After initial reluctance, House Republicans have finally reached an agreement to move forward on a bipartisan bank deregulation bill that the Senate passed in March. Its stated aim — to help rural community banks thrive against growing Wall Street power — appears to have been enough to power it across the finish line.
But banking industry analysts say the bill is already having the opposite effect, and its loosening of regulations on medium-sized banks is encouraging a rush of consolidation — all of which ends with an increasing number of community banks being swallowed up and closed down.
“We absolutely expect bank consolidation to accelerate,” Wells Fargo’s Mike Mayo told CNBC the day after the Senate passed the deregulation bill in March. The reason? Banks no longer face the prospect of stricter and more costly regulatory scrutiny as they grow. And regional banks in Virginia, Ohio, Mississippi, and Wisconsin have already taken note before the bill has even passed into law, announcing buyouts of smaller rivals.
The expected consolidation simply furthers an existing trend. Community banks have been struggling for decades against an epidemic of consolidation; the number of banks in America has fallen by nearly two-thirds in the past 30 years. Ironically, the one state that has seemingly figured out how to arrest this systemic abandonment of smaller communities is North Dakota, the home state of the bill’s co-author, Democratic Sen. Heidi Heitkamp.
That’s because North Dakota has a public bank.
Using idle state tax revenue as its deposit base, the Bank of North Dakota partners with community lenders on infrastructure, agriculture, and small business loans. It has thrived, earning record profits for 14 straight years, which have funneled back into state coffers. And while Heitkamp has complained that the Dodd-Frank Act has been disastrous for community banks, in North Dakota they appear to be doing well. According to a Institute for Local Self-Reliance analysis of Federal Deposit Insurance Corp. data, North Dakota has more banks per capita than any other state, and lends to small businesses at a rate that is four times the national average.
Yet nothing in the new measure, sometimes called the “Crapo bill,” after its main Republican co-author, Sen. Mike Crapo of Idaho, builds upon this proven method to revitalize community banks; it only bolsters the ability of larger regionals to scoop them up.
While a better solution appears to have been sitting in Heitkamp’s backyard, the actual bill, S.2155, has been highly anticipated by bank lobbyists, and should get a floor vote before the end of the month. House Financial Services Committee chair Jeb Hensarling, who had been holding out because he wanted even more deregulatory measures attached, has claimed an agreement with the Senate to move those provisions inside a separate vehicle. (Given the paucity of floor time before the midterm elections, that’s likely a face-saving statement.)
As The Intercept has reported, S.2155 carries something for financial institutions of any size, by hammering away at capital and leverage requirements, mandatory stress tests, mortgage disclosure and ability-to-repay rules, data to detect lending discrimination, and the Federal Reserve’s ability to apply special regulations to individual banks. Combined with efforts inside the agencies that regulate banks to weaken rules, it represents a pendulum shift away from safety and toward what critics claim will be another financial crisis.
Thanks to filibuster rules, Senate Democrats were necessary to provide the margin of victory, and 17 of them obliged, justifying their votes as necessary to maintaining the existence of small community banks and credit unions, which would otherwise disappear amid relentless industry consolidation.
Indeed, the past 30 years have witnessed a dramatic reduction in chartered banks, from 14,500 to fewer than 5,600. “If this pattern continues, we’ll only have Wall Street banks left,” said Sen. Jon Tester, D-Mont., to Politico. “And Wall Street banks won’t serve rural America, they won’t serve Montana. … So, what will rural America do?”
Implicit in this argument is that the Crapo bill represents the only hope for small community banks to survive without being swallowed up by bigger competitors. By lowering the cost of regulatory compliance, smaller banks would be given a fighting chance, the story goes. But that theory is at odds with the analysis of virtually every industry observer who has spoken about the Crapo bill.
“The last three to four months have been much more active than the previous two years,” said Sandy Brown, a partner with Alston & Bird’s Financial Services and Products practice group in Dallas. “I attribute that to an increase in the price of buyers’ stocks, tax changes in December, and a relatively more accepting regulatory environment.”
Brown pinpointed a critical provision in the Crapo bill, which raises the threshold for banks that are subject to enhanced regulatory standards from $50 billion to $250 billion. This obviously benefits the “stadium banks” — banks with over $50 billion in assets, big enough to have a stadium named after them — who get freed from stricter regulations, which include extra capital and liquidity requirements, stress tests, and souped-up risk management.
But it also gives banks under the $50 billion asset level that might want to get bigger plenty of additional breathing space. An acquisition that would have taken a bank over $50 billion might have been skipped before Crapo. But now, it can go through, as long as the new entity stays under $250 billion. “Those mid-tier banks will now look at doing deals,” Brown said. “They have a lot more headroom to grow by acquisition, as opposed to organic slow growth.”
This month, investment manager FJ Capital Management released a white paper noting that only two banks, CIT Group and New York Community Bancorp, have dared to break above $50 billion in assets since the passage of Dodd-Frank in 2010. “Raising these hurdles releases a new pool of acquirers, namely large regional banks that will benefit from mergers,” FJ Capital writes.
