Biden wants to rein in bank mergers — that could help consumers and the economy

President Joe Biden signed a comprehensive executive order on July 9, 2021 aimed at increasing competition across the U.S. economy. In one of the key provisions of the ordinance, he instructed federal regulators to step up supervision of bank mergers.

As a former Federal Reserve attorney who is now a professor of business law, I share Biden’s concern that widespread bank consolidation has harmed consumers and the economy at large.

If your bank has been taken over by a larger financial institution, you may have noticed that you now have a harder time getting a mortgage, a car loan, or you earn less interest on your savings account and pay higher transaction fees.

Biden’s Executive Order aims to reverse these worrying trends. But as the pace of bank mergers accelerates as the economy recovers from the coronavirus pandemic, holding back a damaging consolidation won’t be easy.

3 waves of fusion

From 1934 through the 1980s, the US banking system consisted of more than 18,000 mostly small custodians.

Today, however, the number of banks in the United States has fallen to less than 5,000, while concentration among the largest lenders has reached record levels. The four largest banks – JPMorgan, Bank of America, Wells Fargo, and Citibank – hold the same assets as the next 300 combined, about $ 9 trillion.

Three different waves of bank mergers have contributed to the rapid consolidation of the US banking sector.

First, in the 1980s and 1990s, policymakers lifted longstanding geographic restrictions that restricted banks to operate in a single state. After banks were allowed to expand across state lines, many merged with lenders in neighboring states, creating a cohort of larger regional banks.

Next, banks began to grow not only in size but also in scope. In 1999, the Gramm-Leach-Bliley Act removed restrictions on activities such as investment banking and the sale of insurance from the Great Depression. Many banks expanded into these new activities through mergers, such as the takeover of Travelers insurance company by Citicorp and the merger of Chase Manhattan Bank with investment bank JP Morgan.

The third wave of bank mergers began during the 2008 financial crisis, when several financial giants took over bankrupt companies, often with government support. JPMorgan Chase acquired Bear Stearns and Washington Mutual, Bank of America acquired Merrill Lynch and Countrywide, and Wells Fargo merged with Wachovia. These crisis-induced mergers created the gigantic financial conglomerates that dominate the US financial sector today.

In the past year, Morgan Stanley, PNC Bank and TD Ameritrade made significant acquisitions. Several other regional banking operations are awaiting approval.

In other words, this recent trend shows few signs of slowing anytime soon.

The high consolidation costs

The rapid consolidation of the US banking sector is worrying as my research suggests that bank mergers can harm consumers and the wider economy in a number of ways.

For example, bank mergers increase costs and reduce the availability of financial services to consumers. Bank mergers often lead to branch closures, which is inconvenient for customers. The negative effects of bank consolidation are particularly pronounced in poorer neighborhoods, where check cashing companies and other predatory financial service providers proliferate following bank mergers.

Small businesses also suffer from bank mergers. With fewer banks competing in a given market, lending to small businesses drops significantly after a merger. For small businesses that can borrow, borrowing becomes more expensive and the average loan size decreases. As a result, fewer entrepreneurs are starting small businesses after bank consolidation.

The decline in lending and small business creation after the merger is also having a negative impact on economic development. With fewer small businesses, for example, bank mergers are associated with a decline in commercial property development, new construction activity and local property prices.

At the same time, fewer small businesses lead to less good jobs. In the areas affected by bank mergers, unemployment has even risen, median income has fallen and thefts have become more common.

Finally, large bank mergers increase the risk of another financial crisis. Numerous empirical studies have shown that large bank mergers endanger financial stability. As banks grow through mergers – as did many in the run-up to the 2008 crisis – the consequences of their failure become worse.

Regulators loosen their grip

Of course, bank consolidation isn’t always bad. Some bank mergers – especially between community banks – can reduce bank costs without harming consumers or endangering the financial system.

In my opinion, however, banking regulators – who must approve all mergers – have failed to distinguish harmless bank mergers from those that are likely to harm consumers.

In 1960, the Bank Merger Act directed federal banking regulators to consider the public interest when deciding whether to approve or reject a bank merger. It also authorized the Justice Department to block a merger that would significantly weaken competition.

The supervisory authorities initially regularly rejected bank mergers. For example, from 1972 to 1982 the Federal Reserve rejected more than 60 merger proposals.

Over time, however, regulators have become far more respectful of banks trying to merge. According to my research, since 2006 the Federal Reserve has approved more than 3,500 consecutive merger proposals without a single denial.

No more stamp

Biden’s Executive Order aims to end this stamping of bank mergers. However, the order is very broad and leaves the details to the regulators.

In the past I have suggested several ways to improve the supervision of bank mergers. For example, policymakers could strengthen antitrust rules or authorize the Consumer Financial Protection Bureau to block a merger if a bank has a poor consumer compliance record.

The Justice Department has promised to implement Biden’s executive order in the coming months, and Fed officials have expressed interest in revising their bank merger framework as well. In addition, based on my research, Sen. Elizabeth Warren and US MP Chuy Garcia proposed a law that would significantly strengthen merger supervision.

With a fresh approach, I believe policymakers can ensure that bank mergers support rather than hinder the emerging economic recovery.

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