More study needed about how ‘regulatory burden’ drives bank consolidation, Fed governor says

Bank regulators should understand how consolidation of community banks has been driven by unnecessary, ineffective, or excessive regulatory burden, a governor of the Federal Reserve Board said Tuesday.

In remarks to the 2019 Community Banking Research and Policy Conference in St. Louis, Gov. Michelle (“Miki”) Bowman (who serves as the community bank representative on the Fed Board) cited survey research indicating that cost of regulation plays a key role in bank regulation. The research cited was from the Conference of State Bank Supervisors (CSBS) in a survey conducted this year.

For those banks considering an acquisition offer from another, she said, “a large majority (nearly 75%) say the cost of regulations or the lack of economies of scale at their current size are ‘important’ or ‘very important’ in their decision to consider the offer.”

As for those making acquisition offers, she said, the research could indicate a similar motive to reduce regulatory costs. “While it was not addressed in this part of the survey, it seems to me that the cost of regulation could have been a factor in making acquisition offers, possibly based on the theory that there could be efficiency gains by spreading fixed regulatory costs over a larger firm,” she said. “It is possible these savings may have been a factor for the roughly 80% who cited ‘economies of scale.’”

The Fed governor suggested that “more detailed questions in future surveys could provide firmer evidence about the effect of regulatory costs on decisions related to consolidation.”

She also pointed to results of interviews conducted by state banking regulators in 28 states last year, which probed banking consolidation. She noted that, as reported to the regulators, bankers from many states cited regulatory burden or compliance costs as major factors driving consolidation.

Other frequently mentioned consolidation motives, she said, included costs of keeping up with technological change and the need to scale up in order to compete in a technology-focused landscape and with non-bank fintech firms in some service areas.

In other comments, Bowman said the loss of bank headquarters in communities – a by-product of bank consolidation – seems to be having an effect on the engagement of local bankers in their communities.

“Comparing performance evaluations from CRA (Community Reinvestment Act) exam reports before and after an acquisition can provide some limited, case-specific evidence on the potential consequences of the loss of a bank headquarters,” she said.

She said, for example, that local donations and community service activity decline in communities that lost a bank headquarters following a merger. “Pre-merger CRA evaluations detailed donations to organizations targeting initiatives such as child care, job training, homeless shelters, and scholarship programs for low- and moderate-income (LMI) individuals,” she said. “Other notable activities included in-kind donations of real estate to Habitat for Humanity and monetary contributions to food pantries, Meals on Wheels, and Big Brothers Big Sisters of America. Bank officers and employees also donated significant time to community.”

Bowman said the “wealth of information” included in CRA reports offers a unique look at the local involvement communities potentially stand to lose when a local bank headquarters leaves or is eliminated.

“More research into the effects of losing a bank headquarters could help determine whether these examples are isolated or a predictable result of consolidation,” she said.

Gov. Michelle Bowman: Advancing Our Understanding of Community Banking