Tarullo’s Big Bank Size Cap May Discourage M&A Activity

By Donna Borak

A suggestion by a top Federal Reserve Board official that policymakers should cap the size of the largest banks may have a chilling effect on future mergers and acquisitions. Fed Gov. Daniel Tarullo laid out a two-fold plan this week that would restrict large institutions from expanding their systemic footprint, including limiting their size by the amount of non-deposit liabilities as a percentage of the country’s gross domestic product. He also suggested the Fed may prohibit any merger among the largest U.S. banks that have been designated as globally significant to the financial system. His remarks immediately sparked concern among industry observers, who said Tarullo was sending a strong message to the largest banks not to pursue any mergers or acquisitions. The comments may also discourage mergers among more regional players, some said. “It means that any transactions for any bank holding company of size that are seen not only to increase that size, but also to add complexity for interconnectedness face very tough going at the Fed, if the Tarullo approach is executed at the Board,” said Karen Shaw Petrou, the managing partner at Federal Financial Analytics Inc. Others in the industry agreed.