Biden wants to crack down on bank mergers – here's why that could help consumers and the economy

President Joe Biden signed a sweeping executive order^[1] on July 9, 2021, that aims to increase competition throughout the U.S. economy. In one of the order’s most significant provisions^[2], he directed federal regulators to strengthen oversight of bank mergers.

As a former Federal Reserve attorney who is now a business law professor^[3], I share Biden’s concern^[4] that widespread bank consolidation has hurt consumers and the broader economy.

If your bank has been acquired by a larger financial institution, you may have noticed that it is now harder for you to obtain a mortgage or a car loan^[5] or you may be earning less interest in your savings account^[6] and paying higher transaction fees^[7].

Biden’s executive order aims to reverse^[8] these troubling trends. But with the pace of bank mergers accelerating^[9] as the economy recovers from the coronavirus pandemic, putting the brakes on harmful consolidation will not be easy.

3 waves of mergers

From 1934 until the 1980s, the U.S. banking system consisted of more than 18,000^[10] primarily small depository institutions.

Today, however, the number of banks in the United States has plummeted to fewer than 5,000^[11], while concentration among the largest lenders has reached record levels^[12]. The top four banks – JPMorgan, Bank of America, Wells Fargo and Citibank – hold the same amount of assets^[13] as the next 300 combined, about US$9 trillion.

Three distinct waves of bank mergers have contributed to the rapid consolidation of the U.S. banking sector.

First, in the 1980s and 1990s, policymakers repealed^[14] longstanding geographic restrictions that had limited banks to operating within a single state. Once banks were allowed to expand across state lines, many merged with lenders in neighboring states^[15], 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^[16] eliminated Great Depression-era restrictions on activities like investment banking and selling insurance. Many banks expanded into these new activities through mergers, such as Citicorp’s acquisition of Travelers insurance company^[17] and Chase Manhattan Bank’s combination with investment bank J.P. Morgan^[18].

The third wave of bank mergers began during the 2008 financial crisis^[19], when several financial giants acquired failing firms, often with government assistance. JPMorgan Chase acquired Bear Stearns^[20] and Washington Mutual^[21], Bank of America absorbed Merrill Lynch^[22] and Countrywide^[23] and Wells Fargo merged with Wachovia^[24]. These crisis-induced mergers created the behemoth financial conglomerates that dominate^[25] the U.S. financial sector today.

Now a fourth wave may be underway, triggered by Trump-era financial deregulation^[26] that made it easier for banks to get bigger. COVID-19 has also contributed to bank consolidation. The Fed responded to the pandemic by setting interest rates near zero, which has made it harder for banks to earn profits off lending and has encouraged more mergers^[27].

Within the past year, Morgan Stanley^[28] and PNC Bank^[29] have completed significant acquisitions, and several more regional banking deals are awaiting approval^[30].

In other words, this recent trend shows few signs of slowing down anytime soon^[31].

The high costs of consolidation

The rapid consolidation of the U.S. banking sector is concerning because bank mergers can hurt consumers and the broader economy in several ways, according to my research^[32].

For example, bank mergers increase the cost and reduce the availability^[33] of consumer financial services. Bank mergers often lead to branch closures^[34], inconveniencing customers^[35]. The negative effects of bank consolidation are especially pronounced^[36] in poorer neighborhoods, where high-fee check-cashing companies and other predatory financial service providers proliferate following bank mergers.

Small businesses also suffer when banks merge. With fewer banks competing in a given market, small^[37] business^[38] lending declines significantly^[39] following a merger. For small businesses that are able to get loans, credit becomes more expensive and average loan size shrinks^[40]. As a result, fewer entrepreneurs start small businesses^[41] after banks consolidate.

Post-merger declines in small business lending and formation also have detrimental effects on economic development. For example, with fewer small businesses, bank mergers have been associated with decreases in commercial real estate development^[42], new construction activity and local property prices.

Meanwhile, fewer small businesses leads to fewer good jobs. Indeed, in areas affected by bank mergers, unemployment has increased, median income has declined^[43] and theft has become more frequent.

Finally, big bank mergers increase the risk of another financial crisis. Numerous^[44] empirical^[45] studies^[46] have demonstrated that large bank mergers threaten financial stability. When banks grow through mergers – as many did in the runup to the 2008 crisis – the consequences of their failure become more dire^[47].

Regulators loosen their grip

Bank consolidation, of course, is not always bad. Some bank mergers – particularly among community banks – can reduce banks’ costs^[48] without harming consumers or endangering the financial system.

In my opinion, however, bank regulators – who have to approve all mergers – have failed to differentiate innocuous bank mergers from those that are likely to hurt consumers.

In 1960, the Bank Merger Act^[49] directed federal bank regulators to consider the public interest when deciding whether to approve or deny a bank merger. It also authorized the Department of Justice to block a merger that substantially lessens competition.

At first, regulators regularly rejected bank mergers. From 1972 to 1982, for example, the Federal Reserve denied^[50] more than 60 merger proposals.

Over time, however, regulators have become far more deferential to banks that want to merge. According to my research, the Federal Reserve has now approved more than 3,500^[51] consecutive merger applications since 2006 without issuing a single denial.

