The banking system is in crisis. This year, the collapses of Silvergate Bank, Signature Bank, Silicon Valley Bank and First Republic Bank sent shockwaves throughout the U.S. financial system, underscoring how even regional and midsized banks greatly impact the stability of the economy. What’s more, the crisis underscores a larger systemic problem in the banking system: waves of mergers have caused massive industry consolidation, and the consequences are worrying regulators — and even President Biden himself.
However, it appears Treasury Secretary Janet Yellen hasn’t gotten the memo. In comments addressing mounting pressure on U.S. regional banks at the G7 Summit on May 13, Secretary Yellen astonishingly called for regulators to be “open to” even more bank mergers — despite growing awareness of their many harms.
While banking plays a critical role in the U.S. economy, merger policy in the industry has largely evaded scrutiny, even as lawmakers and antitrust enforcers increasingly take action to address the harms of consolidation in other sectors. As recently as 1990, the United States had more than 10,000 banks; today, mergers have left around 4,000 remaining. Among them, the six largest banks (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) control more assets than all others combined.
The dominance of these titans has spurred further consolidation, with regional and midsized banks looking to bulk up to compete. Now, amid recent financial upheaval, Secretary Yellen’s comments are lending credence to suggestions that mergers may also be essential for these banks’ survival.
That’s simply wrong.
Bank regulators have presided over a merger boom in recent years, greenlighting a procession of multibillion-dollar mergers spurred in part by a 2018 bank deregulation law championed by President Trump. Eight of the ten largest bank mergers of the past decade have taken place since 2019, including SunTrust-BB&T, U.S. Bank-Union Bank, BMO-Bank of the West, PNC-BBVA, M&T-People’s United, and Huntington-TCF. In 2021 alone there was a whopping $77 billion in bank mergers and acquisitions — more than six times the 2017 total and the highest yearly deal volume since the 2008 financial crisis.
These mergers have consequences. Evidence shows that bank consolidation causes an array of harms to markets, communities and consumers. After mergers, banks take advantage of their market power to charge higher fees for overdrafts, stop payments and ATMs. These junk fees make it harder for households to stay banked, pushing families toward predatory firms like payday lenders and check-cashers.
Merged banks also use their market power to pay lower interest rates on deposits and charge consumers and small businesses higher interest rates on mortgages and commercial loans — not to mention the devastating effects of merger-induced branch closures and job cuts on American communities. The $66 billion bank mega-merger between SunTrust and BB&T that created Truist in 2019, for example, saw 820 bank branches shuttered — nearly a third of its locations — and more than 8,000 jobs lost. U.S. Bank, after winning approval for its $8 billion takeover of Union Bank in December 2022, rang in the new year by announcing 145 branch closures in California alone.
And, perhaps most importantly in today’s banking crisis context, a range of empirical studies show that bank consolidation — especially mergers between larger institutions — poses a threat to the stability of the financial system. It is hard to imagine that the recent bank merger wave played no role in today’s crisis. Now, in a vicious cycle, turmoil in the banking sector is threatening another wave of consolidation, as smaller banks see their fortunes fall and look to dealmaking as the answer.
But consolidation, as financial speculators and Secretary Yellen are advocating, is exactly the wrong approach. Instead, regulators must take action against the dangerous consequences of consolidation in our banking system.
Currently, the Department of Justice and FDIC are reviewing their bank merger guidelines, which should be strengthened. But regulators also have the power to reverse harmful consolidation in banking. At an anti-monopoly summit this month, CFPB Director and FDIC board member Rohit Chopra called for regulators to “shrink and simplify” banks whose size and complexity pose a risk to US financial stability. Acting Comptroller of the Currency Michael Hsu said much the same in a January 2023 speech.
It’s time to act. Regulators across the government, including Secretary Yellen, must embrace the president’s competition agenda. They must crack down on bank mergers — their intense scrutiny of TD Bank’s $13 billion takeover of First Horizon, which led to the deal’s abandonment this month, is a good start — and strengthen bank merger policies. But regulators should also use their existing authority to reverse the harms created by decades of lax merger controls by unwinding and shrinking banks whose size and complexity endanger the economy. These actions will ensure stability both in the banking sector and the economy as a whole and protect against the threat of future financial crises — goals Secretary Yellen should be thrilled to get behind.
Shahid Naeem is a policy analyst at the American Economic Liberties Project.