How many banks should there be in the United States? It's a question that merits consideration.
Consolidation has gripped the banking industry for the better part of three decades. Since 1934, just after the creation of the Federal Deposit Insurance Corp., the number of commercial banks peaked at 14,469 in 1983. This number had fallen to roughly 4,200 commercial banks at the end of last year. Although there have been ebbs and flow in M&A activity, there is broad — perhaps unanimous — consensus that even more consolidation is inevitable.
But how far will the industry consolidate, and how many banks will the U.S. ultimately end up with? Is there something that will prevent America's financial system from shrinking until it resembles something like the Canadian banking system (about 80 banks operate in that country) or the airline industry (roughly 60 providers)?
"Based upon historical data and current economic and regulatory factors, I think the number would likely continue to go down for the foreseeable future," said Krista Snelling, president and CEO of Santa Cruz County Bank in California.
"The correct number of banks is probably less than what we have today but more than what we would end up with if the industry was left to its own devices," said Jeremy Kress, an assistant professor of business law at the University of Michigan's Stephen M. Ross School of Business.
"Now there are fewer than 1,000 banks with less than $100 million of assets. Most of those will disappear and leave us with about 3,000 banks," said Rebel Cole, a professor of finance at Florida Atlantic University.
"It's hard for me to say what the number is," said M. Terry Turner, the president and chief executive of Pinnacle Financial Partners in Nashville, Tennessee. "The number is likely in the thousands," he said. "I don't think you are going to a few hundred. How many are in places like Carthage, Tennessee, or Salisbury, North Carolina? No one else is buying those banks, and those banks are doing a good thing."
But that's just it. Canada and Spain and Mongolia and everywhere else in the world each has its own version of a Carthage, Tennessee, or a Salisbury, North Carolina. Why don't those countries have countless small banks — in addition to dozens of larger ones — serving every community?
How many banks do Americans really need?
Why the U.S. has so many banks
The philosophy behind the U.S. banking system can be traced, in part, to the ideas of one of the country's founding fathers and its third president, Thomas Jefferson.
Jefferson favored a decentralized government and sought to ensure the federal government had limited power. He was also opposed to the forming of a central bank, as his rival Alexander Hamilton sought to do.
For generations, Americans have embraced this idea of attempting to constrain centralized power, and that philosophy is felt in the banking system. (Jefferson also had a profound distrust of banks and considered bankers to be mostly criminals. And of course, Hamilton's desire for a central bank did eventually come to fruition.)
"The U.S. has a longstanding distrust of centralized political and economic power," Kress said. "By and large, we have operated under a Jeffersonian tradition of dispersing economic power across the country with locally rooted banks."
The U.S. has remained unique among nations in the sheer number of banks it has. In the 1920s, there were more than 30,000 U.S. banks.
Today, America has a fraction of that. Still, besides the roughly 4,200 commercial banks, the U.S. also has about 600 savings institutions and another 4,900 credit unions. In comparison, all of the European Union, which includes more than two dozen countries, had about 6,000 banks operating there in August 2021, according to Statista, a website that provides market and consumer data. Germany had the most at nearly 1,500, according to the website.
Of course, some of the differences are likely attributed to America's sheer geographic footprint, population and size of its economy. The U.S. is one of the largest countries in the world, has more than 330 million citizens, and boasts a GDP that tops $20 trillion; Germany is about the size of Texas, has 83 million citizens and has a GDP of about $4 trillion.
Still, for decades, laws encouraged new bank charters and even prevented any one institution from becoming excessively large. Ben McDonough, chief counsel for the Office of the Comptroller of the Currency, highlighted the country's dual chartering system. Originally, states were responsible for chartering banks until President Abraham Lincoln signed the National Currency Act in February 1863. That created the OCC, an agency with the power to charter national banks.
"Banks help promote local economies and provide financing and that has been an exciting thing for a lot of our nation's history," McDonough said.
Additionally, there were state laws that made it challenging for banks to have extensive branch networks. That encouraged the formation of small banks. For instance, Illinois did not eliminate the state law that limited the number of locations a bank could have until 1993. That legacy can still be felt today — few states have more banks than Illinois's roughly 380. And that includes a handful of which have less than $20 million of assets.
In the 1980s, interstate banking became easier after state lawmakers passed laws that allowed bank holding companies to buy institutions from out of state.
