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Elizabeth Warren wants to make it harder for big banks to get bigger

Posted December 5, 2019 2:23 p.m. EST

— If big banks held marriage ceremonies to celebrate their mergers, Elizabeth Warren would be the first one to shout, "I object!"

Warren fears these tie-ups will create Too-Big-To-Fail institutions like those at the heart of the 2008 financial crisis.

That's why the 2020 Democratic presidential candidate plans to introduce legislation that takes direct aim at bank mergers by forcing regulators to more closely scrutinize the wisdom of these deals.

The legislation, announced Wednesday, would force bank marriages involving consumer products to get the blessing of the Consumer Financial Protection Bureau, the agency whose 2011 creation was inspired by Warren. And it would call on regulators to stress test the balance sheets of big banks that want to join forces.

Although the legislation is unlikely to get through Congress, the push to crack down on bank mergers underlines the tough stance a President Warren would adopt against Wall Street and Corporate America more broadly.

"This bill serves as an indisputable reminder that the M&A environment will become far less hospitable for companies under a progressive Democratic administration," Isaac Boltansky, director of policy research at Compass Point Research & Trading, wrote in a note to clients Thursday.

3,819 bank merger applications. None of them denied

That would be quite the shift from the current climate for deals, particularly those in the financial industry.

Last month, US regulators approved the merger of SunTrust and BB&T, paving the way for the formation of the nation's sixth-largest commercial bank.

Valued at $28 billion, the SunTrust-BB&T deal is the largest banking merger since JPMorgan Chase's 2004 takeover of Bank One, according to Dealogic. The transaction is expected to close late Friday and the banks will slowly phase in the company's new brand name, Truist, over the next two years.

Warren, whose office said she plans to formally introduce the bill in coming weeks, has repeatedly called out regulators for failing to adequately scrutinize deals. In response to questions from Warren, the Federal Reserve confirmed last year that it did not decline any of the 3,819 bank merger applications it received between 2006 and 2017.

"Regulators serve as rubber stamps," Warren's office said, calling the review process "fundamentally broken."

The banking industry signaled that it will oppose any significant changes.

"We believe the current merger review framework, which includes extensive reviews by both regulators and the Justice Department, has served the nation well," said Jeff Sigmund, a spokesperson for the American Bankers Association, in a statement to CNN Business.

Preventing another Citigroup

The 2008 financial crisis, the worst since the Great Depression, was worsened by the creation of mega banks. For instance, Citigroup became a colossus after its 1998 merger with insurance giant Travelers. That deal was made possible after Congress and President Bill Clinton repealed the Glass-Steagall Act, a Depression-era law that prohibited traditional banks from doing the riskier work of investment banks.

Citigroup would eventually require an epic bailout from taxpayers during the crisis. The bank received $476 billion in cash and guarantees from the federal government, according to a 2011 Congressional report.

"There is deep skepticism among progressive Democrats of the value of larger banks. As a result, mergers immediately raise red flags," Jaret Seiberg, managing director at Cowen Washington Research Group, wrote in a note to clients.

Warren's bill would require the CFPB to approve deals when at least one bank offers consumer financial products. That would seemingly include the vast majority of bank deals.

Further, the legislation would only allow mergers between institutions with the highest Community Reinvestment Act rating in two of their last three exams. Passed in the late 1970s when some banks refused to lend to poor and minority communities, the CRA requires regulators to encourage banks to meet the needs of all neighborhoods, including low-income ones.

Warren also wants regulators to use quantifiable metrics to evaluate the impact of big bank mergers on the financial system. And officials would be required to review the risk management track records of bank management as well as examine the health of big bank balance sheets.

Cowen's Seiberg said the idea of subjecting bank balance sheets to "severe" stress tests "could gain traction," even without Congress taking action.

Against this backdrop, analysts warned banks the clock is ticking to get deals done given the risk of a change in power in Washington.

"The path forward for bank mergers will be smoothest for deals unveiled in time for Trump's regulators to review them," Seiberg said.

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