Over the past half-decade, banking regulators and the Department of Justice have approved the mergers of
However, while these banks’ potential impacts on financial stability has increased with their larger footprints, it is unclear what financial services these merged banks — with consolidated assets of $541 billion to $1.1 trillion — can offer that their pre-merger components could not.
Banks serve a unique role in the economy and can create the businesses that provide the goods and services on which Americans rely. When larger financial institutions acquire local banks, however, small businesses and other customers often have a harder time obtaining basic financial services. Accordingly, regulators must more forcefully police bank mergers than those in other areas of the economy.
Banks allow savers to grow their wealth, make loans so that borrowers can start or grow businesses, and effectuate the government’s monetary and some fiscal policy decisions. These activities increase the long-run productivity of the real economy, and it is important that banks serve these roles. Yet mergers of regionals into the largest of banks, which is starting to occur for the first time since the financial crisis, put all three of these functions at risk.
Some bank mergers have resulted in lower interest rates paid on deposits, meaning that potential depositors may instead invest in riskier assets in a search for yield or simply may not save for the future. Research has found that loans are also fewer, smaller, and higher-priced when banks consolidate, which can stymie small-business creation and job growth. Data from the Federal Deposit Insurance Corp. shows that when called upon to assist the government in extending Paycheck Protection Program loans to businesses affected by the COVID-19 pandemic, larger banks held a disproportionately low share of loans, implying that banks created by a series of mergers did not support the intended beneficiaries of the program as effectively as their community bank counterparts.
The reason for these results is partly that when banks become larger, they tend to forgo relationship banking with small businesses and individuals in their communities: They have the deposit base to begin providing loans and other financial services to other large companies that they previously could not — and therefore the ability to earn greater returns on each transaction.
But as lending becomes more automated, small businesses may require more individualized underwriting than large banks can provide. The merger of community banks with regionals result in slowing small-business formation and increasing unemployment.
Mergers of large banks can also create systemically important institutions, the failure of which could cause significant harm. Accordingly, the only means of preventing this harm may be for regulators or Congress to bail out failing SIBs, which in turn helps them receive too-big-to-fail subsidies from the market in the form of low costs of capital and helps them to grow at a faster rate than their non-SIB competitors. Furthermore, acting Comptroller Michael Hsu recently noted that “if a large regional bank were to fail today, the only viable option would be to sell it to one of the GSIBs” (G for global), making a systemically important bank even larger — and further decreasing competition.
Among the many steps regulators and the Justice Department can take to ensure proper oversight and prohibit anti-competitive bank mergers, three are the most important. First, they can evaluate whether the larger, merged institution is likely to continue serving the convenience and needs as successfully as the two merging banks. Small banks are more effective than larger banks at serving the needs of small businesses, for example, and the acquisition of a community bank can reduce small businesses’ access to financial services.
Second, regulators should do a better job of evaluating the effects that mergers have on financial stability. If the only way to address a merged firm’s potential failure would be to sell it to an even larger competitor, it is likely that merger should be halted.
Finally, regulators can also lower the Herfindahl-Hirschman Index (a measure used to determine market concentration) threshold they use for deciding whether to bring enhanced scrutiny to a proposed merger, ensuring that more mergers are examined for anti-competitive effects.
Mergers in the banking industry result in many of the same harms as consolidation across other sectors, including higher prices, reduced worker bargaining power and increased barriers to competition. Importantly, however, these mergers have the potential to do more damage given banks’ unique role in the economy.
