Big Banks Presumed Guilty: Street Whispers

NEW YORK ( TheStreet) -- At a time when bashing the big banks is all the rage, some regulators just can't help themselves.

During a lecture at the University of Pennsylvania Law School on Tuesday, Federal Reserve Governor Daniel Tarullo said he "urge a strong, though not irrebuttable, presumption of denial for any acquisition by any firm that falls in the higher end of the list of global systemically important banks developed by the Basel Committee."

During a political season where it is all the rage to bash Wall Street and too-big-to-fail banks, Tarullo's suggestion of a "presumption of denial" is unnecessary, since the Fed already is "very much taking a case-by-case approach to these reviews."

It's already difficult enough to get a deal approved.

It's easy to continue pounding away at too-big-to-fail U.S. banks, when we look at what has happened with the "big four" banks over the past ten years. The following data comes from a table prepared by SNL Financial and cited by the Wall Street Journal in August:
  • JPMorgan Chase (JPM) had $2.3 trillion in total assets as of June 30, nearly tripling in size over the past ten years. The company bought the failed Washington Mutual from the Federal Deposit Insurance Corp. in September 2008, having previously acquired Bear Stearns in March 2008 through a fire sale brokered by the Federal Reserve. Among the largest 50 U.S. banks, JPMorgan had an 18.33% share of assets as of June 30, increasing from 12.51% in June 2002.
  • Bank of America (BAC) had $2.2 trillion in assets as of June 30, also more than tripling its balance sheet from ten years earlier. Of course, Bank of America makes a fine argument for a serious and deliberate merger approval process by the Federal Reserve, as the company's lingering mortgage mess resulted in great part from its purchase of Countrywide Financial in July 2008. Following the Lehman Brothers bankruptcy, Bank of America also agreed to Merrill Lynch in September 2008, with regulators making quite a push for the deal to be completed. Bank of America's share of total assets among the largest 50 U.S. banks increased to 17.31% as of June 30, from 10.89% in June 2002.
  • Citigroup (C) had $1.9 trillion in total assets as of June 30, more than doubling in size from 10 years earlier. Citigroup's TARP bailout was unique among the largest banks, as the government's preferred stake in the company was converted into common shares, which were later sold by the U.S. Treasury. Citi's share of assets among the top 50 U.S. banks declined to 15.34% as of June 30, from 18.08% ten years earlier, according to SNL Financial.
  • Wells Fargo (WFC) had $1.3 trillion in total assets as of June 30, which was nearly four times as large as the company's balance sheet was 10 years earlier. The company more than doubled in size when it acquired Wachovia late in 2008, after the Charlotte, N.C. lender's liquidity crisis forced the FDIC to push a sale to Citigroup, which Wells Fargo later trumped with a higher bid. Wells Fargo's share of assets among the top 50 U.S. banks was 10.70% as of June 30, increasing from 5.76% in June 2002.

Tarullo did say that under adverse circumstances, such as the ones facing Bear Stearns, Merrill Lynch and Wachovia, before those firms were acquired, "a case could be made that allowing the acquisition in that circumstance would support financial stability by relieving funding and other counterparty pressures, and forestalling distressed asset sales and other problematic developments."

While the too-big-to-fail banks are still with us and bigger than ever, they are also operating under a much greater level of supervision, with annual Federal Reserve stress tests factoring-in systemic risks when the regulator decides whether or not to approve banks' capital plans.

The Fed -- as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in July 2010 -- has also proposed enhanced capital rules that will more than meet the Basel III capital standards, which the big four banks are well on their way to meeting.

And as we saw with the greatly prolonged approval process for Capital One Financial ( COF) to acquire ING Direct (USA) and its roughly $80 billion of U.S. deposits, which was followed by the company's purchase of HSBC's $27.6 billion U.S. credit card portfolio during the second quarter. While there was some outcry against Capital One growing its U.S. card portfolio so significantly, the company shored up its liquidity in advance through the ING Direct purchase, and credit card lending is the company's core business.

Tarullo's suggested "presumption of denial" for banks listed as systemically important by a non-U.S. committee is not only unnecessary because of the deliberate process that regulators are now taking for large merger approvals, it risks making large U.S. banks much less competitive in a shrinking financial world.

Citigroup, for example, drew 58% of its total second-quarter operating revenue from outside the United States, excluding the Citi Holdings runoff subsidiary and excluding credit and debit valuation adjustments. With the bailouts behind us and the mortgage credit mess winding down, why have a "presumption of denial" against Citigroup expanding its international business?

Why have a "presumption of denial" for any U.S. bank expanding its international operations, for that matter?

"Rochdale Securities analyst Richard Bove late on Wednesday summed up the argument against a "presumption of denial" for acquisitions by the largest financial players by saying "any action to limit these banks size and flexibility would be a direct attack on the United States economy and its standing as a world power in the global financial system. If a governor of the People's Bank of China had suggested capping the size of these banks and limiting their operating flexibility, it would have been seen as a direct threat to the United States position in the world - which it is."

The enhanced capital requirements and greatly strengthened supervision of the large U.S. banks, along with the "case-by-case approach" that the Federal Reserve is already taking when considering large-bank acquisitions is enough. There's no need for a "presumption of denial" for deals.

The big banks were bailed out. We get it. The bailout is over. The irresponsible risk concentrations that led to the bailout are being addressed in a major way. It's time to encourage our big banks to compete internationally.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.