Remember the barbell theory?
In the late 1990s and early 2000s, mass consolidation turned regional banks into nationwide behemoths, and the conventional wisdom was that the industry would ultimately look like a barbell: a handful of very large banks on one end — think nine or 10 JPMorgan Chases — and thousands of community banks on the other. Very few banks would occupy the middle.
Then the financial crisis hit, and industry watchers stopped talking about barbells.
Yes, the crisis created a handful of “too big to fail” banks as healthier banks absorbed weaker ones, but this group of banks hasn’t gotten much bigger over the past decade.
Meanwhile, community banks have been disappearing. Hundreds failed between 2008 and 2012, and many more, facing crushing regulatory and compliance costs, merged with larger institutions. The de novo market dried up too, further shrinking the ranks of small banks.
Those factors led to the rise of more midsize and regional banks. Some saw $10 billion to $50 billion as the new sweet spot as these banks were large enough to enjoy some benefits from economies of scale, but still small enough to avoid designation as systemically important financial institutions, or SIFIs. The number of banks in this asset class increased by 60% from 2010 and 2018, according to Federal Deposit Insurance Corp. data. (The SIFI threshold had been $50 billion until last year, when it was raised to $250 billion.)
Others already above the $50 billion mark, such as KeyCorp and M&T Bank, sought to gain more scale through acquisitions — but were careful not to get too large.
Now, if last week’s
Even before announcing the deal, BB&T Chairman and CEO Kelly King said that large regionals like BB&T — which has $225 billion of assets — need more scale to be able to compete with the
“The big banks are putting billions and billions very effectively into marketing, and it is swaying opinion … swaying decisions and swaying behavior,” King said at an investor conference in November.
Marty Mosby, an analyst at Vining Sparks, said in a research note after the deal was announced that he foresees the banking industry consolidating into six to eight national banking franchises.
As he sees it, many regional banks are stuck in “a no man’s land” and will be compelled to find merger partners to gain the scale needed to compete with the big four — JPMorgan Chase, Bank of America, Wells Fargo and Citigroup.
“JPMorgan, Bank of America, they’re spending $4 billion to $5 billion per year on technology and that’s where all the fintechs want to go,” Mosby said in an interview. “The combined BB&T and SunTrust is going to have a seat at that table every time.”
That's not to say there won't be a place for smaller banks. “The other extreme,” Mosby wrote in his research note, “will be community and regional banks that provide specialized services and products to their customers.”
In other words, sort of like a barbell.
Of course, the view that midsize banks will soon disappear is hardly universal. Bob Jones, the chairman and CEO of the $19.7 billion-asset Old National Bancorp in Evansville, Ind., disagrees that midsize and regional banks are on their way out, arguing that fintechs are so pervasive that banks like Old National can get the technology they need through partnerships.
“We’re never going to be an innovator, but we can be a fast follower” by teaming with fintechs, Jones said.
Midsize and regional banks do hold some competitive advantages, added Doug Faucette, an attorney at Locke Lord who advises midsize and community banks. They are large enough to be able to hold a dominant market-share position in limited geographic areas.
“They understand the economy of those market areas and they’re able to tailor their products and services to the specific needs of those markets,” Faucette said. “When you’re a one-size-fits-all bank like JPMorgan Chase, you can’t do that.”
That may be true, but what JPMorgan Chase can do that most other bank cannot is reach into its very deep pockets and
That’s tough to compete with, as BB&T’s King and his counterpart at SunTrust, William Rogers, concluded. But they believe that as one company, the combined BB&T-SunTrust will have a fighting chance.
Bankshot is American Banker's column for real-time analysis.
