Fed shows outsized concern for too-small-to-fail

December 14, 2011

By Daniel Indiviglio
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Federal Reserve reckons there may be a too-small-to-fail problem of sorts. The U.S. central bank spent nearly two years scrutinizing the tiny takeover of Utah-based Bonneville Bank by prepaid debit card firm Green Dot. The soundness of even niche banks matters. But in the too-big-to-fail era, the watchdog’s slow process is an unneeded deterrent to the sector’s small fry.

Green Dot, a $1.3 billion market-value company whose cards are sold by Wal-Mart and other retailers, bought the Beehive State minnow partly to secure bank holding company status. The Fed’s regulatory imprimatur should give Green Dot investors more comfort. Owning a bank will also enhance operating efficiency and innovation. Green Dot can now collect interchange and other fees directly and introduce new products without waiting for a third-party bank’s say-so.

Shareholders liked the development, pushing up Green Dot shares by almost 10 percent following the Fed’s approval. The news should also be good for unbanked or under-banked Americans. Green Dot can now afford to cut fees and still remain profitable. Yet despite Bonneville’s paltry $36 million of assets, the Fed deliberated over the transaction for 21 months. One of the bank’s five governors, Elizabeth Duke, even voted against it.

Duke expressed concern that Green Dot’s business model isn’t diversified enough – so, in a sense, maybe too small to survive. Along with concerns about economic shocks and competition from big banks, future regulation could endanger the company’s profits.

The safety of small lenders is a legitimate concern. But there’s a new agency to help alleviate some of the Fed’s burden with regards to consumer protection. What’s more, with big banks having grown bigger since leaning on taxpayers to survive the crisis, systemic concerns should be where the central bank is focused.

Though the Fed ultimately approved the Bonneville sale, the delay and dissent suggest an unusually tough path for certain financial institution deals. It might unnecessarily frighten off smaller banks in position to develop underserved markets as their larger brethren wrestle to avoid crippling the system again. Given those circumstances, it doesn’t seem the right message – or use of resources – from the regulator.

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