Other analysts concur with this perspective. American Banker cited several analysts and bank officials making this case last November. In a research note in April, Isaac Boltansky, of Compass Point Research, stated that the Crapo bill would “bolster burgeoning M&A [mergers and acquisitions] tailwinds.” Cowen and Co.’s Jaret Seiberg said in March, “We expect this to lead to greater capital returns and more M&A.”
A separate Crapo bill provision should also spur merger activity. Section 207 increases the Federal Reserve’s “small bank holding company” threshold from $1 billion to $3 billion. Banks that are eligible for this designation can operate with higher levels of debt than would otherwise be permitted. That, again, broadens headspace for hundreds of banks at the smaller end to combine without losing this significant benefit, which enables them to juice returns by using other people’s money. Half of all buyers and nearly all of the sellers in bank M&A deals since 2010 were below $1 billion in assets, according to the investment firm FJ Capital Management.
The increased pool of cash-flush buyers should blunt the mild regulatory relief in the Crapo bill for smaller banks. “It’ll be less expensive to operate a community bank,” said Brown, who is an M&A lawyer. “But the fact is, they have an aging shareholder base, an aging management and board, and a lot of them want out.” And more buyers chasing deals means higher prices, making selling out even more attractive. It’s like a Silicon Valley startup exit strategy, applied to community banks.
So, Tester’s concern — that a more concentrated banking sector will pull out of rural America, leaving large chunks of the country behind — is made, if anything, worse by the bill he supports.
The impacts of this could be severe. In 2017, small business lending in rural America was half of what it was in 2004, according to the Wall Street Journal. Disappearing banks play a huge role, eliminating the kinds of community relationships that kept rural small business loans flowing. Venture capital in rural communities is scarce, making the bank the only place to get a loan. And, increasingly, the banks are leaving.
It’s unlikely that banks trying to merge their way to rapid growth will stick around. “One of the things we do a lot of these days is help investor groups buy a bank in a small town and move it to a larger metro area, where there’s a higher growth opportunity, and a quicker way to build assets,” said Brown.
In anticipation of the Crapo bill’s passage, the rush to deal has already begun. First Virginia Community Bank, which is around the $1 billion threshold, announced a merger with Colombo Bank earlier this month. In March, Civista, an Ohio-based firm, bought United Community Bank of Indiana, creating a $2.1 billion combined institution. At the higher end of the asset scale, BancorpSouth, with $17 billion in assets, purchased the $794 million Icon Bank in April. Associated Banc-Corp of Green Bay, Wisconsin, with $30 billion in assets, made plans to buy Diversified Insurance in February, along with Bank Mutual Corp.
In its report, FJ Capital Management estimated that the total number of chartered banks would decline by 50 percent over the next 10 to 15 years. That’s precisely the opposite of what the ringleaders of the Crapo bill on the Democratic side — Heitkamp, Tester, and Joe Donnelly of Indiana, all from predominantly rural states — hoped the bill would provoke. But they may have known who really wanted this legislation, if they looked into their own campaign finance filings.
According to data from the Center for Responsive Politics, Heitkamp, Donnelly, and Tester shot to the top of the list of senators receiving money from the financial industry in 2017, gathering $408,176. And prominent on that list are banks just under the $50 billion threshold. Employees of Signature Bank, a $41 billion bank based in New York, have given $112,000 to Democratic senators in the 2017-2018 election cycle, eight times as much as the 2015-2016 cycle with six month to go. Campaign finance data shows 45 Signature Bank donors for Donnelly and 38 for Heitkamp.
Signature Bank chair Scott Shay was explicit in his support of Donnelly and Heitkamp, telling the Financial Times, “We find it ridiculous and unacceptable that by virtue of … growing one day past $50bn, we will be burdened with rules intended for the mega ‘too big to fail’ banks.” The Signature Bank board includes former Congressperson Barney Frank, namesake of the Dodd-Frank Act. (Another luminary once sat on the board from 2011 to 2013: Ivanka Trump.)
Among sub-$50 billion banks, Hancock Holding Company in Gulfport, Mississippi ($27 billion), Texas Capital Bancshares in Dallas ($25 billion), and the aforementioned Associated Banc-Corp have also increased donations in 2017 and 2018.
In an email to The Intercept, Compass Point’s Boltansky said that the impact on M&A may not be immediate. For example, the increase in the enhanced regulatory standards threshold is phased, raising only to $100 billion immediately, and then to $250 billion in 18 months. He added that bank M&A also carries political risk, since it usually leads to layoffs.
But any belief that the Crapo bill will protect small community banks runs into the persistent long-term trend of consolidation. “The number of banks have declined every year since 1984,” said Marcus Stanley, policy director at Americans for Financial Reform. “It’s a long-term structural problem that I don’t think you’re solving here.”
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