The Kabuki Theater of the Federal Reserve
Public Meetings - and Other Trends
By Matthew Lee Click here for ICP CRA Reporter or ICP Federal Reserve Watch
In the course of three months in the summer of 1998, the Federal Reserve System held four public meetings on bank mega-merger proposals. While hundreds of community organizations, concerned about these mergers, requested these public meetings, many were left disappointed and dissatisfied with the way the FRB conducted them. This article, at the invitation of the Federal Reserve Bank of San Francisco, will attempt to explain the basis of this dissatisfaction, and sketch certain ways the FRBs public meeting procedures could be improved.
A bank holding company cannot merge, or acquire another bank, without applying to, and receiving prior approval from, the Federal Reserve. The Federal Reserve cannot approve a merger which would substantially lessen competition, and must consider the Community Reinvestment Act record of the applicants, and the effects the merger would have on the convenience and needs of the community. The primary dissatisfaction of most of the groups I spoke with is that they believe that Federal Reserve approval of these merger applications is pre-assured, and so the public meetings, how ever they are held, are little more than window dressing.
Mega-merger proposals such as this summers Citicorp-Travelers, NationsBank-BankAmerica, Banc One-First Chicago and Wells Fargo-Norwest proposals trigger dozens, or in some cases hundreds of comments from community groups, expressing concerns about the banks record of lending in low- and moderate-income communities, the branch closings the mergers would result in, or the elimination of existing community development programs as the acquiring banks corporate culture (and officials) replace those of the target institution.
The Federal Reserve has never explained what its standard for granting public meetings requests is. On smaller mergers, even if the applicant bank has a rare less than satisfactory CRA rating, the FRB often declines to hold a public meeting. What triggers a public meeting appears to be either the sheer volume of comments and requests, or requests from elected officials.
In 1998, the Federal Reserve has granted requests for public meetings on five merger applications. In each proceeding, the Federal Reserve has held only one public meeting, in one location. This has been a change from 1992 (when the FRB held multiple meetings on NCNB-C&S/Sovran and BankAmerica-Security Pacific) and from 1996 (when the FRB held three public meetings on Fleet-Shawmut). Given that the mergers of 1998, particularly NationsBank-BankAmerica, created unprecedentedly large banks, in terms not only of assets but of the footprint of states in which the resulting banks branches would be, this retrenchment is hard to understand. It left many groups disappointed, or unable to participate. For example, the FRB held its single public meeting on NationsBank-BankAmerica in San Francisco. While some groups from NationsBanks home states in the Southeast paid thousands of dollars to travel to San Francisco, other affected groups were unable to do so. Holding its only meeting on Wells Fargo-Norwest in Minneapolis, during a major airline strike, was also difficult to understand. The Federal Reserve, apparently in order to limit the number of groups for whom it extends the written comment period, states that only witnesses who actually travel to and testify at the meetings have an extra week in which to submit written comments on the meeting transcript. This form of pay to play is inappropriate. Advocacy groups which do not have funding to travel thousands of miles to the public meetings are given a shorter period in which to submit written comments than better-funded groups who can travel to the public meetings. This should change.
A second critique raised throughout the summer by community groups was the growing trend of the applicant banks not only soliciting groups they work with and fund to testify, but paying these groups travel and hotel expenses. First Union paid dozens of groups from the South to testify at the First Union-CoreStates public hearing in Philadelphia; local Philadelphia activists asked the Federal Reserve to encourage witnesses to disclose such arrangements, to no avail. Citicorp barraged the Federal Reserve Bank of New York with requests to testify from symphonies and youth groups in Florida, leading to a two- (rather than one-) day public meeting.
This has the appearance of bought testimony. In any court of law, a witness financial motive for testifying is always relevant. Expert witnesses are routinely required to disclose how much they are paid, including whether their travel and lodging expenses are paid. A number of groups have suggested either than the regulators prohibit banks from paying pro-merger witnesses travel and lodging expenses, or, at the least, allow community groups concerned about the merger, which are not funded by the banks, to testify by satellite from locations in their own communities. The Federal Reserve four times this summer denied requests that testimony by allowed from various Federal Reserve Banks (from the Dallas and Richmond Reserve Banks, for example, on NationsBank-BankAmerica).
