up for questions again. If you have questions for us, email them to us at firstname.lastname@example.org. Why do you think the Fed is so pro-merger as an institution? I want to call it pro big bank. But does it relate to the point that you’re making earlier, that they sort of engage in all these technocratic exercises? And sometimes it’s legislation that asks them to do this, right?
BASEL MUSARBASH: Right.
TEDDY DOWNEY: To deal with big banks. Like they spend a lot of their time figuring out how to regulate big banks and deal with big banks. And they almost like work for the big banks in some respects. Is that why we have this sort of expectation that the Fed is going to be so pro-big bank?
BASEL MUSHARBASH: Yeah. I mean, I think just historically the Federal Reserve has not had as much of an interest in policing bank mergers. And so that’s part of why I’m sort of not optimistic about the Federal Reserve. But also, I think to the point about the relationship between regulators and the largest banks, in many ways, the Federal Reserve has a very close relationship with the largest banks. And its activity—as I’m sure many of your listeners maybe have heard of like the Kantian Effect and how sort of the folks who are closest to the money creation process tend to benefit the most from that process.
I hesitate to sort of make like broad claims here. But I think there may be just an unwillingness to or a blind spot maybe in terms of like seeing how a merger that creates larger and larger banks is going to truly be harmful. And I’ll make this point a little bit finer here. In some ways, like the merger and regulatory apparatus that we created with the CellerKefauver Amendment and the Bank Merger Act was supposed to dovetail, it was supposed to integrate with the broader banking regulatory apparatus we had coming out of the New Deal, which was really designed to not only keep banking foreign, but also keep banking local. And the goal there was that you’d have lots of locally owned banks from many different communities. They would be responsive to those communities, not just in the consumer sense, but also in the social and political sense. When you have a bank that operates in like three counties, there’s a bit of social pressure on how that bank operates. And they’re also susceptible to state regulation. But a bank that operates across state lines, none of that exists.
And on top of that, when you look at the structure of the Federal Reserve, like you used to have these local banks, which are member banks in their regional Federal Reserve, and then those regional Federal Reserve banks integrate into the Federal Reserve Board. And the idea was to create this sort of participatory structure for governing the monetary system. And the merger statutes were supposed to help preserve that. It was supposed to help make sure that we don’t have lots of consolidation that sort of vitiates the decentralizing goals of the broader bank regulatory apparatus that we have coming out of the New Deal.
So, unfortunately, I don’t know that the Federal Reserve has had much interest in that. And we’ve seen sort of the Federal Reserve play a much more centralizing role over time than the opposite. And so anyhow, that’s a broad background. I don’t claim to have any particular insight into what folks at the Federal Reserve are actually thinking, but that’s been the Federal Reserve’s role for the last few decades.
TEDDY DOWNEY: And then last question here. What if you had a magic wand? Obviously, changing the merger guidelines only stops more mergers. It doesn’t solve a lot of the consolidation problems that we’ve seen from consolidation that have already happened. If you had a magic wand, what would you do to fix or address the problems that you just walked through in this call in terms of regional and rural bank decline?
BASEL MUSHARBASH: Yeah. Oh, gosh. I mean, I think I don’t know that I have like a broad answer that would fix all problems. But something that’s really important is fostering new banks, new bank formation. That doesn’t necessarily mean just relaxing all regulations, but there are affirmative things that the agencies can do to help small communities, rural communities, form their own banks. And I would say that would be an important part of fixing the problem that we have, which is that banking power has become consolidated in large metro headquartered banks. So that’s one thing.
Another thing that would be useful is to think about break ups. Because in some ways, there hasn’t been enough research on this. But just looking at how consolidation affects other industries, I don’t know that we can separate the near disappearance of new bank formation from the consolidation that exists. I think those two things are connected. And I would say if we actively tried to deconsolidate banking through break ups or other tools, I think that may be useful.
TEDDY DOWNEY: One of the things that the new antitrust enforcers said that they are interested in doing is litigating already closed deals. Is there any big bank merger that happened in the past ten years that strikes you as just like the most egregious, most problematic one that got way through that should be looked at again?
BASEL MUSHARBASH: I wish. Unfortunately, under the Bank Merger Act, we can’t go back and challenge mergers. At least if I remember correctly. So that’s not as viable a route to challenge mergers that have already been consummated. But I imagine there are other avenues to break up banks. But it might really be a matter of going to Congress and asking for that authority.
TEDDY DOWNEY: That makes sense. That makes sense. Well, Basel, thank you so much for doing this. Sorry to everyone, including you, for all the technical difficulties. Like I said, clearly there are some people that don’t want us doing these calls. But just really appreciate your time, really appreciate your willingness to chat with us. And thanks so much.
BASEL MUSHARBASH: You bet. Thank you for having me.
TEDDY DOWNEY: Thanks everyone, for joining the call today. I think we’re going to stick on this theme of bank mergers with interest rates going up to be an interesting area for us. So thanks to everyone for participating. And this concludes the call.