The Biden administration plans to move forward with its big-government agenda by overregulating mergers and acquisitions in the banking sector. The Department of Justice, Consumer Financial Protection Bureau and Federal Deposit Insurance Corporation are launching a review of bank merger policies that could circumvent the agencies’ statutory authority and limit banking options for consumers.
Academic studies have pointed out that restricting mergers based on asset size could weaken services provided to consumers and put banks in the United States at a competitive disadvantage to banks based in foreign countries. Joseph Hughes and Loretta Mester point out that “large financial institutions competing in global financial markets and operating in countries that impose such limits are likely to experience a competitive disadvantage compared to institutions operating in countries without limits.” Large banks can also provide “products at lower average cost than smaller banks” for consumers.
Bank acquisitions also have the potential to improve inefficiencies. One study from 2019 shows that banks’ acquisitions of other banks that have management issues and have been subjected to prior enforcement action by regulators “improve the operating performance of post-acquisition combined entity, lending support to the hypothesis that punished banks’ M&As serve as a means to replace inefficient management and restore the target banks’ performance.”
Bank mergers can also lead to increases in small business lending. One paper from 2016 highlights the benefits of small business lending when a large bank acquires a community bank. The paper’s analysis shows that small business lending “increases more after a merger when a community bank is acquired by a large bank.”
Under Dodd-Frank, the federal government imposed more strenuous compliance costs on banks. According to Allison Nicoletti, an assistant professor at the Wharton School of the University of Pennsylvania, increased government regulations, such as those enacted in Dodd-Frank, have largely forced banks to consolidate to balance out the increased cost of compliance with government mandates. Nicoletti claims that regulatory costs “may incentivize banks to engage in an acquisition.”
The Federal Reserve Bank of New York also conducted a study and found that banks reduce operating costs when they merge. According to the Federal Reserve, there is “a robust inverse relationship between the size of bank holding companies and scaled measures of operating costs. Quantitatively, a 10% increase in assets is associated with a 0.3 to 0.6% decline in noninterest expense.”
Director Rohit Chopra of the CFPB and Acting Chair Martin Gruenberg of the FDIC made clear in their request for information on the Bank Merger Act that they intend to expand regulatory scrutiny of banks with more than $100 billion in assets. The DOJ is also on the path to pursue more stringent regulation over certain bank mergers.
President Biden’s appointees are searching for anticompetitive behavior in a market where consumers are thriving now more than ever.
According to a recent survey by the FDIC, “The proportion of U.S. households that were unbanked (i.e., the unbanked rate) in 2019 — 5.4% — was the lowest since the survey began in 2009. Between 2017 and 2019, the unbanked rate fell by 1.1 percentage points, corresponding to an increase of approximately 1.5 million banked households.” Mr. Biden’s financial regulators want to upend a market functioning well and allocating credit to those who previously did not have access to traditional financial services.
The regulators should carefully examine how the market has improved in recent years and avoid implementing regressive policies that threaten to limit services to consumers.
Mr. Biden’s imprudent pursuit of increased regulatory scrutiny over bank mergers based on an arbitrary asset threshold fails to consider the benefits of M&A. As regulators push forward with their agenda, they need to ensure that they remain within their statutory authority as directed by Congress. Failure to do so could limit the options available to banks to reduce costs and provide adequate financial services to consumers throughout the United States.
• Bryan Bashur is a federal affairs manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.