About a decade later the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed. That law removed some of the restrictions on opening branches across state lines. The easing of interstate banking restrictions helped contribute to the first of three waves of consolidation and helped create regional banks, Kress noted.
The second wave of consolidation was in the late 1990s and early 2000s, when there were several "cross-sectorial mergers," Kress said. This was due in part to the repeal of the Glass-Steagall Act, a change that loosened of restrictions on commercial banks' involvement in investment banking activities.
"Banks would go out and affiliate with investment banks and others," Kress said. "That's when these financial conglomerates formed."
The 2008 financial crisis drove the third and final wave. Institutions that were on better financial footing bought other firms that struggled. This included significant deals, such as JPMorgan Chase's purchase of Bear Stearns and WaMu Bank, and the failure of more than 500 banks, many of those community institutions, from 2008 to 2014.
"That created the truly 'too big to fail' firms we see today," Kress said.
Forces that can drive or slow consolidation
Despite these legislative changes and the economies of scale that institutions can gain through mergers, no one interviewed for this story thought the number of banks in the U.S. would drop to below 1,000 in the foreseeable future. They cited myriad factors.
For instance, unlike other sectors, banks enjoy industry-funded government backing in the form of deposit insurance, noted Greg Baer, president and CEO of the Bank Policy Institute, an industry trade group.
"The major difference is that banks have the benefit of the government guaranteeing their liabilities up to $250,000 and the Federal Home Loan bank advances," he added. "If you said that bookstores could have up to a $250,000 line of credit guaranteed by the government, then you would have a lot more bookstores."
For another, there may not be interested buyers for every institution that would otherwise consider selling.
"I think the first backstop is economics. There is no buyer for the bank in Hohenwald, Tennessee, so they will keep existing and that is a good thing," said Turner, the Pinnacle Financial Partners CEO, referring to a town of just a few thousand residents about 90 minutes southwest of Nashville.
And, of course, regulation affects the scope of the industry at least indirectly. It's said so often that it's now almost a cliché that the regulatory burden is one of the forces behind banks, especially smaller ones, deciding to sell. At the same time, tougher requirements, including needing more capital, to start a de novo mean there will be few new institutions to replenish those that decide to exit, experts said. All of that will drive down the number of banks.
"It's a game of scale," said Ed Wehmer, CEO of Wintrust Financial in Chicago, which he founded in the 1990s. "I probably couldn't start Wintrust today. There is too much capital, too much business behind the big banks, the cost of doing business has just risen enormously with regulation and cybersecurity."
But there are also levers that regulators could pull to slow consolidation, namely making the approval process so slow and arduous that fewer players are willing to navigate it. It's pretty clear that regulators' attitudes can have an influence on M&A.
For instance, right now, "regulatory concerns have tapped the brakes on larger bank consolidation," said Bill Burgess, co-head of financial services investment banking at Piper Sandler. He described some deals that have taken a prolonged time to close, such as U.S. Bancorp's pending purchase of MUFG Union Bank, as being concerning to would-be buyers and sellers.
"If you announce a deal and it won't close for a year and you have to integrate it over two years, you better make sure it's the bank you really want to acquire," Burgess said. "It can't be your fifth choice. It better be No. 1 or No. 2."
There is currently a push to make the regulatory review process more strict, especially for those at the larger end of the spectrum. Critics noted that regulators primarily look at the Herfindahl-Hirschman Index score — a commonly used indicator of market concentration — for the combined institution's deposits and each bank's Community Reinvestment Act rating when approving mergers.
But critics argued that most banks earn at least a satisfactory CRA rating, calling into question the effectiveness of that measure. Additionally, some argued that the HHI score currently used is too high at 1,800. Kress said that the cutoff should be lowered to a score of 1,500.
A score between 1,000 and 1,800 is generally considered moderately concentrated for the banking sector, according to the Federal Reserve and the Justice Department. Under 1,000 would be considered not concentrated.
I try to take a neutral view on whether the number of charters is right. I don't think we should ignore the number of charters, and we shouldn't ignore the concentration of economic power in the largest banks. We need a large, vibrant banking sector.
Regulators could also broaden their review to include whether a merger would create concentration in products and services beyond just deposits, said Todd Phillips, director of financial regulation and corporate governance at the Center for American Progress.
