Barbell Banking: How New M&A Guidelines Could Tip the Scales Against Mid-Size Banks

What Happened: The Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) released proposed guidelines for reviewing bank mergers and acquisitions (M&A). The U.S. Chamber submitted a comment letter critical of the proposed guidelines.

Driven by a misplaced sentiment against mergers, the FDIC and OCC seek to establish new, onerous regulatory benchmarks for bank M&A that prolong the duration of the merger review process.

Our View: Regional banks are key financial institutions in many geographic centers and are important liquidity providers to mid-market companies. The new guidelines would create a “barbell’ banking system in the U.S., comprised of primarily large national banks and small local banks – leaving a dearth of mid-size regional banks harming vital corners of the American economy.

Why it Matters: A barbell banking system – with just very large and very small banks – could decrease competition, threaten financial stability, harming consumers and businesses. The proposed merger guidelines from the FDIC and OCC would create new uncertainty in the bank merger and acquisition approval process and could also force weaker, “zombie” banks to limp along and possibly collapse instead of merging with a stronger institution.

Dig Deeper: The Chamber recently published a white paper entitled “Antimerger Regulatory Proposals Threaten U.S. Financial Markets,” which explains the importance of bank M&A to the stability and growth of the nation’s financial system.

Bank M&A fosters competition and allows financial institutions to achieve greater economies of scale. Under the current regulatory framework, competition in the credit market has increased greatly since the turn of the century. As a result, consumers have more options than ever before in finding an institution to serve their unique needs.

The FDIC and OCC are proposing guidelines out of a misplaced fear of increased concentration in the banking sector. According to the FDIC’s own data, over the past two decades banks have become less concentrated. Furthermore, only 0.3% of mergers have resulted in institutions with over $100 billion in assets, and only 4.4% are involved, resulting in institutions with between $10 billion and $100 billion in assets.

Contrary to the regulators’ worries, bank M&A promotes financial stability and consumer choice. Mergers allow a combined bank access to a broader capital base and liquidity position. Merged institutions also have more resources to address operational risks, including investing in cybersecurity and instituting stronger governance. The proposed guidelines would create the situation regulators are seeking to avoid.

Bottom Line: M&A can boost competition in banking, expand access to services, and promote financial stability.