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Bank Mergers and the Economic Impacts of Consolidation

Senate Committee on Banking, Housing, and Urban Affairs

Subcommittee on Economic Policy

Bank Mergers and the Economic Impacts of Consolidation

Wednesday, July 12, 2023

 

Topline

  • Democrats raised concerns about the effects of consolidation in the banking sector, including its impact on community banks, financial stability, and access to financial services.
  • No Republicans attended the hearing.

Witnesses

  • Morgan Harper, Director of Policy and Advocacy, American Economic Liberties Project
  • The Honorable Michael Faulkender, Dean’s Professor of Finance and Chief Economist, University of Maryland and America First Policy Institute
  • Alexa Philo, Senior Policy Analyst, Americans for Financial Reform

 

Opening Statements

Subcommittee Chairwoman Elizabeth Warren (D-Mass.)

In her opening statement, Warren noted that while Dodd-Frank was designed to ensure that giant banks could never threaten our economy again, the collapses of Silicon Valley Bank (SVB), Signature Bank, and First Republic proved that bank failures remain a serious threat to our economy and that regulators are courting disaster by continuing to improve giant banks to grow even bigger. She added that treating mergers as a solution to financial instability increases instability. Warren explained that as big banks get bigger, branch closures increase, which reduces the availability of bank services and increases the cost of credit for small businesses and families. She discussed how between 2006 and 2021, the Federal Reserve (Fed) approved more than 3,500 consecutive mergers.

 

Warren noted that while the 20 biggest banks in the U.S. hold more than 65% of all bank assets, she explained that the concentration at the very top is even more extreme, with the four biggest banks holding more assets than the next 75 banks combined. Warren discussed President Biden’s July 2021 Executive Order addressing bank consolidation, noting that the DOJ’s Antitrust Division indicated that new guidelines are coming soon. She expressed her concerns over recent actions from banking regulators, highlighting the sale of First Republic to J.P. Morgan Chase in a “sweetheart deal.” Warren cautioned that leaders within the Biden Administration seem to be inviting more mergers, citing recent remarks from Acting Controller Hsu and Treasury Secretary Yellen, which she called wrongheaded. She concluded that regulators must ensure big banks have robust competition to guarantee that they are serving consumers and small businesses.

 

Testimony

Morgan Harper, Director of Policy and Advocacy, American Economic Liberties Project

In her testimony, Harper described megabanks as policy failures, explaining that they lie to regulators, cheat consumers, and neglect small businesses with no meaningful consequences. She said deregulation, lax merger enforcement, and a disregard for our country’s antitrust laws have brought us closer to a hyper-consolidated banking sector. Harper noted the nation’s six largest banks – JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley – control more assets ($13.6 trillion) than all others combined. She added that the share of assets held by smaller banks with total assets under $1 billion has dropped from 25% in 1994 to just 6% in 2019, and is likely even smaller now. Harper explained that more than three-quarters of the United States’ local banking markets are considered uncompetitive, a reality that is even more pronounced in rural areas, where nearly 90 percent of local markets are considered highly concentrated.

 

Harper explained how bank consolidation has increased the cost and reduced the availability and quality of basic financial services for consumers, throttled small business formation and lending, and increased systemic risk for our financial system. She said bank mergers increase unemployment and reduce wages, while pushing more Americans into the arms of predatory lenders. Harper warned that some of the top banking regulators like Sec. Yellen and Acting Controller Hsu are championing more mergers, contradicting the competition priorities of their own President. She concluded that we must preserve and protect the decentralized U.S. banking system, which has facilitated the world’s strongest economy, while prioritizing competition that leads to better products, better prices, and a more stable and sustainable economy.

 

The Honorable Michael Faulkender, Dean’s Professor of Finance and Chief Economist, University of Maryland and America First Policy Institute

In his testimony, Faulkender affirmed that a robust private sector comprised of millions of small businesses is essential to meet the heterogeneous needs and desires of our nation. He explained that access to financing at the local level depends on a robust network of financial institutions with local roots, not just a handful of national megabanks. Faulkender noted that we now have the greatest concentration of banking activity ever, with four megabanks serving nearly 48 percent of the nation’s deposits in 2022. He explained that this enormous consolidation creates new challenges, as community and regional banks are pivotal for critical banking activities that rely on soft information, since local knowledge requires local decision-making. Faulkender warned that we must ensure a vibrant ecosystem for providers of soft-information loans and not allow our concerns about systemic risks from large institutions to create extraordinary burdens for the primary capital providers to America’s thriving small businesses.

 

Faulkender said Congress’ passage of Dodd Frank to impose greater requirements on the banking sector was misguided, because it presumed that financial regulators will be able to stay ahead of the banks they supervise and caused the banking sector to be more uniform. He added that Dodd-Frank’s systemic risk exception on deposit insurance has proven extraordinarily problematic, while uniformly applying regulation and supervisory tactics to all banks when only the largest pose particular types of risk made small and regional banks less competitive. He concluded that bank regulation must make it easier for new banks to enter into existence.

 

Alexa Philo, Senior Policy Analyst, Americans for Financial Reform

In her testimony, Philo cited President Biden’s 2021 Executive Order on Promoting Competition in the American Economy, which encouraged the banking agencies to review current practices and adopt a plan to revitalize merger oversight. She noted that almost two years later, the agencies have yet to publish new guidelines. Philo explained how bank consolidation has produced historically high concentration in the U.S. financial sector, with more than three-quarters of local banking markets considered uncompetitive in 2021. She noted federal bank regulators have not formally rejected a merger application in over 15 years, adding that bank mergers have reduced the availability of credit, increased fees for basic banking services, and lowered interest rates offered to depositors. Philo said that when banks consolidate, small business lending declines. She emphasized that bank mergers exacerbate systemic risk.

