Bank M&A May Hinge on Deposit Cap Rule

Regulators, at the time, were fearful that some banks could impose "undue financial power nationwide" or grow so large "that their failure could threaten the financial system and in turn, the economy as a whole," if there were no restrictions on deposits, according to a 2006 research paper by Robert Litan, who was at the time at the predecessor to what is now called the AEI Center for Regulatory and Market Studies.

Litan, now a vice president for research and policy at the Kauffman Foundation and a senior fellow in economic studies at the Brookings Institution, argued in the paper that the cap should be lifted. In a brief email response to TheStreet.com last week, he said he "still thinks" doing away with the caps makes sense, since federal antitrust laws allow regulators to move against a bank that is growing too large.

To be sure, there are loopholes in the law, allowing for banks to circumvent the rules.

Banks are allowed to be above the 10% cap if the deposits are grown "organically" instead of through acquisitions. Banks can also technically be above the deposit cap if they acquire deposits from a financial company that is not a bank holding company, such as a savings and loan association or thrift, credit unions, or other more obscure institutions, such as an industrial loan company. The law does not count deposits from these institutions as part of the caps on banks.

Additionally, banks can exceed the threshold if the acquisition was of a bank in default, or in danger of default, or where the government assistance was provided.