[Over 109,000 readers rely on The Conversation’s newsletter to understand the world. Sign up today^[52].]

No more rubber stamp

Biden’s executive order seeks to end this rubber-stamping of bank mergers^[54]. The order is very broad, however, and leaves the details for the regulators to figure out.

In the past, I have suggested several ways to improve bank merger oversight. For example, policymakers could strengthen antitrust rules^[55] or authorize the Consumer Financial Protection Bureau to block a merger^[56] if a bank has a poor consumer compliance record.

The Department of Justice has promised^[57] to implement Biden’s executive order in the coming months, and Fed officials have expressed^[58] interest^[59] in overhauling their framework for bank mergers, as well. In addition, Sen. Elizabeth Warren and U.S. Rep. Chuy Garcia have proposed legislation^[60] drawing on my research that would significantly strengthen merger oversight.

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

_Corrects story to remove reference to TD Ameritrade.)

References

1. ^{^} Joe Biden signed a sweeping executive order (www.whitehouse.gov)
2. ^{^} most significant provisions (www.reuters.com)
3. ^{^} former Federal Reserve attorney who is now a business law professor (michiganross.umich.edu)
4. ^{^} share Biden’s concern (www.whitehouse.gov)
5. ^{^} harder for you to obtain a mortgage or a car loan (www.doi.org)
6. ^{^} earning less interest in your savings account (www.doi.org)
7. ^{^} paying higher transaction fees (scholar.harvard.edu)
8. ^{^} order aims to reverse (www.whitehouse.gov)
9. ^{^} pace of bank mergers accelerating (www.spglobal.com)
10. ^{^} more than 18,000 (banks.data.fdic.gov)
11. ^{^} fewer than 5,000 (www.fdic.gov)
12. ^{^} concentration among the largest lenders has reached record levels (www.cnbc.com)
13. ^{^} hold the same amount of assets (www.federalreserve.gov)
14. ^{^} in the 1980s and 1990s, policymakers repealed (www.newyorkfed.org)
15. ^{^} merged with lenders in neighboring states (www.doi.org)
16. ^{^} Gramm-Leach-Bliley Act (www.govinfo.gov)
17. ^{^} Citicorp’s acquisition of Travelers insurance company (www.nytimes.com)
18. ^{^} Chase Manhattan Bank’s combination with investment bank J.P. Morgan (archive.nytimes.com)
19. ^{^} 2008 financial crisis (theconversation.com)
20. ^{^} Bear Stearns (www.nytimes.com)
21. ^{^} Washington Mutual (www.nytimes.com)
22. ^{^} Merrill Lynch (www.nytimes.com)
23. ^{^} Countrywide (www.nytimes.com)
24. ^{^} Wells Fargo merged with Wachovia (dealbook.nytimes.com)
25. ^{^} behemoth financial conglomerates that dominate (www.wsj.com)
26. ^{^} Trump-era financial deregulation (www.cnn.com)
27. ^{^} has encouraged more mergers (www.forbes.com)
28. ^{^} Morgan Stanley (www.federalreserve.gov)
29. ^{^} PNC Bank (www.federalreserve.gov)
30. ^{^} are awaiting approval (www.cnn.com)
31. ^{^} few signs of slowing down anytime soon (www.americanbanker.com)
32. ^{^} research (www.ftc.gov)
33. ^{^} increase the cost and reduce the availability (www.doi.org)
34. ^{^} lead to branch closures (www.doi.org)
35. ^{^} inconveniencing customers (www.washingtonpost.com)
36. ^{^} especially pronounced (scholar.harvard.edu)
37. ^{^} small (doi.org)
38. ^{^} business (doi.org)
39. ^{^} lending declines significantly (fedinprint.org)
40. ^{^} credit becomes more expensive and average loan size shrinks (www.doi.org)
41. ^{^} fewer entrepreneurs start small businesses (www.doi.org)
42. ^{^} decreases in commercial real estate development (www.doi.org)
43. ^{^} unemployment has increased, median income has declined (www.doi.org)
44. ^{^} Numerous (doi.org)
45. ^{^} empirical (doi.org)
46. ^{^} studies (doi.org)
47. ^{^} more dire (doi.org)
48. ^{^} reduce banks’ costs (www.doi.org)
49. ^{^} Bank Merger Act (fraser.stlouisfed.org)
50. ^{^} the Federal Reserve denied (digitalcommons.law.yale.edu)
51. ^{^} has now approved more than 3,500 (digitalcommons.law.yale.edu)
52. ^{^} Sign up today (theconversation.com)
53. ^{^} Adam Hunger/AP Images for JPMorgan Chase & Co (newsroom.ap.org)
54. ^{^} rubber-stamping of bank mergers (www.americanbanker.com)
55. ^{^} strengthen antitrust rules (www.ftc.gov)
56. ^{^} authorize the Consumer Financial Protection Bureau to block a merger (www.americanbanker.com)
57. ^{^} Department of Justice has promised (www.justice.gov)
58. ^{^} expressed (www.federalreserve.gov)
59. ^{^} interest (www.federalreserve.gov)
60. ^{^} proposed legislation (www.warren.senate.gov)