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Frank Vows To Close Big-Bank Loophole

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The financial regulatory reform bill working its way through the House would give Bank of America a legislative gift that it pushed for in early 2007, only to retreat in the face of political resistance.

The bank had been pushing Congress to lift a cap that limits the portion of the nation's deposits that one bank can hold to ten percent. It lost that fight but, as currently written, the House reform bill would do it by default.

The bill currently moving through Frank's committee keeps in place the thrift charter, which allows banks to push thrift deposits into a category that doesn't count against its total.

After HuffPost pointed out the legislative lapse to House Financial Services Committee Chairman Barney Frank (D-Mass.), the lawmaker looked into the loophole and vowed to change it.

BofA started bumping up against the cap and in late 2006 and early 2007 went to Congress to try to get it lifted.

In early 2007, BofA chairman Ken Lewis told the New York Times that he told his lobbyists to "back off" saying that the move was "too aggressive."

"I thought we had gotten out there a little too far in terms of our level of aggressiveness, and it sent the wrong signals," Lewis told the Times.

Roughly a year later, BofA found a way around the cap. It bought Countrywide, which is registered as a thrift, rather than a bank. Though Countrywide's deposits took BofA over ten percent, the Federal Reserve ruled that it was okay because it was a thrift and not a bank. That ruling set a cap-busting precedent.

As of June 2009, according to data provided by the Federal Deposit Insurance Corporation, Bank of America is at the top of the list, controlling 10.8 percent of all bank and thrift deposits, holding $817, 989,321,000. But it also tops a list of bank holding companies (banks that control one or more banks), holding $907,376,948,000 in deposits -- 12 percent of the nation's total.

Why the difference? The deposit numbers vary because the first list doesn't include funds that were then held by newly-acquired thrifts such as Merrill Lynch Bank and Trust.

The loophole has been criticized by banking officials. It "allows them to blow the caps out on the ten percent cap, which is critical," said John Ryan, executive vice president at the Conference of State Bank Supervisors. CSBS represents state officials responsible for regulating the nation's smaller banks.

"This is really critical for the too-big-too-fail problem," said Ryan, calling closure of the loophole one of the top priorities for CSBS.

Big banks typically get bigger not by opening new branches one at a time but by gobbling up other banks, as BofA did with Countrywide, Merrill and MBNA. The cap is intended to prevent one bank from controlling too much of the nation's wealth.

Frank said that he agreed with CSBS that a change to the current bill was needed.

"Until they talked to you and you talked to us, nobody in our operation had even focused on it. We didn't create this loophole. What happened was it got preserved when we preserved the thrift charter and obviously that's now something we'll have to look at in the next couple weeks," said Frank. "I've asked the staff to start looking at it now."

But, Frank said, he wasn't inclined to require banks over the cap to divest of what they already have. "My inclination would be to say, now that you're putting [banks and thrifts] in the same pot, [deposits] ought to be included. There were a couple of questions. If you include it, do you require divestiture? Divestiture is always a harder thing than to grandfather and limit going forward," said Frank.

"Divestiture can be pretty tough when there's not a lot of market for things, but I think going forward there's not a good reason for that separation, especially since we're putting them all in the same regulatory pot."

Frank said the loophole worked its way into the bill because the Treasury Department's version of the legislation eliminated the thrift charter entirely, which would have rendered the point moot, but Frank wanted to keep it as a way to distinguish between banks of different sizes.

"Apparently the thrift deposits didn't count -- the ten percent was declared for bank deposits. And we did want to preserve the thrift charter, unlike the administration. I think there's value there but we were tightening it up," said Frank.

The fact that the loophole was close to becoming law is an indication of the potential pitfalls ahead, as a relatively small staff works overtime to reform the entire industry -- often working closely with lobbyists who are generally not inclined to point out an oversight, or to help insert one.

Ryan said that CSBS had brought the loophole to the attention of committee staff. "We had pointed this out to staff and tried to get fixed," he said. "In fairness, I think they're a bit overwhelmed."

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