What does concern me, however, is that even more of the nation’s bank deposits will be channeled to small businesses through corporate credit cards rather than through loans made by flesh-and-blood bankers. Why is that important? Simply put, because only bankers with deep understanding of industries, communities and customers can be relied on not to push cheap and easy loans during credit booms and then abruptly cut off credit lines or raise rates at the first sign of economic trouble.
Despite their denials, what I just described is the model for business lending for credit card companies such as Capital One. Over the years it has systematically undermined traditional business lending by community banks while exacerbating the swings in the credit cycle and the economy. That is particularly true here in Washington, where Chevy Chase Bank has never been a factor in business lending outside of real estate, in large part because of the limitations of its savings bank charter.
My second concern is that Capital One, along with the rest of the banking industry, is proposing criteria for assessing risks to the financial system so narrowly that they wind up never stopping any financial institution from doing anything. By trying to come up with purely objective, numeric criteria for determining what size is “too big” or what businesses are “too risky,” regulators fall into a trap in which any acquisition or activity can made to appear too insignificant to trigger a global financial crisis.
Remember Fed chairmen Alan Greenspan and Ben Bernanke assuring everyone that subprime mortgage lending was just too small to cause a financial crisis? That is precisely the kind of reasoning that develops when regulators take the narrow, numeric view.
By such standards, regulators in 2007 would have surely concluded that Bear Stearns was not “systemically important.” And yet when Bear was in danger of collapse, Bernanke and his Fed colleagues concluded that they had no choice but to mount a rescue. Why? According to their own testimony, because they feared a psychological impact that would trigger a run on the financial system.
Consider firms that are systemically important in the way Bear Stearns was. Capital One has assets of $300 billion. BlackRock holds $3.7 trillion worth of other people’s assets. And GE Capital at one point had half a trillion dollars in outstanding corporate and commercial real estate loans. All are big and blue-chip enough that the failure of any would cause even lenders and investors not associated with them to run for the exits.
The truth is that there is no great social or economic benefit to Capital One buying ING. Smaller institutions could buy ING, albeit for a lower price. Or it could be spun off to existing shareholders as a strong, independent company. Even without a merger, ING customers can freely get loans from Capital One while Capital One customers are free to deposit their money online with ING. Whatever efficiency gains there are from this acquisition are likely to be captured by shareholders, not customers.
And while it is true that there is a big difference between the systemic risks posed by a trillion-dollar bank and a $300 billion bank, that kind of logic falls into the category of two wrongs somehow making a right. We know that Greenspan and fellow regulators should never have permitted mergers that created trillion-dollar banks. Given the recent crisis, using that as the standard is loony.
Bank consolidation is like a drug — the more you do, the more you want to do. At some point the rest of us have to do the Nancy Reagan thing and just say no.