The massive wave of bank megamergers that took off in the 1990s had plenty of unfortunate results, including the invention of the phrase "too big to fail." Fewer mergers are happening now -- mainly because there are far fewer banks left to merge -- but the ones that do happen can have a huge impact on communities, and those communities deserve a voice.
They don't have nearly enough of a voice now.
Bank mergers must be approved by federal regulators, and those regulators do accept written public comments, but they only occasionally hold public hearings. The process is cumbersome and hard to navigate, laden with industry jargon and complex documents. Too much of the time, it doesn't give the public an effective voice.
On the one hand, in an era when government seems distant and detached from the needs of ordinary Americans, it's good that there is some mechanism in place for citizens to have a voice. But without public hearings, that voice is muted.
Case in point: As I write this, Pacific Western, a bank which operates throughout California, is seeking approval from the Federal Reserve and the Federal Deposit Insurance Corporation to acquire CapitalSource Bank, which operates in the southern and central portions of the state. Neither of these banks is huge by modern standards, but their merger, if approved, will affect communities all over the state.
Thanks to an important and little-known law called the Community Reinvestment Act, we know a fair amount about these banks and how responsive they've been to the needs of the communities they serve. The idea behind CRA, passed in 1977 is to evaluate banks on their community development lending -- the sorts of local investments that create jobs, expand homeownership, develop affordable housing, and help small businesses grow. And at a time when so many people feel disenfranchised and voiceless, those CRA evaluations are a valuable mechanism for community input.
As The Greenlining Institute's recent letter to the Fed and the FDIC notes, CapitalSource has an outstanding record. It received an "outstanding" rating in its last CRA evaluation, devoting 12 percent of its assets to community development lending. CapitalSource justifiably touts its community involvement on its home page, which links to a full page of information on the bank's community involvement.
Pacific Western appears to have nothing like that on its website, apparently for good reason. It got a "low satisfactory" rating on its last CRA evaluation. It's not hard to get a "satisfactory" rating, and "low satisfactory" is roughly the equivalent of your child coming home from school with a D or D+ on her report card -- not too impressive. While Pacific Western's community development lending did increase from an abysmal 0.9 percent to 2.8 percent, that's still less than one quarter of what CapitalSource is doing.
In response to Greenlining's criticism, Pacific Western has asserted that it "intends to be a leader in CRA in its assessment areas." But the bank conceded that an "outstanding" rating is unlikely at present, and was rather thin on the specifics of how it would get there.
If Pacific Western is going to be allowed to swallow a smaller bank with an outstanding community development record, we'd like to see the Fed and the FDIC insist on a concrete, measurable plan to improve its engagement with the community. Until such a plan is put forth, the merger shouldn't be allowed.
Just as important, the communities affected should have a voice in this decision beyond the clunky and cumbersome process of filing written comments. Regulators should hold public hearings and invite input from the real people -- residents, small business owners, nonprofit and community leaders -- in the towns and neighborhoods that will be affected. We've proposed hearings in three different regions of California.
Bank mergers may seem like distant, arcane transactions far removed from our day to day lives, but they affect real people and real communities. You deserve a voice.