Banking and Antitrust.

• Author: Omarova, Saule T.,Steele, Graham S.
• Date: 01 February 2024

ESSAY CONTENTS
                INTRODUCTION 1166
                 I. ANTITRUST LAW AND BANKING: THE SHARED HISTORICAL TRADITION 1175
                 A. Basic Principles of Antitrust Law: A Brief Overview 1175
                 B. The Tangled Roots of Bank Regulation and Antitrust 1179
                 1. The "Money Trust" 1179
                 2. The New Deal Reforms 1181
                 3. Financial Conglomerates 1183
                 II. THE NEXUS BETWEEN BANKING AND ANTITRUST 1185
                 A. Lines in the Sand: Stability vs. Competition, Risk vs. 1186
                 Structure
                 B. Deep Currents: Subsidy, Size, Structural Power 1188
                III. FORMAL ANTITRUST TOOLS IN BANKING 1192
                 A. Bank Merger Review 1192
                 B. Management Interlocks 1198
                 C. Tying Arrangements 1200
                 IV. FUNCTIONAL ANTITRUST TOOLS IN BANKING 203
                 A. Concentration Limits 1203
                 1. Deposit Limits 1204
                 2. Nationwide Liabilities Limit 1205
                 3. Lending Limits 1206
                 B. Rates and Pricing 1207
                 1. Rate Ceilings 1208
                 2. Preferential Pricing 1211
                 C. Corporate Breakups 1213
                 V. UNNATURAL MONOPOLY CONTROLS IN BANKING 1217
                 A. Market-Entry Controls 1218
                 B. Activity and Affiliation Restrictions 1220
                 1. The "Bank Powers Clause" 1221
                 2. The Glass-Steagall Act 1222
                 3. The Bank Holding Company Act 1225
                 4. The Dodd-Frank Act 1232
                 C. Regulation of Affiliate Transactions 1235
                 VI. BANKING LAWAS ANTITRUST: POLICY IMPLICATIONS 1238
                 A. The "Too Big to Fail" Problem 1238
                 B. The Rise of Digital Finance 1244
                CONCLUSION 1252
                

INTRODUCTION

Antitrust is once again a hot area in U.S. law and politics. (1) The rise of Amazon, Facebook, Google, and other giants forced it out of stuffy courtrooms and academic halls and into the public square. (2) Technology platforms' aggressive growth and seemingly unlimited ability to control our social and economic lives ignited a movement to revive antitrust as a tool of democratic politics. (3) Paralleling American politics of the early twentieth century, antitrust is now the stuff of fiery campaign speeches, bestselling books, and intense doctrinal debates. (4) In the wake of a pandemic that exposed deep inequality and structural weaknesses in the nation's economy, it may also translate into substantive policy change. The Biden Administration has signaled its resolve to prioritize curbing the power of big businesses and restoring fair competition in key sectors of the U.S. economy. (5) That caused not only Big Tech but Big Pharma, Big Agribusiness, and many other highly concentrated industries to brace themselves for the new era of antitrust enforcement. (6)

Except for Big Banks. America's banking industry does not seem concerned about the antitrust turn in American politics. As the leading trade publication put it, President Biden's actions pose a "minimal threat" to the ongoing consolidation in the banking sector. (7) Wall Street clearly believes it is beyond the reach of new-generation trustbusters.

This is puzzling. Financial institutions are not immune from antitrust laws. Competition policy is part of federal bank regulation, administered by the specialized regulatory agencies--the Board of Governors of the Federal Reserve System (Fed), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC)--in coordination with the Department of Justice (DOJ). (8) It is also not the case that the U.S. financial industry is perfectly competitive. Banking is notoriously concentrated, with the ten largest commercial banks controlling about 55% of the U.S. banking assets, (9) and the eight U.S. Global Systemically Important Banks (GSIBs) accounting for approximately 66% of the assets held by U.S. bank holding companies (BHCs). (10) In fact, one of the most politically salient problems in financial policy is the existence of "too big to fail" (TBTF) banking conglomerates effectively shielded from market discipline. (11)

