Prepared Remarks of CFPB Director Rohit Chopra at the National Community Reinvestment Coalition

Good afternoon.

Recently, there has been renewed interest in the role that banks play in local economies and communities, particularly when it comes to mergers. The failure and sale of Silicon Valley Bank, Signature Bank, and First Republic Bank generated significant discussion. The more recent announcement of a proposed merger between two credit card giants has similarly sparked public debate. Against this backdrop, the banking industry sued regulators in February regarding the modernization of the Community Reinvestment Act rules.

Today, I want to talk about how we should think about why banks should serve cities, towns, communities, and neighborhoods, especially in the context of bank mergers.

First, I’ll discuss some history of banking and the term “convenience and needs.” Next, I’ll discuss the Bank Merger Act and the ways in which regulators drifted from its original legal purpose over time. Finally, I’ll close by highlighting a few key provisions in the FDIC’s new proposed policy on bank merger review as it relates to serving the community.

Essential Infrastructure

Throughout the history of our country, the government has recognized that certain sectors, like telecommunications, transportation, energy, and banking, are essential and special. They are effectively economic and social infrastructure that facilitate commerce and underpin our society. If they turn off or shut down, chaos erupts. If access is unavailable or limited for certain populations, their lives are diminished.

It’s one of the reasons I’m so drawn to the business of banking and finance. It’s as essential to our lives as the electricity grid or our roadways.

For these industries, the government provides extensive public privileges, and, in turn, the companies face special obligations to serve the public. That’s been the basic bargain at the heart of our laws on essential infrastructure and utilities.

The state and federal statutes governing infrastructure and utility industries include public interest provisions reflecting this bargain. A very common phrase in these statutes relates to the requirement that the “convenience and needs” or “convenience and necessity” of the community be served.

In the mid-to-late 1800s, states began adopting this standard primarily as a threshold for approving new entrants to or greenlighting new projects in a utility industry.¹ In the early 1900s, this phrasing was adopted in federal law as a statutory consideration for various actions that required regulatory approval, including in the Transportation Act of 1920, Communications Act of 1934, Natural Gas Act of 1938, and Motor Carrier Act of 1935.

Many banking laws in the U.S. include the “convenience and needs” standard. State and federal laws governing the chartering of banks and the granting of deposit insurance, such as the National Bank Act and Federal Deposit Insurance Act, included this language as a statutory factor for considering such applications.²

A plain reading of the law suggests that two distinct questions are embedded in this standard. Does the application advance the goal of addressing unmet needs in the community? Does the application improve upon a product, service, or outcome that would be in the community’s interest to realize? This interpretation is generally supported by a review of 19th and early 20th century case law and orders issued by relevant regulatory commissions.³

This standard meant that a company could meet financial, safety, or other qualifications, but if the new firm, new project, or other action wasn’t in the public’s interest, the application could be denied. This standard is designed to ensure that the privileged position the company holds advances the interest of our nation and is not simply exploited for private gain.

Bank Merger Act of 1960

In 1955, Chase National Bank, the third largest commercial bank in the country, merged with Bank of the Manhattan Company, the 15th largest bank, to form Chase Manhattan Bank. This was just one of a wave of bank mergers in the 1950s that created significant public concern about the creep of consolidation. In response, Congress passed the Bank Merger Act of 1960 to rein in the merger spree. Initially, there were three factors for the banking regulators to consider: competitive effects, financial and managerial resources and future prospects of the company, and, yes, the convenience and needs of the community to be served.

As the Supreme Court later stated in 1968 referencing the Bank Merger Act, “[Congress] concluded that a merger should be judged in terms of its overall effect upon the public interest.”⁴

After evaluating a range of merger approval orders from the past few decades, it is clear the robust review intended by the 1960 statute was whittled away.

For example, the agencies have increasingly relied on the merging banks’ Community Reinvestment Act rating as a proxy for the convenience and needs of the community factor in merger review. There are a few problems with solely relying on this rating.

The Community Reinvestment Act rating is backward-looking. The rating judges how well the banks met the needs of the community over the past several years. Given the frequency of the Community Reinvestment Act review cycles, the rating regulators relied on could be quite stale.

In addition, the rating represents regulatory judgement of how each individual bank has met the needs of the community in which it currently operates. This can provide a muddled picture of how the combined entity would serve the new broader community, given that mergers often lead to significant changes in a bank’s business plan. A target bank may do a great job serving local family farms. The large acquiring bank may have no experience with that business line. As a result, the combined bank’s service to family farmers may deteriorate. The Community Reinvestment Act is an important anti-redlining statute, but it asks a different question than the one regulators’ face when reviewing a merger application.

The shift away from the law’s public interest standard in merger review created a void. As communities dealt with the harms inflicted by bank consolidation, many local groups have attempted to fill the void. One of the major ways is to negotiate agreements with merging banks. Even when local groups couldn’t stop the stamp of approval for an illegal merger, many use their voices and relationships to convince banks to come to the table.

But as you have rightfully pointed out, this is not an antidote. Community organizations do not have the authority to adequately enforce the terms of the agreements. Some banks have allegedly flouted the agreements as soon as they received regulatory approval. In addition, if banks know the convenience and needs factor will not ultimately inhibit approval, community organizations have limited leverage in the negotiations.