 

Philo discussed how due to recent mergers, PNC, Truist, and Capital One are now bigger than Washington Mutual, Countrywide, and National City when they failed in the 2008 financial crisis. She explained how large bank mergers can exacerbate existing problems, such as the “too-big-to-fail” dynamic, as well as related problems, such as when banks become “too-big-to-manage.” Philo said the American public would be better served by the agencies evaluating emergency sales through a lens broader than just the least cost to the insurance fund, including the resulting effects on financial stability, ability to effectively manage the combined entity, anti-competitive impacts, and other negative economic consequences not beneficial to communities served or the economy. She cited her disagreement with those who believe that we need deregulation to check concentration, explaining that recent supervisory failures point to the need for stronger regulation and effective supervision. Philo concluded that banking agencies should pause merger approvals until their Bank Merger Guidelines are strengthened and should work together to conduct a retrospective analysis of the impact of prior banking mergers on consumers and communities.

 

Question & Answer

Financial Stability

Warren asked if mergers are a good way to increase stability in the banking sector. Philo said no, and explained how big bank mergers increase the risk of financial crisis due to the increases in complexity, concentration, and interconnectedness.

 

Warren asked the witnesses if they agreed with Secretary Yellen and Acting Controller Hsu’s belief that more mergers would make our financial system safer. Harper and Philo both said no and classified these beliefs as extremely disconcerting. Warren agreed and said bank consolidations make our financial system and economy weaker.

 

Sen. Jack Reed (D-R.I.) asked if regulators should be more rigorous and transparent in establishing the criteria of the financial stability factor when considering merger applications. Philo said yes, explaining that this is a key lesson to be learned from the SVB failure.

 

Community Banking

Warren noted that over the last 15 years, the number of community banks has shrunk by over 40%, leaving one third of rural counties without a local bank. She explained that this leaves rural communities and communities of color with little choice but to turn to megabanks for checking accounts and loans.

 

Warren asked about the effects on a community after its last small bank closes. Harper explained that these closures are devastating for the local economy because community banks serve the small businesses who fuel the local economy, and the closure of local banks leads to job losses and less dynamism in the economy. She added that these closures lay the groundwork for predatory firms and payday lenders to take advantage of vulnerable populations.

 

Warren asked if small business owners have a better chance of getting loans from their local community banks or from Wells Fargo. Harper explained that while big banks are incentivized to serve larger clients, small banks have the time and incentives for relationship lending. She noted community banks provide 50% of small business loans, while big banks provide only 18%.

 

Reed cited regulatory approvals of private equity backed acquisitions of open and solvent banks. He asked why banking agencies should be skeptical about approving these merger applications, and which specific elements of private equity model dangers apply to banking. Philo said this trend is deeply concerning, noting the private equity industry controls an ever-increasing portion of the U.S. economy. She said private equity’s extractive business model requires private equity firms to acquire and consume more businesses and sectors every year. Philo concluded that private equity firms have different incentives than banks, and they have the propensity to put profits first.

 

Reed said private equity firms are typically acquiring community banks, which have a more community-oriented mindset, rather than a profit-driven structure. Philo agreed, emphasizing that the private equity firms who are acquiring community banks will not have the same commitment to or understanding of the local economy as the acquired bank.

 

Sen. Chris Van Hollen (D-MD) asked Harper to elaborate on her testimony that the absence of community banks forces people to turn to predatory lending services. Harper said the harms of consolidation are exacerbated in rural communities and majority-minority communities, culminating in junk fees and the rejection of mortgages.

 

Bank Merger Guidelines

Reed asked how the current bank merger framework evaluates anti-money laundering practices and cybersecurity risk. Harper emphasized that these factors must be considered in any merger review. Philo noted there is no existing requirement to consider issues like this, adding that these are important parts of reform advocates are looking for.

 

Warren asked Philo how she would evaluate the application for merger between two banks if she were a regulator. Philo said she would examine deposits, financial stability, especially for the larger institutions, public interest, and financial and managerial resources.

 

Warren said that while there should be a very high bar for approving a merger, the FDIC, OCC, and the Fed have never seen a merger they didn’t love. Warren noted that since 2013, the FDIC has received more than 1,100 bank merger applications, denying zero. She added that only one merger application has been denied over the past 20 years.

 

Warren asked if Faulkender believed that only one of the thousands of mergers over the past 20 years posed a threat to competition, risk to financial stability, reduced options for consumers, or any of the other factors that regulators are required to consider. Faulkender said that mergers are usually approved with restrictions, like divestitures, to ensure there is still local competition.

 

Warren said regulators are not using a high enough bar in the current merger review guidelines. She warned that banks are aware that the process has effectively become a rubber stamp.

 

Warren asked if the witnesses agree with President Biden that the bank merger guidelines need to be toughened up to keep consumers, small businesses, and our financial system safe. Harper said yes, noting that recent actions from the DOJ are very encouraging. She noted the DOJ intends to apply the statutory obligation. Philo also agreed with the President. Warren noted that when she asked the Fed nominees the same question, they refused to give a straight answer, which she said was incredibly concerning.

 

Warren pledged to reintroduce her Bank Merger Review Modernization Act to strengthen and modernize the bank merger guidelines.

 

FinTech Sector

Van Hollen suggested applying similar standards and rules to the non-banking fintech sector would even the playing field. Harper said the best way to create a competitive environment is through a strong bank merger policy that will prevent consumers from turning to predatory non-bank products.

 

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.