Even as he stoutly assured Congress last week that the Fed is staunchly apolitical, Chair Powell acknowledged several post-inauguration epiphanies. These include sudden recognition of the supplementary leverage ratio’s impact on Treasury-market liquidity and the importance of cost-benefit and cumulative regulatory-impact analyses along with disavowal of all things climate risk. Another Fed U-turn relates to merger policy, but this escaped broad notice. It shouldn’t have – bank-merger policy is due for a major makeover and that matters.
In a detailed FedFin analysis of banking-industry competition last year, we looked at current market realities and years of research showing that the dramatic erosion in U.S. bank charters is not due to voracious big-bank gobbling of small-bank charters. Instead, it’s the result of inexorable technological advances combined with an array of new rules that challenge the ability of all but the very biggest banks to achieve the economies of scale and scope now vital to charter survival. Many new rules, warranted or not, have also had the inexorable effect of enabling regulatory arbitrage, empowering massive nonbank competitors who easily quash vulnerable companies unable to match technological prowess and network effects.
Sudden Fed policy reversals did not escape Republican notice, with Senate Banking Chair Scott commenting acidly about Fed “flip-flops.” But, unless Members of Congress make Jay Powell angry – and that’s hard to do in public – nothing the Fed chair says in public is offhand even if it seems that way at the time. During last week’s hearings, Mr. Powell changed his stand on bank mergers. In the past, all he has said is that the Fed is reviewing it with other agencies. Now, he pondered the extent to which regulatory policy may have contributed to rapid consolidation in which GSIBs play an outsize role.
Take, for example, his answer to Sen. Cramer, here edited for clarity.
We need those [smaller] banks to be healthy and profitable because we need them to compete with the GSIBs. We don’t want a world where the GSIBs just keep getting a bigger and bigger share of the economy, that’s not what we’re looking for…We’ve seen the number of community banks especially declining for thirty years…We don’t want to be the cause of that. If it’s happening by natural causes or because of evolving technology, that’s one thing, but we don’t want to be inadvertently causing that to happen.
What does this mean in practice? It might mean nothing other than appeasement if it weren’t for the fact that bank-merger policy will be rewritten in the very immediate future. New leadership at the FDIC has already promised to retract the agency’s very controversial merger policy, Congressional Republicans are looking to repeal at least one part of the OCC’s merger policy, and a new Comptroller will do this on his own unless the Acting Comptroller beats him to it. As we also noted in our forecast of bank-merger policy, new leadership at DOJ and the FTC will rewrite the guidelines that govern DOJ bank-merger review, with whomever succeeds Mr. Barr as Fed vice chair sure to revisit the Fed’s still-binding 1995 policy in a very different light.
Importantly, this light will not shine through an open door for the very biggest banks – that’s what’s so notable about Mr. Powell’s new GSIB worries. Whether or not these came to him on his own, they also reflect the views of the new Treasury Secretary. Reflecting continuing antitrust concerns about the very biggest companies, he assured Senate Finance during his confirmation hearing that he believes the top five banks have undue market share.
And, as we showed in our paper, their market share is indeed formidable – the five largest U.S. retail banks held about a 38 percent share of total U.S. retail deposits and nearly a 48 percent share of total assets in 2024. The retail deposit share of the top two banks alone – JPMorgan and Bank of America – was over 22 percent in 2024. These two GSIBs also dwarf the three super-regionals – JPMorgan and Bank of America have grown their assets since 2019 by over $2 trillion, more than the total combined size of PNC, U.S. Bancorp, and Truist as of last year.
Thus, big is now very big, but how big is too big for a strategic merger? Bank-unique market share indicators already bar the two largest retail banks from most bank mergers and Mr. Powell’s newfound GSIB fears will likely block others in concert with the Department of Justice.
What about emergency deals such as JPMorgan’s First Republic acquisition in 2023? We know that at least one super-regional bid against JPM, but lost due to the FDIC’s ostensible fears about its least-cost test and its more potent desire to find what it believed to be the least-risk option thanks to JPMorgan’s unassailable balance sheet. Any similar scenario under new FDIC leadership in the new political alignment will favor super-regionals even in crisis based on a more flexible reading of least-cost and a better understanding of political risk.
What about more ordinary circumstances? The Fed’s GSIB fears finally give super-regionals a fighting chance, and a good thing too. If these banks can’t muscle up, then the U.S. will quickly see an even deeper abyss between a few market-dominant banks and a rapidly-shrinking roster of ever more desperate small banks doing riskier and riskier things even as more and more finance moves to nonbank powerhouses. That’s an inexorable market truth the Fed finally finds it expedient to understand. Better late than never.