Blanche Lincoln Goes to Bat for Arkansas’ Biggest Bank

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Damian Paletta writes in The Wall Street Journal that Senator Blanche Lincoln is seeking to tweak new capital rules to benefit the largest bank in her state:

The bank, Arvest Bank Group Inc., of Bentonville, Ark., is predominantly owned by the Walton family, of Wal-Mart Stores Inc. fame, perhaps the most influential family in the state and one of the richest in the U.S.

Under Ms. Lincoln’s proposed change, Arvest would be excused from a provision that could require banks to raise more capital, in Arvest’s case about $115 million. Other Senate Democrats had intended only to exempt banks with less than $10 billion in capital from the provision. Ms. Lincoln wants to raise that to $15 billion, a threshold that would exempt Arvest. It is the only bank in Arkansas with between $10 billion and $15 billion of assets, though there are some in other states.

For starters, bad on Lincoln.

Bigger picture, this shows the limits of a certain kind of populist frame for looking at financial regulation. Once you construe the problem as something like “big Wall Street banks” rather than “poorly regulated financial institutions” you start doing things like setting a $10 billion cutoff for new rules so that you can say you’re cracking down on “big Wall Street banks” and not raising the ire of smaller bankers—banks whose managers and headquarters may be in your congressional district—who count as pillars of “Main Street” respectability. But then you run into a problem like Arvest, a bank that’s just a teeny bit over the arbitrary threshold. And that happens to be owned by the most important family in Arkansas, people with whom good relations are going to be important either to Blanche Lincoln the politician or to Blanche Lincoln the former politician. So why not tweak the rule to help this bank? After all, it’s basically a medium sized “Main Street” bank and not an icky evil Wall Street giant.

But if you go up and up like this, then your rules become worthless. Bottom line, $15 billion is worse than $10 billion, but only a little worse. What would be much better is not $10 billion but $0—if new rules are appropriate, they should be applied as broadly as possible or else you’ll just tend to push trouble into the under-regulated segments of the industry.