#mergers

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 …