Bank regulators have been loath to let big lenders buy each other. They might have to reassess and allow more mergers as a way out of the current midsize-bank turmoil.
Those lenders are under pressure after several of their peers failed in recent months. Some analysts and banking experts say the best way to shore up depositors’ and investors’ confidence is for more banks to merge without government assistance—and they say regulators should get out of the way or even encourage the tie-ups.
“If the stress continues, the banking regulators are going to have to permit M&A,” said Jonathan McKernan, a Republican on the board of the Federal Deposit Insurance Corp. He said regulators should also consider letting private-equity firms take positions in banks.
Any move to embrace greater consolidation would mean a shift at federal banking agencies, including at the FDIC. The agency plays an outsize role as the federal regulator of thousands of banks, including two of the three midsize banks to fail in recent months.
Martin Gruenberg became chairman of the FDIC last year after putting pressure on a Republican-appointed agency chief seen by Democrats as moving too slowly to impose hurdles on merger activities. She ultimately resigned more than a year before her term ended.
Democrats on the board argued that lenders had grown rapidly thanks to unduly permissive merger reviews in recent years, introducing new risks to the financial system.
Though analysts and some bankers have called for regulators to take a more hands-on role as matchmakers amid the recent banking turmoil, the opposite happened last week. Toronto-Dominion Bank called off a previously announced $13.4 billion merger with First Horizon, citing uncertainty over whether and when they could receive regulatory approvals for the deal. Reluctance by the Office of the Comptroller of the Currency and the Federal Reserve to give TD a clean bill of health on its anti-money-laundering practices proved to be the biggest obstacle.
Separately, Mr. Gruenberg’s agency last year discouraged State Street’s acquisition of a Brown Brothers Harriman business, according to people familiar with the matter. State Street ended the proposed $3.5 billion transaction in November, sensing government officials would ultimately reject it, the people said.
Through a spokeswoman, Mr. Gruenberg declined to comment.
There has been little bank merger activity recently outside of the sales of failed lenders. The FDIC, which resolves failed banks, faces stringent limits on extending any assistance before a bank has failed.
The agency sold Silicon Valley Bank and Signature Bank, which failed in March, to other banks. JPMorgan Chase, the largest U.S. bank, recently bought the failed First Republic Bank. The collapses ushered in a period of instability at midsize banks.
In addition to regulators’ general reluctance to green-light big bank mergers, another hurdle at the moment is the hit an acquiring bank might have to take to its capital position to absorb another firm with large amounts of unrealized losses on its securities, some banking lawyers said.
Higher interest rates sharply pushed up the price banks have to pay to keep depositors and led to declines in values on the loans and securities they hold. Some banks also have a high share of customers with uninsured deposits, who became a flight risk when the turmoil hit.
Bank earning reports last month showed regional lenders, assisted by a quick government response, have stanched the most severe outflows. But midsize bank stocks have still been hammered, and some longtime customers are moving assets to money-market mutual funds or to larger banks that they see as less likely to fail.
Some lawmakers have endorsed policy changes they say would shore up banks’ balance sheets, such as expanding deposit insurance to accounts with more than the current $250,000 limit.
Guaranteeing deposits in all regional banks “will stop the short selling and stabilize the system,” said Rep. Ro Khanna, a California Democrat whose district includes the headquarters of SVB.
Isaac Boltansky of financial-services firm BTIG said that would “prove to be a Band-Aid over a bullet hole.” He said such changes wouldn’t address underlying problems for midsize banks, such as consumers looking for safer banks or for institutions that can provide them a wider range of services.
“Everyone has a plan until they get punched in the face, and this mini-crisis could be the punch in the face that shifts the Biden administration’s restrictive thinking in bank consolidation,” he said.
Some banking experts also say bulked-up banks could more easily absorb heightened capital, liquidity and stress testing requirements that officials say they plan to propose over the coming months, to be phased in over several years.
Midsize banks are already pitching the benefits of consolidation to Washington policy makers, presenting it as a way of ensuring robust competition with the biggest, most-interconnect firms.
“The best policy is to allow for midsized and smaller banks to combine in order to create more capable competitors,” Thomas Michaud, president and CEO of investment bank Keefe, Bruyette & Woods, told House lawmakers this week.