A major wave of consolidation is about to reshape the banking industry

• Key insight: New bank capital rules have changed the calculus for many banks in the U.S., eliminating many of the barriers that prevented midsize institutions from growing. The result will likely be a rapid spike in mergers.
• Supporting data: Consolidation has been happening steadily in the U.S. since the 1990s. After the Interstate Banking Act was signed in 1994, the number of U.S. banks went down from 10,300 to 7,100 by 1997.
• Forward look: There are four banks in the U.S. today worth a trillion dollars. In five or six years, there may be seven or eight banks in the trillion-dollar club.
  

Since the Federal Reserve Board of Governors released its blockbuster capital requirements proposals on March 19, 2026, much of the color commentary has focused on how the updated Basel III and global systemically important bank, or GSIB, requirements are a stunning win in leveling the playing field against private credit firms and unlocking $175 billion or more in capacity.

However, the most impactful part of the Fed's proposals isn't merely capital relief that directs banks back into residential mortgage and corporate lending businesses. The new U.S. regulatory posture will catalyze an era of mass banking consolidation in the U.S., where the number of banks may shrink from 4,500 to as few as 1,000 in the next few years.

However, this banking consolidation superhighway is not only a story about big bank dominance. This is also a mid-market bank success story. Rather than leveling the playing field, the proposal is actively redrawing it, creating two distinct competitive paths and accelerating divergence across the sector.

There have been a handful of titanic U.S. banking policy changes in the past 40 years, from the Dodd-Frank Act and Gramm–Leach–Bliley Act to the Interstate Banking and Branching Efficiency Act. After the Interstate Banking Act was signed in 1994, the number of U.S. banks went down from 10,300 to 7,100 by 1997. Consolidation has been happening steadily in the U.S. since the 1990s, in a fundamental restructuring of this country's banking system away from small community institutions, because of globalization, digitalization and a global pandemic. The amended Basel III proposal is another "boulder in a pond" moment: a bright green light for mergers and acquisitions. And it won't take long.

In the last few years, the approval process for a bank to get a deal done was glacial, and frankly, many times overlooked. We didn't see many bank deals other than rescues, where a failing institution was basically purchased and put into receivership. One cannot underestimate the power of regulatory clarity in banking. The current regulatory environment is aimed at banks getting their vitality back.

Naturally, the GSIBs and Tier 1 banks above $700 billion will have more capital to go out and do deals. Under the strict 2023 Basel framework, a merger would have pushed a bank into a tougher capital bucket, making it less attractive to boards. Under the new proposal, trading-related risk-weighted assets are projected to decline by about 48% for depository institutions and about 20% for holding companies, whereas the prior proposals would have increased them by 9%.

The merger approvals process has accelerated to the fastest pace in three decades, down to as little as four months. Previously, the Fed's average time to approve a merger and acquisition application for firms greater than $100 billion had been an historically onerous 10 months. The new proposals are in no way incremental measures; they are a structural shift. Basel III has gone from punitive to positive.

A lot of banks in the $50 to $500 billion realm will be fulfilling their desire to expand and compete with the biggest banks. Under the old regime, these mid-markets were the least suited to navigate the M&A environment, because of the punitive impact on balance sheets and the lack of clarity.

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As a result, regional banks kept themselves from eclipsing the $700 billion level. Larger, healthier balance sheets will allow institutions to pursue M&A mandates to double their size over the next few years, especially because organic growth is often insufficient to compete at scale. Banks will find it more economically attractive to originate, pool and securitize residential mortgages. Regional banks that want to get in on the residential mortgage action can grow that line by acquiring banks in other states or regions. The action is already heating up.

"Fidelity is planning an acquisition of Affinity Bancshares; Santander is buying Webster Bank; and U.S. Bancorp is buying BTIG. Buoyed by the new Basel proposal, mid-market and regional banks are aggressively looking for more deposits and more customers. We're going to see mid-markets like Fifth Third Bank, BMO Bank, and Huntington Bank become two, three, or even four times bigger than they are today.

Some institutions are working on multiple acquisition deals at once. We may see divestitures, banks peeling off business lines to focus on mortgage and corporate lending, as well as more horizontal-type transactions, like the recently closed Huntington Bancshares-Cadence Bank merger.

Tier 2 mid-market banks can avoid complex capital charges, run bigger trading books, add financing desks, expand securities lending and offer more boutique prime-style services. The 2023 Basel III proposal would have sentenced Tier 2 banks to the perpetual sidelines in prime brokerage and trading. The 2026 Basel proposal requires that only Category I-II (Tier 1) banks apply the new expanded risk-based approach. Category III-IV (Tier 2) banks will also not be required to calculate credit valuation adjustment, and will see their risk threshold jump from $1 billion to $5 billion.

Mid-market institutions will shake free of previous constraints for capital allocation and gain incremental capacity to expand electively into capital markets, prime brokerage, market-making, structured products, and corporate and retail lending. It's a fundamental rethink of how banks of all sizes deploy balance sheets and pursue growth.

The clarity that the Basel III movement brings will help ignite this new era of consolidation. There are four banks in the U.S. today worth a trillion dollars. In five or six years, there may be seven or eight banks in the trillion-dollar club.

The new capital regime is a structural shift, offering mid-markets the scope to move effectively into capital markets and spark new competitive dynamics against big banks.