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Business News/ News / Mergers Will Lead to a Better Banking Industry
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Mergers Will Lead to a Better Banking Industry

Deals between struggling midsized banks can make the financial system safer, leaner and more competitive. Regulators should ease the way.

Mergers Will Lead to a Better Banking IndustryPremium
Mergers Will Lead to a Better Banking Industry

(Bloomberg Opinion) -- For banks in 2023, one message is coming through clearly: Scale is good.

The US has a lot of banks. At one end are small community banks, which provide essential services to small towns, rural areas and minority groups that are often overlooked by bigger rivals. At the other end are the megabanks, such as JPMorgan Chase & Co., which cater to global corporations and investment firms as well as to individuals and businesses. Then there’s the middle tier, which has traditionally focused on lending to property developers and businesses in specific regions, often competing with community banks in some areas and with megabanks in others.

As a wave of turmoil earlier this year showed, these regional banks — there are about 146 nationwide — are under increasing pressure. They hold many of the most troubled commercial real-estate loan portfolios, have been forced to pay more for deposits and have sustained credit-rating downgrades. The biggest among them may soon face tougher regulation, including higher capital requirements. Exactly what value they still add is an open question.For these banks, the logic of consolidation — that is, of becoming bigger banks — has rarely been more compelling. Lawmakers such as Senator Elizabeth Warren have warned for years about the perils of “too-big-to-fail" institutions. They caution that bigger banks add risks and reduce competition. The reality, in many cases, is quite the opposite.

To be sure, the largest financial institutions require stricter oversight, but such a regime is already in place. More to the point, as higher interest rates have curbed loan demand, slashed asset values and boosted the cost of deposits, the advantages of size have only grown. Bigger banks tend to have more diverse sources of funding and revenue. They have ample resources to invest in technology and compliance. Stricter capital rules will make them both more creditworthy and more resilient in a crisis. In many respects, bigger is safer.

Consolidation is also no obstacle to competition. For one thing, the industry is already under fierce competitive pressure. Banks today compete with a widening array of credit unions, tech-enabled mortgage providers, private equity-backed direct lenders, and online payment companies, to name a few. A small business that once relied on the local bank for its account-management needs may today turn to Shopify Inc. and Stripe Inc. Enabling more regional banks to merge would only add to this salutary pressure, encouraging efficiency, pushing down consumer costs and spurring innovation.As it happens, banking regulators and the Justice Department are in the process of revising their rulebook for analyzing bank mergers. They should accept that the US financial landscape is naturally evolving to support fewer but bigger banks, and resist political pressure to impede that process.As the incentive to gain scale grows, one strategist has predicted that the number of lenders in the US will drop to a few hundred from more than 4,000 in the next two decades. That may be an extreme estimate, but consolidation would be for the best: The likelihood is that those institutions that remain will be safer, leaner and more dynamic than the regional banks they’ll displace. For the sake of the industry and the broader economy, regulators should ease the way.

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Published: 17 Apr 2024, 01:05 AM IST
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