Banking Restrictions – Assignment Example

Banking Restrictions The United s (U.S financial regulation passed in 1994 of 10% concentration limit on bank deposits is enforceable on all banks operating on U.S. soil, including those of foreign ownership. Additionally, several states have placed a 30% cap on bank deposit holdings by any single entity, be it through growth or merger and acquisition activity (Razaee, 2001, p.56). The primary reason behind placing such constraints on banking institutions is to avoid the monopoly of a single or a few large entities in the industry. The secondary reason behind Congress’ enacting this law was to allow smaller banking organizations to function in an encouraging environment, and offer some level of competition to the big entities of the sector.
However, the law has been opposed by bank bosses for many years, with many trying to fight to have the law repeal but remaining unsuccessful. According to the executives, the law does not offer the American banks a competitive platform against foreign banks, as the latter do not adhere to any such restrictions in their home nations. This allows the foreign banks to continue their growth and provides them a position for furthering their position within the U.S., giving them more fiscal strength to undergo mergers and acquisitions.
But the law remains flawed for the U.S. institutions as well, as many have been able to source and abuse a loophole within it. The three recent activities of JP Morgan Chase taking Washington Mutual, Bank of America acquiring Merrill Lynch, and Wells Fargo merging with Wachovia, have ended up creating three entities controlling almost one-third of all deposits in the United States (Sanati, 2008). This has been possible because the law is strictly enforced for banks, while the three targets in the above deals were not classified as banks by the Federal Deposit Insurance Corporation, America’s regulator for bank deposits. Washington Mutual is listed as thrift, Merrill Lynch as a broker-dealer, and Washington Mutual as a bank holding company. In all cases, independent analysts have placed the total deposits of the newly formed entities over the 10% cap.
Large institutions have shown a greater tendency of risk-taking and failures with more impact; the case of Lehman Brothers is most evident of this. The deposit cap for banks can only work in controlling the growth rate, but not the liquidity stress test that banks must undergo in order to ensure their survival in troubled times. Additionally, its application must be enforced in a more logical method, so that all financial depositories are considered as similar risk factors in terms of fiscal policy.
References
Rezaee, Z. (2001). Financial Institutions, valuations, mergers and acquisitions: the fair value approach. (2nd ed.). John Wiley & Sons.
Sanati, C. (2008, October 17). “Merging Banks Surge Past U.S. Deposit Cap”. The New York Times (Online). Retrieved June 08, 2010.
http://dealbook.blogs.nytimes.com/2008/10/17/merging-banks-surge-past-us-deposit-cap/