The recent wave of regional bank failures may be behind us, but concerns about the viability of anything but the largest banks persist. The question on everyone’s mind is how big is the hole in their balance sheets, and can they survive in the long run?
Banking-industry consolidation has once again taken center stage, reigniting the age-old battle between those who support consolidation, like the Bank Policy Institute, and those who oppose letting big banks grow even bigger, such as community and consumer-advocacy groups like Public Citizen. Surprisingly, I find myself agreeing with aspects of both sides.
For community and regional banks to continue playing a significant role in the U.S. economy, they need to attain financial success and sustainability. Paradoxically, this success is now dependent on what has historically been viewed as their nemesis: consolidation. Rather than leaving community and regional banks stagnant and unable to compete, inadvertently allowing “too-big-to-fail” banks to dominate further, policymakers should take bold action to enable the formation of slightly larger, yet still viable, community and regional banks.
The Need for Financial Success
It’s no secret that community and regional banks have faced numerous challenges in recent years. Economic uncertainty, regulatory constraints, and increased competition have weighed heavily on these institutions. In order to weather these storms and ensure their long-term survival, fundamental changes are needed.
Consolidation offers a potential lifeline for community and regional banks. By joining forces and creating larger entities, these banks can gain the scale necessary to compete in today’s rapidly evolving industry. This consolidation should not result in a handful of mega-banks dictating the landscape, but rather give rise to a diverse cadre of more robust community and regional banks.
Striking a Delicate Balance
While consolidation is crucial for the future of these banks, it is important to strike a balance. The small-town charm and personalized service that community and regional banks are known for must not be sacrificed in the pursuit of growth. Rather, consolidation should be approached in a way that preserves the unique qualities that have endeared these institutions to their customers while enabling them to thrive in an increasingly competitive market.
Policy-Makers Must Act
To facilitate this transformative process, policymakers need to act decisively. They must create an environment that fosters consolidation and ensures that the necessary regulatory frameworks are in place to support the growth of these new, slightly larger banks.
The future of community and regional banks hinges on their ability to adapt and thrive in an ever-changing landscape. Consolidation represents an opportunity for these institutions to secure their place in the U.S. economy. By embracing this path while being mindful of their unique strengths, community and regional banks can not only survive, but also flourish, providing essential services and fostering economic growth in their communities.
The Importance of a Diverse Banking System in the U.S.
The United States sets itself apart from other developed countries due to its vast number of banks, which collectively hold roughly half of the banking market. This diversity has been a cornerstone of our economic power and decision-making for more than a century, contributing to our innovative, dynamic, and entrepreneurial environment.
However, it is becoming increasingly evident that our diverse banking system is facing threats to its sustainability. Over the past few decades, the number of banks in the U.S. has declined by three-quarters. This shift has resulted in significant challenges for the remaining 4,600 community and regional banks, primarily driven by the rising fixed costs associated with being a bank.
One of the main factors amplifying these challenges is the rapid increase in regulatory and technological costs. For subscale banks, higher fixed costs, especially when compounded by such spikes, inevitably lead to poor economics. The Federal Deposit Insurance Corporation (FDIC) recently released a report stating that banks with under $100 million in assets, which constitute 16% of all institutions, earned a return on equity roughly half that of larger banks.
In response to these escalating fixed costs, consolidation emerges as a solution. Just like in any other industry, achieving greater scale can help alleviate these burdens. It is important to acknowledge that not every smaller bank can magically become economically viable again; consolidation is an inevitable and logical outcome. Even without acquisitions, the largest banks can leverage their economies of scale to gain a larger market share.
Over the past decade alone, the market share of the top five banks has surpassed one-third and now stands at over half. This share has been further boosted by JPMorgan’s emergency acquisition of First Republic. This trend highlights how the largest banks continue to solidify their positions and exert their influence.
As we navigate the challenges and changes within the banking industry, it is crucial to recognize the value of a diverse banking landscape. Preserving this diversity while also addressing the economic realities will require thoughtful strategies and actions from both industry leaders and regulators. By doing so, we can ensure that the U.S. banking system remains innovative, dynamic, and resilient for generations to come.
The Impact of Consolidation in the Banking Sector
Consolidation in the banking industry is a reality that we cannot prevent. However, it is crucial to consider its consequences and ensure that they are beneficial for the economy as a whole. We need to be wary of consolidation leading to the concentration of economic power or an increase in systemic risk. As such, it is reasonable for community and consumer advocacy groups to advocate for limitations on acquisitions by the largest banks, particularly those with assets exceeding $100 billion.
Nevertheless, not all forms of consolidation are detrimental. In fact, if consolidation leads to the emergence of more banks that can effectively compete with the largest players, it can be seen as a positive development. While we should place restrictions on acquisitions by major banks, we must also foster an environment that allows and even encourages consolidation among community and regional banks. Blanket opposition to any form of bank growth, even if it results in relatively smaller institutions, only benefits the largest banks. What we truly need is consolidation that gives rise to numerous $10 billion or $50 billion banks. This will provide the necessary scale for survival alongside the flexibility to cater to the needs of consumers and small businesses. Such an outcome aligns with the interests of the industry, our economy, and consumer and community advocates.
In addition to its positive impact on competition and diversity in the banking sector, consolidation can also aid in the sector’s recapitalization. With losses incurred on fixed-rate securities and impending challenges in commercial real estate, recapitalization is desperately needed. By allowing consolidation to take place and improve financial performance, investors will be more likely to inject the capital required for sustainability.
In conclusion, while we may not be able to prevent consolidation in the banking industry, we have the power to shape its outcomes. By carefully monitoring and regulating consolidation, we can mitigate risks associated with economic power concentration and enhance competition. Moreover, we should encourage consolidation among community and regional banks to promote a more diverse and consumer-oriented banking landscape. Lastly, allowing consolidation to facilitate recapitalization will ensure the sector’s resilience and ability to serve the needs of our economy effectively.
The Need for Reforms in Bank Merger Regulations
In recent years, the regulatory approval process for mergers among community and regional banks has come under scrutiny. Available data clearly indicate that this process is broken and in dire need of reforms. Not only has the number of bank merger applications significantly decreased, but the time taken by regulators to make decisions on these applications has increased by about 50%. It is evident that swift action is required to rectify this situation.
To address this issue, several simple reforms must be implemented to expedite the process for small banks looking to merge. One crucial reform would be a return to delegation to regulatory regional offices. This approach would empower these offices to efficiently handle merger applications within statutory timelines. Additionally, banks should be afforded greater freedom to share the necessary information required for a merger deal, further streamlining the process.
Preserving the vibrancy and diversity of our banking sector is of utmost importance, as it directly impacts the future dynamism and fairness of our economy. While consolidation among banks is inevitable, we possess the power to guide this consolidation in a manner that benefits community and smaller regional banks, as well as our overall economy. It is time to shed the negative connotations associated with consolidation and embrace it as a lifeline for many struggling community and regional banks.