Before Preemption There Was Riegle-Neal

That may be the least-SEO-friendly headline of all time, but hey, we’re not the Huffington Post! This from the Journal’s Fed story today strikes me as something that’s crying out for more coverage:

The ultimate outcome could shape finance as much as anything since the 1930s, when the Federal Deposit Insurance Corp. was created, or the 1990s, when banks gained freedom to cross state lines and build trading desks to compete with Wall Street.

That loosening of regulation was from the 1994 Riegle-Neal Interstate Banking and Branch Efficiency Act, which has been given short-shrift in the press’s post mortems. And that seems like a decent-sized miss—evidence of the press’s lack of institutional memory (and this landmark bill was just a decade and a half ago). That’s especially because the law super-charged concentration in the banking industry, helping create the too-big-to-fail problem. Here’s how one researcher put it:

This study shows that in the IBBEA’s aftermath, bank holding companies streamlined operation by consolidated bank charters within the holding companies; banks of mammoth size quickly emerged; concentration increased at that national level and bank size grew; and when segregating banks into five asset sizes, the consolidation among banks over the last 10 years came largely at the expense of the number of the nation’s smallest banks.

The big problem, as we’ve pointed out before, and the press has unfortunately not examined closely enough, is that the Bush administration in its first term preempted state regulators from issuing rules that were tougher than the federal government’s—for national banks that is. From my understanding, states could regulate an in-state bank as hard as they wanted to, but if Citigroup or Bank of America dropped a toe in, they were untouchable. This made the federal government the linchpin of bank regulation, not coincidentally in an administration that didn’t believe in regulation.

Here’s something from congressional testimony last fall from the Conference of State Bank Supervisors:

As recently as 1994, with the passage of the Riegle-Neal Interstate Branching Act, Congress explicitly stated that state consumer protection laws applied to national bank branches. It has only been in the past decade that some federal banking agencies have sought to preempt state consumer protection laws by regulatory fiat.

When Riegle-Neal has been covered at all, it’s been aspect of the law that capped a bank’s assets at 10 percent of all deposits in the country. But if this testimony is accurate, and I have no reason to doubt it is, it raises the question of why the regulatory apparatus was able to overturn something written into law.

Let’s see some reporting on that. And meanwhile, go read my interview with John Ryan of the state regulators association from 2008.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.