Yet, for the past half-century, antitrust has not been a prominent theme in U.S. banking law and regulation. Regulators have balanced the need to promote competition within the sector with the more prominent goal of preserving the stability of the banking system and solvency of individual institutions. (12) To the extent that these goals are inherently in tension, competition concerns remain subordinate to banks' "safety and soundness." (13) Even the TBTF problem, which clearly implicates antitrust-like concerns, is treated primarily as a matter of macroprudential regulation--a set of regulatory objectives and tools aimed at protecting the stable functioning of the financial system. (14) "Bigness" is not viewed as problematic, as long as big banks run their portfolios prudently under the watchful eye of their regulators and supervisors. (15) Accordingly, the goal is not to keep individual banking firms from becoming too big but to keep them from becoming too risky. (16)

The government's response to the financial crisis of 2008 reflected this logic. The bailout of Wall Street resulted in a smaller number of bigger banking institutions, and post-crisis regulatory reforms aimed to ensure that these reconstituted giants do not fail. (17) Fifteen years later, the domino-like failures of Silvergate, Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank put a new spin on the same problem. By exposing multiple regional banks' vulnerabilities, this latest crisis refocused public attention on the need for good risk management and traditional prudential oversight. (18) Massive deposit flight, expansion of deposit insurance to protect large depositors, and emergency sales of troubled banks further increased the size of large banking conglomerates and led to calls for liberalizing federal bank merger policy. (19) Greater concentration and greater public subsidies once again became the price of banking sector stability.

The single-minded prioritization of safety and soundness makes bank regulation appear fundamentally different from antitrust law, which seeks to preserve fair competition and prevent monopolies. The two spheres are seen as doctrinally and normatively separate, with only a small area of overlap--primarily, bank merger review. Beyond this, antitrust currently has little impact on banks' daily operations.

This Essay challenges that widely accepted view. It offers an alternative understanding of the relationship between the principles of antitrust and banking law. We argue that, on a deeper level, U.S. bank regulation is designed to operate--and needs to be recognized--as a particular kind of sector-specific antitrust regime, rooted in the antimonopoly tradition in American law and policy.

In making this claim, we adopt a structural view of antitrust, which defines its core objectives in deliberately broad terms of preventing excessive concentration of private economic power. This view rests on a simple yet powerful notion that "antitrust policy doesn't operate in a vacuum; it is interwoven with the fabric of the economy" (20) From this perspective, the overarching purpose of antitrust is not simply to maintain some technical measure of "competitiveness" in specific product markets, but to create durable structural foundations for the healthy growth of a democratic economy (21)

Historically, the principal federal antitrust laws--the Sherman Act, the Clayton Act, and the Federal Trade Commission Act--were a direct response to the growing threat corporate monopolies posed to American economic and political democracy. (22) Through these statutes, Congress sought to safeguard competitive markets and to prevent excessive concentrations of private power that threatened the nation's vitality and growth. Since the 1970s, however, U.S. antitrust jurisprudence has been myopically focused on consumer prices in specific product markets. (23) Antitrust analysis and enforcement were reduced to technical application of microeconomic models, foreclosing broader political-economic concerns that animated the trustbusters and Progressives of the early twentieth century. (24)

It is those original understandings of antitrust, recently revived by the proponents of a progressive neo-Brandeisian movement, that underlie our project. (25) This Essay reframes the core narrative of U.S. banking law as a multilayered system of structural constraints on private banks' accumulation and abuse of economic power. It reveals the macrosystemic significance of federal bank regulation as a de facto antimonopoly regime that operates through a variety of mechanisms. Most of these mechanisms are routinely viewed solely as tools of prudential regulation and supervision. Their other role as structural means of preventing excessive concentration of corporate power over the supply and allocation of financial resources in a democratic economy is nearly entirely overlooked, in both academic discussions and policymaking.

We divide these mechanisms into three categories.

The first category includes three provisions of U.S. banking law that establish what is generally recognized as competition policy in banking: regulatory review of bank mergers and acquisitions, anti-tying rules, and prohibitions on management interlocks. (26) This modality represents direct, or formal, application of antitrust to banking institutions and remains the overwhelming focus of the scholarly literature on antitrust and banking. (27)

The second category includes elements of banking law that, while not explicitly labeled as such, nevertheless function as antitrust tools. These include liability and loan concentration limits, rate regulations, and authority to break up large banking organizations. Each of these provisions has a parallel, though not necessarily identical, principle in competition policy. This modality thus represents functional replication of traditional antitrust in bank regulation.

The third and final category comprises the key elements of U.S. bank regulation without direct parallels in antitrust law: market entry controls, activity and affiliation restrictions, and regulation of inter-affiliate transactions. (28) Typically framed in terms of bank safety and soundness...