As federal policymakers scrutinize bank mergers, the consolidation’s effect on communities is quite rightly an important focus. And analysis shows that consolidation has allowed banks to serve those communities better, and that a current revolution in the business of banking will only continue that trend.
Historically, the place where banks served customers was a local branch. Critics of bank mergers argue that mergers decrease branch service, but the data tells a different story. A recent analysis of Federal Deposit Insurance Corp. data by the Bank Policy Institute shows that while the number of banks fell by more than half over the last 40 years, the number of branches doubled. Furthermore, in recent years branch closings have occurred about as frequently among banks that engaged in merger and acquisition activity as those that did not. That indicates that mergers are not creating banking deserts.
This result makes intuitive sense: A given area can only support so many branches, regardless of how many different banks own those branches. Of course, areas that have seen population losses ended up with fewer branches — and dry cleaners, hair salons and other businesses.
Fortunately, while you can’t get your clothes cleaned or your hair cut online, mobile banking is alive and growing. Partly for that reason, evidence shows that mergers do not cause consumers to be unbanked. A 2019 survey from the FDIC found that only 2.2% of unbanked households cited inconvenient branch locations as the main reason behind their being unbanked. Furthermore, the rise of online banking is likely to have driven many of the branch closings in recent years, not consolidation among financial institutions.
Of course, offering convenient apps and building robust technology infrastructure to defend them from cyber attackers and fraudsters is an expensive business, and one that demands scale and scope. Not surprisingly, this is the predominant reason cited by banks looking to merge.
That, combined with needing scale to compete with fintechs that bear next to none of the compliance burdens that banks endure, none of the capital and liquidity requirements and none of the on-site examination demands that stifle innovation and consume vast amounts of management time and technology budgets.
Going forward, on the deposit side, financial inclusion requires finding ways to reach people who don’t trust banks. This includes more banks expanding partnerships with minority-owned banks and community investment projects. An example of these efforts is the Bank On program from the Cities for Financial Empowerment Fund, which is supported by a number of larger financial institutions. Bank On includes partnerships between local officials, federal government agencies, financial institutions and community groups to help the underbanked and unbanked. It provides a model for basic low-cost accounts.
In terms of access to credit, a March report from the Government Accountability Office has documented regulatory obstacles to small-dollar lending and other products geared toward low- and moderate-income consumers. Banks don’t know whether the product lauded today by one regulator as expanding access to credit will be denounced tomorrow by another regulator as lending to people without the ability to repay. They are hesitant to make investments to ramp up offering these loans if there is a good chance regulators will thwart their efforts later.
Regulators share banks’ goal of expanding credit access. But they’re aiming at the wrong target if they constrain banks’ ability to achieve scale. However, there are a few policy changes outside of the M&A area that could enable that outcome.
For one, regulators should consider expanding the programs for which banks receive Community Reinvestment Act credit to include Bank On, which provides a framework for low-cost checking accounts. Both with respect to small-dollar lending and other products, the GAO report offers a helpful to-do list that the Biden administration should study and implement.
Homeownership is also an essential pathway to wealth-building, and a missing piece of intergenerational wealth-building for many families. Post-crisis restrictions have made it too expensive for banks to hold mortgages with all but the wealthiest borrowers, and made securitization uneconomic. Simple changes could rightsize that regulation and bring deserving borrowers back into the banking system. For instance, regulators could reduce reliance on data from 2008 to 2010 when examining the performance of loans made to borrowers who do not have stellar credit scores during the Federal Reserve’s stress tests. They could also reverse a steady trend of risk moving to government-sponsored enterprises, backed by taxpayers.
Steps such as these and many others would better serve communities and consumers than attempts to slow merger activity.
