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An Exploration of Mid-Tier Consolidation in US Banking Market


The banking sector has contracted significantly over the last twenty years. In 1988 there were approximately 13,400 commercial banks in the US; by the end of 2018 that had dropped to about 4,800. That's a 65% drop.

Most of these banks didn't fail - they merged. The rate of mergers today for banks with less than $10bn in assets is almost double what it was during the financial crisis.

What Factors Are Driving Mid-Tier Consolidation?

The driving factor behind consolidation is weak profitability. This forces banks to scale to survive, and one of the easiest ways to do that is by merging with other banks in a similar situation.

Weak profitability also discourages new entrants into the market. In 2008, the FDIC approved one hundred new banks; from 2016-2017 it approved just 10 in total, with a slight increase to 14 in 2018.

This squeeze on profitability isn't because individuals aren't using banks, it's because banks are becoming more expensive to run. Factors include:

  • Increase in compliance obligations and costs

  • Increased security costs to counter cyber-crime

  • Increased investment in technology to meet consumer expectations

Additionally, the switch to online and phone banking has worked in favor of larger banks. Between them, the top three banks in the U.S. have taken more than $2.4 trillion in new deposits since 2008. Smaller banks have struggled to create the technology necessary to compete, further undermining profitability.

Recent changes make continuing consolidation likely. Under President Trump's administration, the Federal Reserve has made M&A easier by increasing the threshold at which the merger triggers a deeper regulatory probe (from $25bn to $100bn).

Is Consolidation Good or Bad for Business?

Research suggests that when small banks merge there is an increase in lending to small businesses, but the opposite happens when large banks merge. The latter is not a problem as long as there is sufficient competition; other banks will step in if a merger leaves a gap in the market. 

M&A can have other benefits. Larger, healthier banks are more stable, have more competitive pricing, and more likely to embrace the latest technology. All of which can benefit business.

With almost 5,000 commercial banks in the U.S., it's likely that it can afford to lose a few more without impacting competition. However, long-term unchecked consolidation could eventually have a negative effect on business lending, particularly in less well-served areas.

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