Canada has suffered very little in the way of bank crises over the past 100 years, while the U.S. has endured regular bank upheavals during that period.
The last was a regional bank crisis in 2023, when Federal Reserve interest-rate increases created a damaging mismatch in rates between banks’ assets and liabilities.
One advantage Canada has is that six national banks control its banking system. Now the U.S. banking system is shrinking in Canada’s direction, though it’s not a concerted effort by the U.S. to copy its neighbor, and it’s not headed to just six dominant banks anytime soon.
Still, the U.S. has dropped to about 4,400 FDIC-insured banks now from almost 9,000 in 2005. And three banks contain about 30% of the nation’s deposits.
Moreover, regional banks are on an acquisition spree, slicing the number further. There have been five mergers of regional banks totaling at least $1 billion so far this year.
Fifth Third, PNC activity
The biggest came earlier this month, when Fifth Third (NASDAQ: FITB) announced it’s buying Comerica (NYSE: CMA). That would make Fifth Third the ninth biggest bank in the country by assets – at nearly $300 billion. Last month, PNC Financial Services (NYSE: PNC) said it’s acquiring FirstBank for $4.1 billion. PNC is the sixth largest bank in the U.S.
So what’s generating the buyout boom?
First, the Fed’s rate-cutting (it moved in September and is expected to do so again this month) makes it a good time for banks’ to increase their assets.
The Fed is pushing short-term rates down, which means banks can pay less for deposits. But the threat of stubborn inflation is keeping long-term rates up. And it’s long-term rates that banks charge on many of their loans and earn on many of their investments.
Also, mergers increase the acquiring banks’ deposit bases, creating opportunities for lending and investing and often more geographical diversity. For example, Comerica will help expand Cincinnati-based Fifth Third’s deposits in California, Texas, Michigan, Arizona and the Southeast. That could make depositor flight less likely the next time there’s a banking crisis.
Increasing assets also makes it easier for regional banks to compete against their bigger competitors, such as JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC).
Regulatory issues
In addition, regional banks incur higher regulatory compliance costs when their asset levels hit $100 billion and $250 billion. Banks want to surpass those levels by a large amount to justify the new expenses. And acquisitions can make that happen.
Of course, purchase activity wouldn’t be possible without a positive regulatory environment. The Trump administration has revoked a 2021 executive order from the Biden administration that had encouraged regulators to increase scrutiny of bank mergers and acquisitions.
The government also overturned a 2024 rule from the Office of the Comptroller of the Currency that had eliminated the “expedited review” process for bank mergers. So now the process is back in play. “It’s not going to get any better than this from a regulatory perspective,” Gregory Lyons, a partner at law firm Debevoise & Plimpton, told Bloomberg.
So be prepared for more mergers. There’s talk PNC will swallow Citizens Financial (NYSE: CFG).
This all seems well and good, but acquisitions and the growth they engender can cause problems for banks. “Whenever things grow quickly in finance, we worry about bad things happening, because they tend to happen,” Gregor Matvos, a Northwestern University finance professor, told Marketplace news.
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