The Feds public meeting process has in some sense become a form of kabuki theater, a ritualistic dance whose script and outcome is known in advance. The applicant banks will sing their own praises for half an hour; the Feds panel will ask three or four questions, to which the banks may or may not respond. This will be followed by alternating panels of community advocates, usually from the state in which the public meeting is being held, testifying in detail about the mortgage lending record of the applicant, then panels of community development professionals, often from far away, testifying about the financial support the banks have given their organizations. Reporters will file stories saying that the testimony was mixed. The record will close; the banks may or may not submit a written response to what was said at the meeting. The Justice Department will approve the merger as to antitrust, and shortly thereafter, the Feds Board of Governors will meet and approve the merger, issuing a long Order which appears most concerned with CRA, but on this issue primarily recites from CRA exams, and addresses the comments with pre-designed boiler plate footnotes.
A number of groups have the following suggestion: since no one disputes that the banks have in fact given the funding that they list in their applications and annual reports, such testimony should be stipulated to, and pro-merger groups who will only testify about financial support they have received need not attend the public meeting. At present, each witness has only four to six minutes, largely because the banks barrage the Fed with requests to testify from groups they have funded. Since the Fed only holds public meetings if there is opposition to a merger, it is logical that the public meeting testimony (and increased questioning, see below) would focus on the basis of this opposition.
At the public meetings, the applicant banks are given the first panel. They read prepared statements into the record, face two or three questions from a Fed staffer, and then do not speak again at the meeting. The result is that the banks never have to answer the allegations made by the commenters. It is like ships in the night: first the banks say that they are good, then dozens of groups say that the banks are bad, and the meeting is adjourned. Numerous groups suggest that the banks be required to answer questions from the protesting groups, or, at least, speak later in the public meeting, so that it is more likely they will address the issues that have been raised.
The Federal Reserve staffers who preside at the meeting often have two or three questions prepared for the bankers panel. Often, however, these questions are not directly answered by the bankers. For example, at the August 13 Banc One First Chicago hearing, Banc Ones CEO answered a question about his institutions fair lending record by noting that the Fed has approved all of Banc Ones prior expansion applications. The Fed staffers appear, to many community groups, not to care whether their questions are answered; often, the question and response do not even show up in the Boards final order on the application.
One solution would be to allow protesting community groups to submit questions in advance for the Federal Reserve panelists to ask. A second, more complete solution would be for the Fed to allow, as numerous state utilities and insurance regulators do, pre-hearing discovery by community groups. In the weeks prior to a scheduled public meeting, the applicant bank would be required to answer specific, detailed and relevant questions from community groups, and to send copies of its responses to the Federal Reserve. If the Fed is not going to ask the most pressing questions, or is not going to demand answers, community groups should be allowed to ask these questions.
Not only do the Federal Reserves procedures compare unfavorably to those of state utilities and insurance regulators -- they compare unfavorably to other federal bank regulators procedures. The Office of Thrift Supervision explicitly retained an automatic right to a meeting, upon a substantive comment, on savings bank merger applications. Since the OTS meeting (first informal, then, if requested, a formal meeting, with rebuttal time for each party) is a right that community groups have, it is easier to make suggestions to the OTS to improve their procedures. Since the Federal Reserve only holds public meetings in its unfettered discretion, complaints about Feds public meeting procedures are constrained by the Feds ability to simply say, No more public meetings. In fact, some community groups believe that the Federal Reserve has been holding increasingly absurd public meetings, with three minutes per witness, to justify eliminating or drastically curtailing public meetings in the future.
The Office of the Comptroller of the Currency, on a number of recent national bank merger applications, has conducted informal meetings, including by conference call (thus keeping down the expenses of the grassroots protesting groups), and has gone out and made fact-finding trips to the communities affected, and conducted on-site CRA mini-exams. In most of todays mega-mergers, however, the companies apply first to merge the bank holding companies, and only once this approval (from the Federal Reserve) is received, do they apply to the OCC to merge the subsidiary national banks. This has taken most antitrust responsibilities, and now most CRA / public meeting responsibilities, away from the OCC, and makes fair procedures by the Federal Reserve even more important.