"I've heard stories of community banks trying to merge, but they would have a monopoly on the deposits in a particular community, whereas larger banks can merge because they operate in the community but don't hold all of the deposits," Phillips said. "We shouldn't just use HHI for deposits, but also for different product lines."
The regulators are working on interagency guidance, but it's uncertain what the long-term effects of it could be on consolidation. McDonough said that any changes shouldn't be framed as making the process more or less strict. Instead, he considered it as updating policies that haven't been seriously revamped since the mid-1990s.
He also argued that regulators needed to focus on the convenience and needs of each community, rather than the number of bank charters.
"I try to take a neutral view on whether the number of charters is right," he said. "I don't think we should ignore the number of charters, and we shouldn't ignore the concentration of economic power in the largest banks. We need a large, vibrant banking sector."
Still, even if this particular discussion over regulatory concerns causes a decline, at least temporarily, in some M&A, how much of a difference could that make in the overall number of banks in the long term? And who knows what regulators will do in five or 10 or 15 years that could either slow or spur consolidation?
And perhaps focusing on the overall number of banks is failing to get to the real heart of the issue — competition, and perhaps more specifically, concentration. Consumer advocates warn that too little competition and too much concentration can lead to a host of negative outcomes, including higher prices for credit.
And if that's the real concern for the industry, then the ship has at least pulled away from the dock, if not outright sailed. On the matter of concentration, the banking sector isn't too far from other industries that the average consumer might regard as highly consolidated. Banks with more than $250 billion of assets controlled almost 52% of the deposits in 2021, according to data from the FDIC. That was up from 46.2% in 2016.
In contrast, banks with less than $1 billion of assets controlled just under 6% of deposits in 2021, down from 9.4% five years earlier, according to the FDIC.
If customers are largely working with just a handful of the largest banks, do Americans need or even want thousands of others to exist?
The emotional side of banking
To the sources interviewed for this story, the answer to that question is a resounding yes. Small banks fulfill a vital role and many of these are still needed to better their communities. Because of that, examining the industry's concentration levels requires a far more nuanced view, experts argued.
For one, a large portion of these consumers did not actively seek out to do business with one of these megabanks. Instead, they ended up with an account there through a merger. Banking is a famously sticky business, and customers are loath to change institutions barring a truly egregious error, even if they don't like the acquirer.
"Voting with your feet doesn't happen as much because switching costs are so high," said Kress, the University of Michigan professor.
Additionally, these megabanks may not be a customer's primary financial institution, said Cole, the professor at Florida Atlantic University. Instead, the bank may provide consumers with a credit card or service their mortgage, while the person has his or her paycheck deposited into an account with a different institution.
Geography still plays an outsize role in how a customer selects a bank. The safekeeping of one's money is personal in a way that few other business functions are. Despite technology that allows consumers to complete many tasks online, they still largely want to be able to visit a branch and speak to someone in person if an issue arises. Because of that desire, a customer may not really have that many choices.
"When looking at this national market share data for banks, that's not telling the whole story about consumer choice," Kress said. "The average consumer may have only three choices of where to bank in their community given how important geography is."
But there is another aspect of banking that is harder to gauge with market share data and other metrics. The bankers interviewed for this story underscored the continued relevance of their banks and that of the community bank sector because of their ties to and the way they serve their communities.
"There is a certain connection between small-town America and local banks," Burgess said.
Perhaps nothing better captures the nostalgia this country has for small-town bankers than the classic "It's a Wonderful Life." In the 1946 film, Jimmy Stewart stars as George Bailey, a good-natured fellow who — reluctantly at first — helps run the family's business, the Bailey Brothers Building and Loan, after his father unexpectedly passes away. Bailey takes on the powerful local slumlord, Henry Potter, to provide better and more affordable housing to his neighbors and becomes a hero to his community.
Despite some of the movie's sentimentality, the central premise — a local banker who does right by his neighbors — resonates today. The bankers interviewed for this article — who mostly still considered themselves community bankers even after some of their institutions have grown significantly — argued that was still part of their core mandate. They argued that consumers had a connection to their banks in a way that they don't relate to a health insurance company or an airline or even one of the megabanks. That's because, as bankers, they know and are involved in their communities. They are willing to make loans to small-business owners who won't qualify under a national bank's cookie-cutter underwriting process and are active in local causes and civic organizations.
