Kristoffer Tripplaar/Sipa USA via AP
Earlier this month, U.S. Bancorp agreed to a $100 billion CBA over five years with the National Community Reinvestment Coalition, as part of a merger with MUFG Union Bank.
A few years ago, Federal Reserve chair Jerome Powell produced an incredible statistic in response to a query from Sen. Elizabeth Warren (D-MA). Between 2006 and 2017, banks submitted 3,819 merger applications to the Fed. Of this number, 3,316 were approved and 503 were withdrawn prior to action by the Fed. That adds up to 3,819, meaning that the Fed did not deny a single merger application over that decade-plus period. And there is no formal accounting of the Fed denying any mergers in the five years since. Jeremy Kress of the University of Michigan has written that the last denial of a bank merger was in 2003.
Under Joe Biden, several regulatory agencies are attempting to reform a largely invisible process. It was the subject of one of the early skirmishes of the Biden administration, which ended with the Trump-era chair of the Federal Deposit Insurance Corporation resigning. Right now, four agencies are taking public comment on a review of bank merger policy.
But the unity among Democratic-appointed regulators that precipitated the review has come into question. Michael Hsu, the acting head of the Office of the Comptroller of the Currency (OCC), has suggested an openness to continuing to allow mergers, as long as a community benefits agreement is signed, committing the merged bank to maintain robust lending to consumers and businesses in the affected community. This contrasts with Democratic policymakers who favor a moratorium on mergers involving larger banks, while detailing the harms of consolidation to small and rural communities.
Hsu has always been viewed as a swing vote on more aggressive regulatory policy; his background as a Federal Reserve supervisor has given skeptics pause that he has internalized the go-slow-if-at-all approach of the central bank when it comes to financial regulation. His remarks on bank mergers, which lean toward a conditions-based approach that has been inadequate in other areas of competition policy, reinforce those concerns.
In the May 9 speech at the Brookings Institution, Hsu correctly identified longtime consolidation in the banking industry. While assets have grown nearly fivefold since 1995, the number of insured depository institutions has fallen by 60 percent.
Perhaps the greatest impact of this has come in rural communities. Basel Musharbash, an attorney in Paris, Texas, outlined this problem in a report in February. He points out that around 7 in 10 community banks have been wiped out since the 1980s, mostly through mergers and acquisitions. “The decline of local banking and the decline of local communities go hand in hand. They consolidate resources in these large metro-headquartered banks,” Musharbash said. “Even if those banks had tons of branches in every small rural community, they would still not replace the value and importance that a locally owned bank plays.” Musharbash noted that local reserves often fund local businesses and startups much more reliably than distant huge mega-banks, and that historically, community banks even financed local infrastructure. His hometown of Paris, which has four community banks, has been an example of how this can continue to work.
7 in 10 community banks have been wiped out since the 1980s, mostly through mergers and acquisitions.
Hsu’s OCC is working with the Department of Justice, which is seeking to update bank merger review guidelines last changed in 1995. The Consumer Financial Protection Bureau and the FDIC have also initiated reviews, which were initially blocked by Donald Trump’s FDIC director, Jelena McWilliams. Martin Gruenberg now heads the FDIC in an acting capacity, and he supports the merger review.
In the Brookings speech, Hsu endorsed changing the framework for how regulators assess competition effects and financial stability effects of bank mergers, as well as how to best solicit community feedback. It would be an advance to force a merging bank to show how it would unwind itself in the event of trouble, as Hsu suggested.
However, he added, “The role of community benefits agreements [CBAs] … also warrants consideration and discussion.” He said they could offer clear guidelines on community needs, while acknowledging questions of who represents communities in these negotiations. “Greater transparency and consistency in the governance of how CBAs are negotiated could help mitigate such concerns,” he concluded.
The short passage raised eyebrows among financial reformers. It called to mind the antitrust agencies’ long-standing focus on behavioral remedies as a substitute for challenging mergers they find problematic. The idea is that if a merger would harm competition or threaten monopolist abuses, the company will agree not to do it. There’s just one problem: The remedies don’t work.
For example, a 2011 paper from Diana Moss and John Kwoka (now an adviser to the Federal Trade Commission) looked at three large mergers—Ticketmaster and Live Nation, Comcast and NBCUniversal, and Google and ITA—finding that the conduct remedies in those cases were impractical and unlikely to be successful. With the benefit of hindsight, we know that in the Live Nation and Comcast cases, the remedies were almost immediately and repeatedly violated.
If and when a bank violates a community benefits agreement, the scale of the bank relative to the small community harmed is sizable compared to Bloomberg TV complaining about Comcast’s channel placement. “I don’t know how many small towns are going to be willing to sue to enforce a community benefits agreement,” Musharbash said. “You’re taking it on faith that they would do what they say.”
Musharbash highlighted other problems with CBAs. While they can require a bank to issue a minimum threshold of small-business loans, maintain branches in a city, or keep a prescribed level of local deposits, large regional banks tend to become more standardized in their lending criteria. This could change the mix of loans given, preferencing fewer businesses. The terms of the loans could change, with higher interest rates and the likelihood of more defaults.
This is seen in the data, where small-business lending falters after a merger. Particularly in rural communities, businesses rely on “relationship lending” with a community bank that understands their circumstances and can correctly price risk. Today, as those relationship lending arrangements vanish, small loans in rural communities are at 1996 levels.
Some bank advocacy groups like community benefits agreements because they represent a deliverable they can tout. For instance, earlier this month U.S. Bancorp agreed to a $100 billion CBA over five years with the National Community Reinvestment Coalition, as part of a merger with MUFG Union Bank. But most of this honors existing promises from MUFG Union.
While this may work for some communities, Musharbash says that rural areas can’t expect CBAs to do the job. “The loss of a local bank, it affects the civic fabric of the local community,” he said. “It’s a hub to convert social capital into real capital. When it’s gone, it has a deleterious effect on the value of local networks. It makes the community dependent on an outside decision-maker.”
While the OCC claims to be working with the Justice Department on its ongoing bank review, it hasn’t initiated a formal request for comment; nor has the Fed. Sen. Sherrod Brown (D-OH) called for a formal comment process from those two entities last month.
The original Bank Merger Act guidelines said that bank mergers would be illegal if they substantially lessened competition or tended to create a monopoly, unless those problems were outweighed by meeting the needs and convenience of the community. While taking over a failing bank clearly qualifies under the exception, to many experts, that’s about it. Too many studies show the dangers of bank consolidation to grant exceptions, as mergers do not appear to operate in the public interest.
The regulatory divide, with the CFPB and FDIC on one side, the Federal Reserve on the other, and the OCC somewhere in between, has characterized financial regulatory policy in the Biden administration thus far. The head of the Justice Department’s Antitrust Division, Jonathan Kanter, clearly wants to be more aggressive around mergers, and put the era of behavioral remedies in the past. Whether Michael Hsu will join him remains to be seen.