As the 1997 Home Mortgage Disclosure Act data shows, large steps remain to be taken so that residents and small businesses in low- and moderate-income communities have equal access to mortgage credit. This is even more true in the field of small business lending. Mega-mergers, with the branch closings and concentration of market power they often result in, are an opportune time for the Federal Reserve to consider these issues -- the CRA requires the Fed to consider these issues on all merger and expansion applications. Public meetings allow consumers and small business people, who might not submit detailed written comments, to testify to the Fed. The Federal Reserve, by not implementing the improvements suggested above, and others, is allowing its public meeting procedure to degenerate into a theater of the absurd, with legitimate questions unanswered by the banks, and with bought testimony drowning out the critical analysis that was the basis of the public meeting in the first place. Improvements should be implemented; the mega-merger trend is far from over.
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The Federal Reserve should also begin holding public meetings on applications and issues beyond the prototypical bank mega-mergers. . It is imperative that the Federal Reserve open itself to information on continuing and emerging problems, in light of the increasing consolidation of the banking industry, the proliferation of high interest rate, so-called subprime lending, and the shrinking scope of the CRA .
While data reported under the Home Mortgage Disclosure Act (HMDA) for the first half of this decade reflected much increased lending to low and moderate income and minority borrowers, these improvements slowed noticeably in 1996 and 1997. The banking industry continues to deny applications from African-American loan-seekers twice as frequently as those from whites. Many in the banking industry try to justify these disparities by referring to the credit histories of applicants, the industry has opposed including credit history information in HMDA reports, and the federal bank regulatory agencies, particularly the Federal Reserve, pay less and less attention to denial rate disparities in the CRA performance evaluations they conduct. The Federal Reserve has become increasingly explicit that it will not examine for fair lending compliance finance and mortgage companies owned by bank holding companies, instead relying on the Federal Trade Commission and the Department of Housing and Urban Development, which hardly have enough staff to regulate independent mortgage companies, and therefore pay little attention to bank holding company subsidiaries.
Low income communities, particularly communities of color, are increasingly targeted for high interest rate loans, and, given the profitability of these high interest rate lending, bank holding companies are increasingly engaging in subprime lending themselves, through subsidiaries that the Federal Reserve refuses to examine or consider. Many of these institutions refer applicants denied normal interest rate loans from their banks to their higher interest rate finance company subsidiaries, but have no procedures in place to refer up for normal interest rate credit applicants eligible for such credit but who approach the institution in the first instance through the finance company. While the Office of Thrift Supervision (OTS) has become more active in monitoring the fairness of subprime lenders which apply for thrift charters, and the Office of the Comptroller of the Currency (OCC) imposed certain conditions on this issue when First Union National Bank acquired The Money Store earlier this year, the Federal Reserve claims it does not have to consider these issues, because, as the Fed stated in its recent NationsBank-BankAmerica order, the FTC and HUD have primary jurisdiction for fair lending over nonbank lending subsidiaries. This Fed position is increasingly problematic, particularly because the Fed, which is the lead regulator on the bank holding company mergers through which CRA is enforced, is de facto the main CRA regulator.
Some of the decreasing scope of CRA is not the regulators fault. The wallet share (of Americans financial resources) held by FDIC-insured banks has decreased throughout recent decades, tied to the growth of the mutual fund industry, and financial management offered by brokerage houses and insurance companies. The Financial Modernization legislation of 1998 would (or will, depending on events in the weeks preceding this articles publication) allow much increased cross-mingling between the banking, insurance and securities industries. Most community and consumer advocates believe that if the principles of community reinvestment are not extended as a part of this modernization, the scope of CRA will be reduced, along with access to credit in low income communities. Furthermore, the number of applications subject to public comment, on which CRA can be enforced, and on which the regulators can hold public hearings, would/will be reduced. (In this new era, community development groups whose work has been made easier because of the CRA may have to become more active again in advocating for their communities).
Other trends must be addressed by regulators, community groups, and the industry, after the issues have been fully set forth, publicly, including in public hearings. An increasing number of banks provide their services, and collect deposits, primarily through the Internet. Not only does this disproportionately exclude the residents of low and moderate income communities -- the regulators to date have allowed these essentially nationwide financial institutions to limit their CRA assessment areas to the communities in which they have their main office. The same is true of the insurance companies who have applied for savings bank charters, to use their insurance agent networks to market credit and in some cases deposit products: these institutions argue that they only have a CRA duty in the communities where their head offices are. The CRA need to be revamped to address these emerging trends, and community groups need to become more active.
Low and moderate income communities would be ill-served by inattention to the emerging trends sketched above. The banking industry, and the regulators including the Federal Reserve, can and must do better.
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