BB&T and SunTrust appear to have struck a nerve. Their merger would reportedly create the sixth-largest bank in the United States. There is, however, no reason to sound any alarms.
Over the last 155 years, Congress has constructed and reconstructed an arduous gauntlet for the review and approval of bank mergers. The Dodd-Frank Act significantly raised those hurdles. Every merger either meets those standards and receives approval, or it doesn’t.
Every aspect of the institutions and their proposed merger is relentlessly and painstakingly scrutinized — usually several times by multiple federal and state agencies. Regulators evaluate the safety and soundness of the institutions, the future prospects of the combined entity, the quality of management, the adequacy of capital and liquidity levels, the quality of risk management, the status of any outstanding examination or regulatory issues, the competitive consequences of the combination, the benefits to the communities served, the parties’ record of compliance with consumer protection laws, anti-money-laundering standards and fair lending within their communities, and the impact of the transaction on the stability of the financial system.
The process is not for the faint of heart. It is exhausting, costly and can take up to a year or more. Mergers may also trigger additional hearings and protest proceedings that can add months to the approval process.
Some question the high percentage of bank mergers that are approved by regulators. That assertion ignores how the process works. There is very little that regulators don’t know about the merging banks before they propose to merge. Banks file voluminous periodic reports and are carefully supervised by their regulators, who often have examiners in residence on-site at large institutions for large portions of the year.
In fact, banks usually don’t propose a combination without first having had several regulatory pre-filing meetings and received assurances of likely approval from advisers that have war-gamed every legal, regulatory and accounting issue that could arise. Mergers that won’t meet the standards are rarely proposed, and so disapprovals should be infrequent.
Since the Dodd-Frank Act was enacted in 2010, few if any of the largest banks have announced or competed mergers with another bank. Dodd-Frank rewrote the regulation of big banks adding, among other capital, liquidity and resolution standards, a systemic stability test, limits on the size of merged institutions and increasing regulatory oversight the larger a bank becomes. When banks like BB&T and SunTrust go down the merger path, they are volunteering for closer regulation and enhanced financial regulatory targets and operating restrictions.
The elephant in the room is the debate over the creation of “too big to fail” banks — a legitimate concern, but one that should be put in context. The U.S. has always had TBTF banks. In fact, for all the criticism that is laid at their feet, history tells us that larger institutions have stepped in to calm financial panics, created stability in times of duress and been an important partner with the Federal Reserve in the balancing of monetary and economic policy.
The merger of BB&T and SunTrust would create a bank with less than 25% of the assets of the largest U.S. bank. Globally, the picture takes on a much different perspective. Only two U.S. banks are among the top 10 in the world measured by assets, and none are in the top five. The top four banks in the world are Chinese. That is striking, especially in light of the fact that China has established a goal of global dominance in artificial intelligence by 2030. The U.S. cannot fall behind the economic arms race, particularly since the futures of financial services and artificial intelligence will likely merge.
There is a worthwhile debate to be had about what the composition of the U.S. financial system should look like — but it should include questions about why the U.S. has so many banking crises and how mergers impact them. As Charles Calomiris and Stephen Haber note in their 2014 book, "Fragile by Design," since 1830 the U.S. has experienced banking crises in 10 different decades and lags only Argentina in frequency. Canada, which has a small number of large banks, has had only two banking crises with a handful of bank failures in that time. Since 1830, in excess of 7,500 banks and savings institutions have failed in the U.S.
Does the U.S. have too many or too few banks? How does the size of banks impact the frequency of crises? Is regulation too intrusive, not intrusive enough or applied too unevenly? Should big banks be broken up, regional banks permitted to catch up as regulators seem to be allowing or should the market be left to evolve on its own? It would be good to have data-driven analytics to debate policy issues like these before the role and impact of a bank merger is considered. Torturing mergers that play by the rules whenever they happen to appear is an ineffective way of creating or changing national policy.
