Banks and the 10% Deposit Cap

On page 180, we say this:

“Bank of America, JPMorgan Chase, and Wells Fargo all had to be exempted from a federal rule prohibiting any single bank from holding more than 10 percent of all deposits in the country.”

This is not quite right.

We were relying on this passage from a Washington Post article: “Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation’s deposits despite a rule barring such a practice.”

The facts are a little more complicated. The Riegle-Neal Act of 1994 did create a 10 percent deposit cap (codified in 12 U.S.C. 1842(d)), but the cap is enforced for acquisitions, not for organic growth. In September 2007, the Federal Reserve approved BofA’s purchase of LaSalle Bank on the grounds that BofA  had 9.0% of deposits and LaSalle had 0.9% of deposits, so the combined bank would only  have 9.9% of deposits. Then BofA got across the 10% line organically. In June 2008, when the Fed approved BofA’s acquisition of Countrywide, BofA already had 10.04% of deposits; however, since Countrywide’s only insured depository subsidiary, Countrywide Bank, was a “federal savings bank,” it was  not a “bank” for the purposes of the 10 percent deposit cap (see Federal Reserve order, p. 5, n. 13).

This same loophole allowed Bank of America to buy Merrill Lynch in September 2008. BofA already had 10.8 percent of all deposits at insured depository institutions, and Merrill had 1.1 percent of deposits. However, that acquisition was allowed because:

“The [Riegle-Neal Act] provides that the Board [of Governors of the Federal Reserve] may not approve an application for the interstate acquisition of a bank if consummation of the acquisition would result in the applicant controlling more than 10 percent of the total amount of deposits of insured depository institutions in the United States. . . . ML Bank is chartered as a federal savings bank under the Home Owners’ Loan Act and, therefore, is exempt from the definition of ‘bank.’ . . . ML USA operates as an industrial loan company and also is exempt from the definition of ‘bank’ under the [Bank Holding Company] Act. . . . As a result, ML Bank and ML USA are not ‘banks’ for purposes of the BHC Act and its nationwide deposit cap.”

In October 2008, the Federal Reserve Board also approved Wells Fargo’s acquisition of Wachovia. Based on the latest available data at the time (June 30, 2008), the combined company would have 10.1 percent of total deposits. This time, however, the Fed ruled that based on other data, total deposits were likely to have grown around 3 percent in Q3 2008, meaning that Wells-Wachovia would have less than 10 percent of total deposits.

I can’t find an order approving JPMorgan Chase’s acquisition of the assets of Washington Mutual. This is probably because it was technically an asset acquisition, not the acquisition of a bank; in any case, Washington Mutual probably would have also fit through the exemption for thrifts, like Countrywide and Merrill Lynch.

So in summary, while there is a 10 percent deposit cap, it only applies to acquisitions of banks, not thrifts, and therefore Bank of America and JPMorgan Chase were able to get above it without requiring special treatment by the Federal Reserve. Whether the loophole for thrifts is a good idea is another question beyond the scope of this blog post.

Thanks to Ron Feldman for pointing out our need to address this issue.

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