Regulations intended to avoid future government bailouts of big banks are having an unintended consequence – they’re forcing small banks to get bigger simply to afford the regulatory burden
Here’s a little story about unintended consequences: Once upon a time, a bunch of big banks helped wreck the economy and ended up needing government bailouts. The government didn’t want to bail out big banks anymore, so it created a lot of rules and regulations to avoid it in the future. But the rules and regulations were so stringent that smaller banks couldn’t afford to abide by them. So to handle the costs, those small banks started merging – creating more big banks that the government doesn’t want to bail out.
This financial Mobius strip has hit a peak last year, when mergers and acquisitions by U.S. banks spiked to around $18 billion, the highest level since 2009, according to Bloomberg. And it looks like that mark will be surpassed this year.
Why is it happening? In a word, regulation. According to Bloomberg, in nine out of the 10 largest deals completed so far this year, the banks being sold cited increased regulation as a driver behind the sale. The Fed’s extension of low interest rates isn’t helping either, as banks see their profits erode.
“It’s harder to grow earnings, grow revenue in the environment we’re operating in for all the banks,” Huntington Bancshares CEO Steve Seinour told Bloomberg. “And there’s still more regulatory expectations and more burden, if you will, coming. Those factors will influence more combinations in the foreseeable future.”
Huntington Bancshares is part of those “combinations” – the firm just completed its takeover of FirstMerit Corp.
Deals like Huntington’s, even at the current pace, aren’t going to create any Wells Fargo-style titans, according to Bloomberg. Many smaller banks don’t want to cross higher asset thresholds that trigger even greater regulatory oversight.
“There’s a reluctance of banks to join the ranks of what we call systemically important financial institutions,” attorney Kip Weissman told Bloomberg. “A lot of banks that are $20 or $30 billion are reluctant to go to the $50 billion size.”
But since those higher regulatory tiers trigger additional regulations, banks that do hit one of them will feel driven to grow even more, Bloomberg reported. For example, a bank that crosses the $10 billion threshold will probably need to grow its assets to at least $12 billion to get “an appropriate return,” Bloomberg reported.
And the regulatory forces that pressure small banks to combine can have a negative impact on local economies.
“(The smaller banks are) the pillars of their communities,” Bill Hickey, a principal and co-head of investing at Sandler O’Neill, told Bloomberg. “When a community bank goes away, that generally is not a good thing.”
This financial Mobius strip has hit a peak last year, when mergers and acquisitions by U.S. banks spiked to around $18 billion, the highest level since 2009, according to Bloomberg. And it looks like that mark will be surpassed this year.
Why is it happening? In a word, regulation. According to Bloomberg, in nine out of the 10 largest deals completed so far this year, the banks being sold cited increased regulation as a driver behind the sale. The Fed’s extension of low interest rates isn’t helping either, as banks see their profits erode.
“It’s harder to grow earnings, grow revenue in the environment we’re operating in for all the banks,” Huntington Bancshares CEO Steve Seinour told Bloomberg. “And there’s still more regulatory expectations and more burden, if you will, coming. Those factors will influence more combinations in the foreseeable future.”
Huntington Bancshares is part of those “combinations” – the firm just completed its takeover of FirstMerit Corp.
Deals like Huntington’s, even at the current pace, aren’t going to create any Wells Fargo-style titans, according to Bloomberg. Many smaller banks don’t want to cross higher asset thresholds that trigger even greater regulatory oversight.
“There’s a reluctance of banks to join the ranks of what we call systemically important financial institutions,” attorney Kip Weissman told Bloomberg. “A lot of banks that are $20 or $30 billion are reluctant to go to the $50 billion size.”
But since those higher regulatory tiers trigger additional regulations, banks that do hit one of them will feel driven to grow even more, Bloomberg reported. For example, a bank that crosses the $10 billion threshold will probably need to grow its assets to at least $12 billion to get “an appropriate return,” Bloomberg reported.
And the regulatory forces that pressure small banks to combine can have a negative impact on local economies.
“(The smaller banks are) the pillars of their communities,” Bill Hickey, a principal and co-head of investing at Sandler O’Neill, told Bloomberg. “When a community bank goes away, that generally is not a good thing.”