Some argued that COVID-19 perhaps made this more apparent than ever before. Mike Daniels is one of those bankers. Daniels started Nicolet National Bank in Green Bay, Wisconsin, with Bob Atwell in 2000. Both were commercial bankers at Associated Bank but decided that Wisconsin needed a new local lender.
Nicolet has completed eight mergers since 2013 and has increased assets to $7.3 billion. Despite this growth, Daniels still has a deep knowledge of his customers, even the smaller ones who might not normally warrant the attention of a company's president and CEO.
"That little shop owner over here," Daniels said while pointing across his office in downtown Green Bay. "It's just him and his wife. He needs to pay the rent, pay the utilities. Maybe that income is the only money he has to make his mortgage payment."
Although 95% of Nicolet's business clients were deemed essential and remained open throughout the pandemic, Daniels said, some of them were forced to close their doors.
To stay afloat, these businesses tapped the Paycheck Protection Program.
Or at least they tried to.
The rollout of the Small Business Administration-backed initiative was chaotic and the rules were essentially being written as lenders were trying to get funds into the hands of business owners. So instead of making smaller clients navigate the governmental boondoggle, Nicolet just gave them the funds.
"We had our people run through our PPP calculations for them," Daniels said. "Whatever they qualified for, we did it as a grant."
In total, Nicolet provided $1.25 million in grants to 325 companies.
To Daniels, this is how Nicolet can distinguish itself from a competitive field, especially as various banking products have become more commoditized. During PPP, his bank fielded calls from distraught business owners who were struggling to get a larger institution to help.
This philosophy informs everything Nicolet does, including how management communicates with shareholders. Daniels said he tells investors he isn't there to wring every cent he can from customers. Instead, he believes if the bank treats customers, employees and the community well, then the desired financial results will follow.
"It has to be a relationship where people understand who to call, and customers aren't seen as objects to extract money from. There are only so many ways you can design a checking account. How unique can it be?" Daniels said.
"When you see the number of banks plummet, it's perhaps because the customers and the community no longer feel that what the bank brings is anything other than a commodity," he added.
Snelling, the head of Santa Cruz County Bank, shares that philosophy and makes a significant effort to remain in touch with clients as her bank's assets have ballooned from about $325 million a decade ago to $1.7 billion.
Snelling noted that this can be more difficult as the bank grows but she still managed to attend six client meetings recently in the two weeks before going on vacation.
"I make every opportunity to talk to them," she said. "Any client-facing [employee] knows that I am available all day any day to meet with a client. There is no better time spent for me than meeting with clients."
Turner helped found Pinnacle Financial Partners more than 20 years ago with veteran bank executives Robert McCabe and Hugh Queener. Like Daniels, the Pinnacle team thought they could form a bank to better serve the business community in Tennessee.
"When we formed, there were 49 banks, and no one was crying out that we need 50," Turner said. "What are we going to do that warrants our existence?"
To Turner, the answer to that question is ensuring local decision-making, even though the institution's assets have grown to $39 billion.
In general, the decision-makers in the bank's local markets are responsible for all aspects of the institution's business — not just a particular business line or product — and can make credit decisions up to $20 million in some cases. That amount covers about 95% of the loans Pinnacle originates, Turner said.
That means customers, for the most part, don't have to wait for a decision to come from some faceless executive in a corner office hundreds of miles away. Turner argued that not only makes clients happy but also attracts workers who craved autonomy.
These are just a few ways that a handful of bankers are providing a higher level of service that could be lost if the country consolidated down to just a handful of regional institutions and megabanks. Experts argued that if the number of banks drops dramatically, small businesses may have difficulty getting quick answers to questions about their credit needs. In times of crisis, any consumer rated as less profitable to a bank may be left behind.
Because of such concerns, those interviewed for this story were confident there would always be demand in this country for thousands — not merely hundreds — of banks.
"There will always be a place for scale to generally do some good things, like improve efficiency and improve the payment system," Turner said. "If you go to the other end of the spectrum, there will always be a soft spot for small banks. I don't think there is any good that JPMorgan can do for Hohenwald, Tennessee. There will be a good number of banks, and all of those banks need to exist to support their local economies."
