Federal Reserve Gov. Michelle Bowman is again calling on regulators to update M&A competitive considerations as community banks face increasing competition from credit unions and fintechs.
Nonbanks, digital banks and credit unions should be included in updated M&A guidelines, Bowman said Oct. 4 during a community banking conference in St. Louis. Current guidelines don’t account for the advent of digital banking and the potential loss of local lending if a community bank is acquired by an out-of-town institution, she said.
More than 65 percent of banking markets are considered noncompetitive in the current analytical framework established in 1995, but Bowman noted that number doesn’t account for the strong competition provided by nonbanks.
“Reforms that result in impairing the future of the community banking industry or the elimination of community bank charters to mergers or acquisition because of over-regulation or excessive compliance burden can have a significant, adverse impact on small business formation in local communities given the hurdles new small businesses face when seeking credit,” Bowman said.
Her comments came one year after she called for bank regulators and the Department of Justice to update and modernize the framework used to evaluate the competitive impacts of a proposed merger. Bowman called on regulators to also consider whether asset-size-based thresholds should be changed to business model-based risks.
In June, Department of Justice Assistant Attorney General Jonathan Kanter announced the agency would expand its M&A competitive review process to include fees, interest rates, branch locations and the potential to further consolidate power in an already dominant bank.
Bowman noted that the top three mortgage lenders in the country are nonbanks. In August, East Lansing, Mich.-based Michigan State University Federal Credit Union acquired two Chicagoland banks, including Algonquin State Bank and McHenry State Bank. Five CU-bank deals were announced in September.
“After a community bank has been acquired by a CU, the resulting CU is no longer viewed as a baseline competitor with other community banks in the market,” she noted. “I think it is fair to question whether this view is consistent with reality.”
The number of withdrawn M&A applications in the first half of this year exceeded the total in all of 2022, Bowman noted. Earlier this month, Winnebago, Ill.-based Foresight Financial Group cited regulatory delays in terminating an agreement to sell one of its six bank subsidiaries, State Bank of Herscher, to investor and entrepreneur Greg Kidd.
“A regulatory review framework should not be designed to obstruct mergers that result in stronger, more diversified community banks with relationship business models,” Bowman noted. “Clearly, these policies need to change, unless the goal is to facilitate further consolidation of banking products and services into the hands of a few national players.”