The July 9, 2021, executive order “Promoting Competition in the American Economy” has been presented by the Biden administration as a “whole-of-government effort” to prioritize steps to address unfair competition in the American economy. Of the more than 70 industry-specific policy priorities contained in the executive order, the Department of Justice and the three federal banking agencies — the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corp. — are encouraged to review current practices and adopt a plan within 180 days for the revitalization of merger oversight under the Bank Merger Act and the Bank Holding Company Act of 1956.
The impetus for this review is multifaceted, but at its core is a presumed assertion by the administration that increased bank consolidation and a lack of adequate bank merger oversight has been harmful to consumers. Considering costs have gone up for consumers, credit has been restricted for many small businesses and low-income communities have felt the brunt of bank and branch closures over the last 15 years — a period when not one bank merger was denied by regulators — that assertion seems well founded.
A fact sheet put out by the White House calls attention to 10,000 bank closings over the last 40 years, with many of those closures the result of mergers and acquisitions. The White House notes that communities of color are disproportionately affected, with 25% of all rural closures in majority-minority census tracts. With increased consolidation consumers have less choice among banks, restricted access to credit, and face higher interest rates and fees.
One example of a merger arguably not meeting the needs of the community is the 2020 acquisition of E-Trade by Morgan Stanley. The Fed noted in its approval that Morgan Stanley would control nearly 13% of deposits in Virginia despite not operating any retail branches in that state — or any other state, for that matter.
The Justice Department and the banking agencies have already signaled that there’s a problem here that needs solving. In September 2020, the Justice Department requested public comment on the efficacy of its 1995 Bank Merger Competitive Review guidelines, a move that typically presages a regulatory review. And after the Fed’s May 2021 approval of the acquisition of BBVA USA Bancshares by PNC Financial Services Group, Fed Gov. Lael Brainard expressed particular concern for the increased concentration of banks in the $250 billion to $700 billion asset category, a category where, she said, “common-sense safeguards have been weakened.”
Although any plan put forth by the Justice Department and the banking agencies may not be released until the beginning of 2022, scholars have already developed something of a roadmap for how to make the bank merger process more equitable and reflective of current market realities.
A 2019 article in the Yale Journal of Regulation by Jeremy C. Kress, assistant professor of business law at the University of Michigan Ross School of Business, argued that the “current approach to evaluating bank merger proposals is poorly suited for modern financial markets” and the traditional focus on competition has been rendered “obsolete” by “changes in bank regulation and market structure — including the repeal of interstate banking restrictions and the emergence of nonbank financial service providers.” Kress suggests that the merger analysis should emphasize the statutory factors — impacts on financial stability, benefits to the public, and the long-term viability of the companies and banks involved in the proposal — that are outlined in the Bank Merger Act and Bank Holding Company Act.
Regulators could also redouble their efforts to ensure that bank mergers really benefit consumers as much as they benefit the merging firms. One way of doing that might be to orient the merger review process in such a way that regulators begin with the presumption mergers will harm consumers and thus requiring the merging parties to demonstrate the contrary.
Any bank merger revision should also demonstrate that it would not create or sustain so-called banking deserts — communities that lack reasonable access to a bank branch. Having merging firms explain how they plan to address branch redundancies — and how those choices might affect communities that already have limited banking options — seems like important data for regulators to consider.
Banks could manage some of this themselves and make this process less onerous by engaging with vulnerable communities on their own. Although not part of the formal regulatory process, many banks and communities have entered into so-called community benefits agreements, which provide merging banks the opportunity to explain how the post-merger entity will meet its Community Reinvestment Act requirements. The agreements outline lending, investments and philanthropy strategies in low- and moderate-income neighborhoods affected by a merger. Since 2016, the National Community Reinvestment Coalition has facilitated the creation of CBAs worth $338 billion with 15 banking groups. The largest-to-date plan, finalized in April 2021, was a four-year, $88 billion agreement between community groups and PNC Bank.
Regulators should also be more skeptical of mergers involving community banks, a problem that has vexed policymakers for years. Small banks tend to serve small communities that larger banks don’t, and the rapid consolidation of the smallest banks could limit rural communities’ access to capital.
Bank consolidation is not always bad for consumers, but a lack of banking options and access to capital is. As the Justice Department and banking regulators begin their much-needed work overhauling the rules governing bank mergers, they should put the onus on the merging banks to build a case for why their deal helps the community rather than requiring the community to make the case that the deal hurts them.
