After Too Big To Fail, Too Big To Merge?

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Did antitrust ideology play a role in the collapse of Silicon Valley Bank (SVB) and the slight contagion that destabilized the global banking system thereafter? Randy Quarles, Vice Chairman for Supervision at the Federal Reserve until as recently as 2021, asks a pointed question in the Wall Street Journal:

[W]hy didn’t the FDIC arrange for a stronger bank to buy SVB the night before it failed? The swift transfer of a failed institution into the hands of a strong buyer usually restores calm without extraordinary regulatory actions, which inevitably confuse incentives and create moral hazard. Were some potential purchasers ruled out at the beginning? Did the FDIC provide enough incentive for an acquisition early on? The system is designed to absorb the failure of a $100 billion bank, but not if the FDIC ties one hand behind its back.

We need to know the answer to this. After quite some time, the FDIC did indeed arrange a sale, to a moderately-sized regional bank, First Citizen of North Carolina, for which the Corporation is extending a $70 billion line of credit. This will put banks and their customers (ie us) potentially on the hook for much more than the $20 billion it will cost to replenish the deposit insurance fund.

So why didn’t the FDIC do what it would normally do? We already knew that it ruled hedge funds out of buying the bank’s loans because of political animus. What if the sale of the bank was delayed for similar reasons? When Credit Suisse started to crumble, Swiss regulators wasted no time in arranging its sale to Switzerland’s largest bank, UBS. Why didn’t the FDIC arrange the sale of SVB to one of the nation’s largest financial institutions?

There are rumors flying in Washington that the White House, Senator Elizabeth Warren, CFPB head Rohit Chopra and others may have thrown their weight around, saying they would not stand to see a large bank grow even larger without onerous terms. In other words, this road not taken was ruled out by the antitrust ideology that has suddenly taken over much of Washington DC.

As Tyler Cowen said on the Bari Weiss podcast Honestly (sixteen minutes in,) these rumors suggest that there were plenty of interested suitors, but the administration ruled them out for precisely these reasons. As he put it, this was a “seventh order” worry in comparison with what the banking regulators should have been concerned about – the stability of the banking system.

We have a high level committee expressly set up to consider the stability of the banking system – the Financial Stability Oversight Council (FSOC). It should immediately conduct a public investigation into this question and let us know why suitors were ruled out. The failure of the FDIC to arrange a sale came this close to being another Lehman Brothers moment, when the keys to the financial Doomsday Machine were handed out. Any possibility that anti-market ideology put us on the brink should be treated like the scandal it is.

Such an investigation is unlikely any time soon. Instead, we should worry that regulators have added to the moral hazard of Too Big to Fail another problematic category – Too Big to Merge.

If FSOC won’t act, the relevant House Committees must.