GLB Lessons Instructive as Deposit Cap's Future Eyed

By Davenport, Todd | American Banker, February 28, 2007 | Go to article overview

GLB Lessons Instructive as Deposit Cap's Future Eyed


Davenport, Todd, American Banker


It is a company struggling to demonstrate a road map for growth. The struggle is all the more challenging because it is one of the world's largest banking companies, and the law of large numbers is working against it.

And gumming up its model of choice is a federal law that looms as a seemingly insurmountable barrier.

That characterizes the pickle in which Bank of America Corp. finds itself now. The Federal Reserve Board said the company, which in the past used acquisitions as its primary growth strategy, held 9.7% of the nation's deposits once it acquired MBNA Corp. on Jan. 1, 2006. Federal law prohibits acquisitions that would put that figure over 10%.

Almost a decade ago Citicorp was a close analogy. When it announced a pairing with Travelers Group Inc. on April 6, 1998, it had one little problem: The combined company mixed businesses that the Glass-Steagall Act of 1933 had separated. So Sanford Weill, then the chief executive of Travelers, put his efforts behind removing the legal barriers. A year after the deal was done, Glass-Steagall was gone.

Bank of America's odds of duplicating Citigroup Inc.'s success are substantially longer, and not just because Kenneth Lewis, B of A's chief executive, is now scaling back -- at least publicly -- his company's lobbying efforts against the deposit cap. And for those who suggest B of A's primary limitation is a buttoned-down corporate suite that can't match the damn-the-torpedoes aggression that came to characterize Mr. Weill's, it is worth remembering that there is a big difference between swashbuckling and tilting at windmills.

In his quest to repeal Glass-Steagall, Mr. Weill had all the advantages that Mr. Lewis lacks: industry allies, sympathetic legislators and regulators, and, perhaps most importantly, good timing.

"Just as Citi might have wanted a change in the law, others wanted a change -- and not necessarily for the reasons Citi did," said former Rep. Jim Leach, the Iowa Republican who hammered out the eventual modernization law that bears his name. "This bill had been under consideration long before Sandy Weill dreamed of getting in the banking business."

It will take plenty of lobbying muscle from the nation's largest banking companies to mount a challenge to the deposit cap -- which seems inevitable, as consolidation nudges their market shares toward the limit -- but for now B of A is alone.

"The longer-term outlook is that the domestic-bank consolidation is likely to continue, and there are enough banks that are potentially within striking distance that it will become something that is more widely supported by the banking industry," said Jeffery Harte, an analyst at Sandler O'Neill & Partners LP. "But as it stands now, eliminating the cap pretty much helps B of A only, and I don't see why any of its competitors would want to support that."

The "Financial Supermarket Thing"

The deposit cap, part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, is relatively new and untested. Citigroup challenged a legal barrier that was weakened from decades of banking companies' knocking against it, usually with their regulators' help.

Legislation to "modernize" financial services laws by repealing Glass-Steagall, which prevented commercial banks from engaging in securities and insurance underwriting and dealing, had become a recurring fixture on the legislative agenda. The lobbying effort that followed Citicorp's merger with Travelers was the catalyst that pushed the bill to completion.

Not that most banking companies had been stymied by Glass-Steagall. The Depression-era law empowered the Fed to define what constituted a holding company's "engaging" in underwriting, and the definition softened over the years.

By 1996 the Fed had declared "a company earning 25% or less of its revenue from underwriting and dealing would not be engaged principally in that activity" under its interpretation of Glass-Steagall. …

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