In a significant turn of events that could influence significantly the size and composition of the banking industry, a fresh debate about bank merger policy may be on the verge of starting in Washington — this time at the behest of Democrats.
The battle lines are already firmly established. That’s because there was a dress rehearsal in the closing days of the Trump administration.
The difference is that while the past administration’s Department of Justice was calling for a review of merger policy with an eye toward liberalizing it, a Democratic DOJ would be seeking to crack down on alleged past laxity in merger approvals and toughening standards.
Strong feelings about past bank merger policy and current practices have been voiced by Senate Banking Committee Chairman Sherrod Brown (D.-Ohio) and House Financial Services Committee Chairman Maxine Waters (D.-Calif.), as well as Sen. Elizabeth Warren (D.-Mass.), who has spearheaded legislation to impose policy change in this area. Multiple sources predict that the Biden administration wants to open up the matter.
The fulcrum for the fight is a set of merger policy guidelines that the Justice Department uses to evaluate proposed bank mergers and acquisitions. While various measures have been added, the basic guidance hasn’t been changed since 1995.
Competition Means More than Branches:
The debate that is shaping up will not necessarily synch with the world that many bankers an credit union execs find themselves competing in.
Proponents of change have pointed out that even with later adjustments, policy mechanisms for evaluating the competitive impacts of mergers ignore the advent of online deposit gathering and online-only banks, fintechs and neobanks, along with increasingly broad lending by — and liberalized charter scope for — credit unions. Indeed, acquisitions of banks by credit unions, while not a tidal wave, occur more frequently today than they did when the rules were written.
Traditionally, the competitive review process has been focused on geography — the presence of branches in given markets. The longstanding measurement for competitive concentration is a complex formula called the Herfindahl-Hirschman Index.
The typical remedy for market dominance has been required divestiture of branches in affected markets, the idea being that selling them to other institutions will preserve competition. This practice continues in spite of the growing role of the internet and mobile banking.
“Branch Desert” Worries:
The viewpoint of many Democrats and advocacy groups is that merger reviews have failed to deal with loss of competition in both urban neighborhoods and rural communities. They also worry about a complete loss of banking service.
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Bank Merger Policy Will Be Sucked Into Multiple Social Issues
The Biden administration is expected to engage in more antitrust enforcement overall. Antitrust law has historically been the core for Justice Department merger reviews. But the debate over banking mergers will certainly broaden to the impact on people in low- and moderate-income communities and on minority neighborhoods.
The weakening of DOJ competitive analysis proposed by the Trump administration is clearly off the table now. As it was, the Democratic view, as expressed in a Warren policy document, is that “merger review practice lacks rigor, and regulators serve as rubber stamps.”
A criticism this camp makes is that almost no bank mergers have been disapproved for decades. Proponents counter that some of this reflects behind-the-scenes regulatory suggestions to drop a merger idea before officially filing for approval. It’s not unusual for many regulatory applications to be walked around agencies before they become “real.”
The Bank Merger Review Modernization Act was introduced by Warren and others in the previous Congress and is likely to be introduced again with a Democratic Senate Banking Committee chairman (Sherrod Brown) now in place. The legislation includes these broad changes to the evaluation process:
- Guaranteeing that the merger in is in the public interest — including approval by the Consumer Financial Protection Bureau when one of the merging institutions offers consumer banking products. At present, only the surviving institution’s primary federal regulator weighs in, beyond the DOJ.
- Safeguarding the stability of the financial system. Congressional opponents of deals like the SunTrust-BB&T merger that created Truist have raised the “too big to fail” issue.
- Requiring regulatory analysis of anticompetitive effects on specific banking products. Currently only the general availability of banking products is considered, not specific ones like mortgages and small business loans. (The growing role of online services will complicate the debate, or be ignored, politically.)
- Evaluating the merged institution for financial and managerial resources.
When the previous DOJ Antitrust Division leadership asked for comments about bank merger guidelines, a group of members of Congress wrote that “As the financial industry changes, we call on the DOJ to protect our communities and strengthen its merger guidelines rather than bowing to industry pressure and rolling back protections.” The group included Jesus Garcia (D.-Ill.), a sponsor of the House version of Warren’s legislation and a vice-chair of the Congressional Progressive Caucus, and Alexandria Ocasio-Cortez (D.-N.Y.)
“In many instances bank mergers have already increased the cost and reduced the availability of credit while inflating fees and discouraging investment. These effects have been compounded in working class communities of color.”
— Commentary on M&A from congressional progressives
The letter also stated that, “While these communities already face additional hurdles to accessing credit, research shows that predatory financial service providers like high-fee check-cashing companies expand into areas impacted by bank mergers. This not only restricts these communities’ access to credit but opens them up to unpayable cycles of debt and unscrupulous debt collectors.”
Business Banking Is Also in Play:
Opponents of liberalizing guidelines have charged that bank mergers tend to shrink the supply of small business credit.
Fintechs’ Activities Not Necessarily on the Radar
Regarding the influence of fintech on the supply of services, the National Community Reinvestment Coalition wrote, “…the digital financial providers may not have much of an impact in low- and moderate-income neighborhoods since customers unfamiliar with banking are less likely to engage in significant digital banking transactions.” On the small business side, the coalition noted that Federal Reserve research has found that small firms “tend to be less satisfied with fintech loan terms and conditions.”
The group also called for imposition of special requirements on very large mergers, such as those involving institutions over $10 billion. Specifically, merger applications would have to include “public benefit plans” affecting the merging institution’s entire geographical footprint. (It’s common in very large mergers for institutions to voluntarily make grants or other offers of aid to community groups in affected areas.)
While bank regulators’ reviews of mergers go beyond antitrust considerations, the coalition stated that the “agencies’ implementation of the public benefits or convenience and needs factor has been inconsistent and uneven.”
On fintechs, the congressional letter stated that, “The unregulated growth of complex non-bank financial institutions makes proper oversight of the growth and financial ties of our banks essential for managing systemic risk in our economy.”
Banking Groups Have Arguments in the Offing Too
Many of the points brought up by banking lobby groups commenting on the Trump DOJ proposal may now be moot, but some could still factor into the current debate.
In regard to the affect of bank mergers on rural areas, for example, the Independent Community Bankers of America argues that making it easier for rural banks to merge will preserve banking services.
“Increased regulatory burdens have forced many small banks to realize economies of scale through merger to remain economically viable,” ICBA wrote. “These mergers, while they may quantitatively appear anticompetitive, often result in stronger financial institutions that are better able to meet compliance burdens, deploy technology, serve local households and small business with upgraded products and services, and compete with non-local, internet-based lenders that do not have a physical presence in rural areas.”
The American Bankers Association suggests that credit union and savings association presence in a market should be assessed, as they often compete directly with banks and are a legitimate factor in those markets.
The Bank Policy Institute argued that the internet has changed the character of competition. “Banking markets have become more informationally efficient,” the large-bank group wrote, “which may be as important a factor for ensuring competition as the number of competing firms.”