US bank consolidation: Biden vows crackdown while pushing deals

Wait until Joe Biden’s banking regulators hear about what his competition regulators are saying about consolidation among financial institutions.

Jonathan Kanter, who leads antitrust enforcement at the US Department of Justice, said this week he would more closely scrutinise banking deals beyond the basic measures of depositor or geographic concentration. 

Such holistic approaches to competition enforcement across sectors sets the Biden administration apart. But at least for the banking sector it looks odd given that the US President has facilitated in recent months the rescue of three different troubled banks: Silicon Valley Bank, Signature Bank and First Republic Bank. All of those were acquired by rivals at steep multibillion-dollar losses to the banking deposit insurance fund.

Since the financial crisis, US regulators have been loath to allow the biggest institutions to swell. But the more than 4,000 banks in America now look inefficient. The costs of regulatory compliance and capital, along with efficiencies from a single network of locations and marketing, scream for a streamlined sector. The Biden administration would be best served by developing a coherent framework for evaluating bank deals.

In a 2021 executive order on revising merger guidelines, the Biden administration said the US had lost 70 per cent of its banks since 1980. Regulators had not rejected a deal in 15 years. Still, many banks knew they should not even bother with a transaction. Deal volume data shows a sharp drop in activity since the financial crisis and passage of the Dodd-Frank reform. 

Banks typically need approval for both holding companies and banking subsidiaries. That requires review from the Federal Reserve as well as the Federal Deposit Insurance Corporation (FDIC) or the Office of the Comptroller of the Currency (OCC). Among six significant bank mergers announced in 2021, the median time to approval was more than a year, according to law firm Wachtell Lipton.

Higher interest rates should theoretically help banks’ profitability. However, depositors are increasingly attuned to how much interest they are earning in checking and savings accounts. They have been remarkable in their willingness to move deposits to higher yielding institutions or money market accounts.

Earnings for some banks will be squeezed below their cost of equity. Regulators, across agencies, are going to have temper their reflex to squelch consolidation. Scale matters in an increasingly competitive banking landscape.