Following the Law on Mergers

I want to talk about some of the features of the FDIC’s proposed policy on bank merger review that are intended to address these weaknesses and shift back to the original intent of the law by restoring a comprehensive assessment of the impact on local residents and small businesses.

It is important to reiterate at the outset that the convenience and needs review is distinct from the evaluation of a transaction’s impact on competition. A transaction that undermines competition will have a negative effect on the community and under existing law there are rare exceptions for when approval of an anticompetitive merger should be allowed, such as when a bank is failing.

First, the policy statement sets a clear standard for review: the community should be better served by the combined institution than it was by the individual banks prior. This analysis is forward-looking, and the burden of proof is on the applicant to provide actual evidence, not just corporate platitudes. Would the merger improve the products, services, and delivery channels the community already enjoys or address an unmet need? Will the community actually benefit?

There are strong laws and incentives in place to ensure that shareholders and executives benefit, but the law requires that bank mergers factor in the impact on the communities that the merger will affect. If there’s no clear benefit, the application can be denied.

Second, the policy statement restores regulatory accountability. If the banks make certain representations or commitments in the application to demonstrate how the community will be better off, including by submitting a Community Benefits Agreement, some of these requirements may be formal conditions of approval.

Of course, we should be skeptical of relying on time bound pledges and commitments if there are concerns about the long-term impact of the transaction that may outweigh any short-term benefit.

Third, the policy statement asserts that the agency will consider branch closures in the convenience and needs review. Over the past 15 years, regulators have too often ignored branch closures in the context of merger review. Since 2009, branches have decreased by 15% nationally. Recently, this trend has been driven by megamergers and large bank branch closures. Since 2019, the banks with the largest net reduction in branches were Truist, Wells Fargo, PNC, Bank of America, and U.S. Bank.⁵ These banks accounted for more than 50 percent of the net branch reductions from 2019 to 2023. During the same period, small relationship lenders with $10 billion or less in assets increased their branches by 1.1 percent.

Even as online and mobile banking functionality has proliferated, people still find it very useful to visit a bank branch and talk to a real person. In 2019, 83% of households with a bank account visited a bank branch in the previous year.⁶ Updated 2021 data shows that 15% of households with a bank account use a branch as their primary method of accessing their account.⁷ This is an especially important service for lower-income, older, and rural households. These households have been most impacted by branch closures over the last 15 years.

At the CFPB we’ve seen this impact firsthand. We’ve heard directly from rural communities across the country, from New Mexico to Montana to Uniontown, Alabama, where Cadence Bank recently closed the town’s last remaining bank branch.

Bank branches can be vital for the health of local economies. After branch closures, small business lending and mortgage lending can dry up, businesses may close shop or leave town, jobs are lost, and the local economy suffers.

Finally, I want to highlight the policy statement’s discussion of the merging banks’ record of compliance with consumer protection and fair dealing laws. It doesn’t make much sense to permit a bank that has repeatedly violated the law to expand its reach. That simply puts more consumers and businesses in harm’s way.

Mergers themselves can also further aggravate a repeat offender’s propensity to engage in unlawful conduct. As the bank becomes larger and more complex, it becomes more difficult to manage. Wells Fargo is a useful example. As the firm grew through major acquisitions before and during the financial crisis, it lost control of its financial empire and consumers became the collateral damage.

Indeed, a common theme of many violations of law that the CFPB has identified over the years can be at least partially attributed to botched consolidation. A lot of the consumer harm we see in the wake of mergers, both in the near-term and long-term, can be tied to failed systems integration, highly complex governance structures, and misaligned incentives throughout the expanded organization.⁸

Ultimately, the purpose of the banking system is to provide a neutral power source for businesses to develop new products and services and for households to attain the dream of homeownership and thrive. It is a privileged position within our economy and society. It's critical that we go back to the original meaning of our founding statutes to ensure that basic principle is reflected in our merger review.

Thank you.

Footnotes

1. For a state-level history of this standard, see https://doi.org/10.2307/1121802 .
2. This statutory factor was removed from the National Bank Act for national bank chartering decisions in 1991, but remains a consideration in many state laws governing bank charters and is a consideration in the Federal Deposit Insurance Act for deposit insurance applications.
3. See for example, a summary of early Interstate Commerce Commission Orders implementing the Motor Carrier Act of 1935’s convenience and necessity standard. “Commission will grant a certificate if the proposed operations are unique or distinct from existing service by reason of the applicant's special equipment or experience or if the proposed operations serve a public need or class of customers not served by existing carriers. On the other hand, if the applicant's proposed service is the same as that which existing motor carriers offer, a certificate is usually denied” (emphasis added) https://repository.law.umich.edu/cgi/viewcontent.cgi?article=10075&context=mlr.
4. United States v. Third Nat'l Bank of Nashville :: 390 U.S. 171 (1968) :: Justia US Supreme Court Center .
5. U.S. Bank Branch Closures and Banking Deserts (philadelphiafed.org) .
6. https://www.fdic.gov/analysis/household-survey/2019/index.html#:~:text=and%20Financial%20Services-,2019%20FDIC%20Survey,union%20(i.e.%2C%20bank) .
7. https://www.fdic.gov/analysis/household-survey/index.html .
8. It requires a more nuanced analysis when the target company is a repeat offender. The default theory in bank merger review over the past few decades has been that a well-managed acquirer can fix a problem target. It is possible, though, for a poorly run target to infect a well-managed acquirer.