President Joe Biden signed a sweeping executive order in July that aims to increase competition throughout the U.S. economy. In one of the order’s most significant provisions, he directed federal regulators to strengthen oversight of bank mergers.
As a former Federal Reserve attorney who is a business law professor, I share Biden’s concern that widespread bank consolidation has hurt consumers and the 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 loan or you may be earning less interest in your savings account and paying higher transaction fees.
Biden’s executive order aims to reverse these trends. But with the pace2of bank mergers accelerating as the economy recovers from the COVID-19 pandemic, putting the brakes on harmful consolidation will not be easy.
From 1934 until the 1980s, the U.S. banking system consisted of more than 18,000 depository institutions. Today, the number has plummeted to fewer than 5,000. And the top four banks hold the same amount of assets as the next 300 combined, about $9 trillion.
A new wave of consolidation may be triggered by Trump-era financial deregulation that made it easier for banks to get bigger. 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.
The rapid consolidation is concerning because mergers can hurt consumers and the broader economy.
For example, bank mergers increase the cost and reduce the availability of consumer financial services. Bank mergers often lead to branch closures, inconveniencing customers. The negative effects of bank consolidation are especially pronounced in poorer neighborhoods, where predatory financial service providers proliferate following bank mergers.
Small businesses also suffer when banks merge. With fewer banks in a given market, small-business lending declines. For small businesses that are able to get loans, credit becomes more expensive and average loan size shrinks. As a result, fewer entrepreneurs start small businesses after banks consolidate.
Post-merger declines in small-business lending and formation also have detrimental economic effects. Bank mergers have been associated with decreases in commercial real estate development, new construction activity and local property prices.
Big bank mergers also increase the risk of another financial crisis. Numerous empirical studies have demonstrated that large bank mergers threaten financial stability. When banks grow through mergers, the consequences of their failure become more dire.
Bank consolidation, of course, is not always bad. Some mergers – particularly among community banks – can reduce banks’ costs without harming consumers or endangering the financial system.
In 1960, the Bank Merger Act directed federal regulators to consider the public interest when deciding whether to approve a merger. It also authorized the Department of Justice to block a merger that substantially lessens competition. From 1972 to 1982, the Federal Reserve denied more than 60 merger proposals.
Over time, however, regulators have become far more deferential to merging banks. The Federal Reserve has now approved more than 3,500 consecutive merger applications since 2006 without issuing a single denial.
Biden’s executive order seeks to end this rubber-stamping, but it also leaves the details for the regulators to figure out.
The Department of Justice has promised to implement Biden’s executive order in the coming months, and Fed officials have expressed interest in overhauling their framework for bank mergers. In addition, Sen. Elizabeth Warren, D-Mass., and Rep. Jesus G “Chuy” Garcia, D-Ill., have proposed legislation that would significantly strengthen merger oversight.
With a fresh approach, I believe that policymakers can ensure that bank mergers support, rather than impede, the economic recovery.
Jeremy Kress is an assistant professor of business law at the University of Michigan. Distributed by The Associated Press.
