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 Of this number, 3,316 were approved and 503 were withdrawn prior to action by the Fed.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…