Update 332 — The BB&T/SunTrust Merger:
Bank Consolidation Gains, Thanks to S. 2155?
Virtually every major sector and industry in the American economy has seen increasing concentration and reduced competition over the last several decades and banking is no exception. Trump era deregulation has accelerated this trend and last year’s S. 2155 and its implementing regulations have paved the way for the largest bank merger in over a decade.
What dangers lurk behind bank consolidation? What lies ahead if current trends continue? We have a look today at the merger, the trends, and the challenge for regulators and legislators concerned about the effects of deregulation.
On February 7, BB&T and SunTrust, the 15th and 16th largest banks in the U.S. respectively, announced plans to consolidate. The merger’s purchasing price of $66 billion is the largest since the financial crisis and would create the sixth largest bank in the country. With over $430 billion in consolidated assets, the new entity would be classified as a “mega-regional bank” — financial institutions of $250-700 billion in assets.
The merger, subject to final regulatory approval, raises questions about the pace and extent of bank consolidation and its consequences. Consolidation in the banking sector has increased over the past several decades, paused during the financial crisis and recovery, then propelled forward by deregulation following passage last May of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act. With relaxed oversight, bank consolidation could undermine competition among banks and introduce greater risk into the financial system.
Why Banking Consolidation?
The number of US banks has fallen 65 percent since the mid-1980s, while total bank assets have surged. In 1994, banks with assets under $10 billion comprised 57 percent of deposits and 70 percent of all bank branches across the U.S. In 2018, these smaller banks represented just 20 percent of deposits and 44 percent of branches.
More recently, regulators appointed by Trump have given large and mid-sized banks more flexibility to comply with regulations. The Fed and other agencies have sped up their approval process for bank mergers, and under Trump, the Fed has approved almost all acquisition and merger requests.
Banks consolidate for several reasons. A larger entity with greater resources can provide more services and lend more than two banks independently, in theory. Increasing the amount of capital on hand enables a new entity to scale up current operations and expand its geographical footprint, allowing it to compete with bigger banks. Banks could use the efficiencies gained by consolidating to pass savings onto the customer.
Consolidation can be harmful in two key ways:
- Rural and underbanked communities: Consolidation can mean shuttering branches in isolated areas, affecting both employment and access to financial services in the region. Fed Chairman Powell raised concerns about this issue during a conference at Mississippi Valley State University: “The loss of [branches] meant more than the loss of access to financial services; it also meant the loss of financial advice, local civic leadership, and an institution that brought needed customers to nearby businesses.”
- Competition and Systemic Risk: According to JPMorgan Chase CEO Jamie Dimon, “there are still too many banks,” and regulators should make it easier for smaller banks to merge. This opinion is not shared by progressive lawmakers such as Sen. Warren, who argues that provisions in S.2155 loosened safety and soundness regulations on large and mid-size banks, creating a regulatory environment where mergers like BB&T and SunTrust will become more commonplace, resulting in new TBTF banks and less consumer choice.
S. 2155: Shall Tailor, Will Merge
Republicans touted S. 2155 as a bill that would alleviate regulatory burdens for community banks. In her response to the BB&T/SunTrust merger announcement, House Financial Services Chair, Maxine Waters, reiterated that S. 2155 was “a broader deregulatory giveaway to large banks that would fuel mergers, accelerate industry consolidation, and make it more difficult for community banks to compete.”
In the nearly 100 pages of S. 2155, it was just one word change — “may” to “shall” — that prompted a sea of change in the Federal Reserve’s tailoring directive. The insertion of “shall” into Section 165 of Dodd-Frank made regulation tailoring for the nation’s largest banks a prescription, rather than a suggestion.
In October last year, the Fed announced the creation of four new categories to differentiate banks according to their asset size and activities — the rule was essentially a targeted depletion of banks between $100 to 700 billion in assets.
Under the proposal, whose comment period closed January 22:
- Banks in a $100 to $250 billion asset range would be exempted from the liquidity coverage ratio.
- Banks with assets between $250 and $700 billion would face much lighter liquidity requirements, equivalent to 70 to 85 percent percent of their existing liquidity coverage ratio.
The proposed Suntrust and BB&T merger would create a new entity with over $430 billion in assets, less than the $700 billion asset threshold that would subject it to greater regulatory scrutiny, adding to critics’ fears that S. 2155 might lead to further consolidation.
Rules and (De)Regs in Fed Pipeline
Several deregulatory rulemakings have been proposed since the end of 2018, as agency directors begin implementing S. 2155, passed last May. Two Fed proposals, both of which are open for comments until the end of March, stand out as significant for systemic risk:
- In late December, the Fed delivered a notice of proposed rulemaking (NPR) of its intention to exempt community banks from the Volcker rule, which aims to curb proprietary trading.
- On February 14, the Fed put out an NPR for modifying stress-testing rules to conform with S. 2155.
Chair Waters’ HFSC agenda will focus first on consumer issues, credit, and housing, in line with her legislative and oversight priorities. We are likely to see a second wave of hearings on systemic risk issues in late March or early April, primarily focused on leveraged loans, Collateralized Debt Obligations, and other market vulnerabilities — which could, and should, include under-$250 billion bank consolidation.
Where From Here?
Although the Democratically-controlled House can provide oversight on the increasing concentration of U.S. banks and hold regulators to account for rulemakings that go beyond S. 2155, it cannot prevent consolidation. With President Trump’s appointees operating across federal regulatory agencies, 2019 signals a green light for more consolidation, likely at the expense of community banks and underbanked populations across the country. As consolidation occurs among banks under the $700 billion threshold, surviving regulation may not be as effective in monitoring these newly-formed financial institutions.
In the wake of the SunTrust and BB&T merger last week, HFSC Chair Waters declared that “[it] raises many questions and deserves serious scrutiny from banking regulators, Congress and the public to determine its impact and whether it would create a public benefit for consumers.” Legislation could ensue.