US regulators and some politicians seem to be missing the real story in American banking. Blocking mergers and higher capital charges were the key financial questions fired at the chief executive officers of seven US megabanks by congressional committees this week — when financial issues got a hearing amid the more nakedly political grilling anyway.
But what’s going to be far more important for the future shape of the banking industry is technology. The biggest banks, with the greatest profits, are already investing vastly more in faster, cheaper, easier-to-use digital apps than smaller banks can afford. Technology is helping big banks gain market share and is more likely to drive consolidation in the years ahead than regional bank mergers.
On the Republican side, one concern for the future was that the Federal Reserve’s new vice chair for supervision, Michael Barr, will hike capital demands as he aligns US rules with global standards. Jamie Dimon, JPMorgan Chase & Co. CEO, and Citigroup Inc.’s Jane Fraser — smarting from recent increases in capital requirements — put a marker down ahead of the hearings, saying the growing demands would hurt lending to the US economy. The CEOs repeated the message before the committees. JPMorgan has said it is holding back loan growth while it builds more capital, although the bank hasn’t said what types of loans or quantified the impact.But capital fears are a red herring. The Fed, like European regulators before it, will likely aim to have a neutral effect on large banks’ capital needs after any changes to the rules, according to Bloomberg Intelligence. Barr could have a more chilling effect on regional bank mergers, where he’s pledged to protect competition and is considering new guidance on what deals will be allowed.
With nearly 5,000 banks, the US financial sector is highly fragmented compared with many other countries. That sounds like a lot of competition, but it isn’t when so many are too small to compete in a world where the fixed costs of regulation and reporting are high, and where technology is racing away from those who can’t afford to spend billions each year.
As an example, JPMorgan’s investment budget for technology and growth in consumer and small business banking this year is $7.5 billion. That’s greater than the 2021 revenue of all but nine banks in the S&P 500. Of that investment, $2.8 billion is purely for technology, which is roughly the same as the revenue at three S&P 500 banks: Signature Bank, Comerica Inc, and Zions Bancorp NA.Brian Moynihan, Bank of America Corp’s CEO, told the House Financial Services Committee on Wednesday that Truist Financial Corp was a stronger competitor now than either of the banks that merged to form it three years ago had been individually.
Like JPMorgan, Bank of America is a big investor in digital technology and both have been winning a disproportionate share of the growth in deposits as a result, according to Mike Mayo, an analyst at Wells Fargo.
Both banks have about $1 trillion in consumer deposits, and JPMorgan grew its market share nationally from 8.9% to 10.3% between 2017 and 2021. Its share is greater and has grown by more in the US states it has operated in longest. And Dimon has said there’s no reason why it can’t get to 20% of the US market some day. Both banks also have a high and growing share of customers that join them digitally rather than through a branch.Mayo estimates that the two banks have increased total deposits over the past two years by an amount that is equivalent to the total deposit base of the sixth biggest US bank. The proposed new law to limit regional bank deals “may as well be called the Protect Jamie Dimon Act,” Mayo said.
Banking is increasingly a scale game where the biggest players are most able to absorb high fixed costs and generate the best returns. Advantage begets advantage as profits can be plowed back into making services cheaper and continuing to build smarter technology that customers want to use.
In areas like trading stocks and bonds, the biggest US banks have already raced ahead of weaker European rivals. The same dynamic is coming to corporate and consumer banking – maybe not to quite the same levels of industry concentration, but you better believe that JPMorgan and Bank of America, for example, are going to be much bigger tomorrow than today.
If politicians and regulators want to worry about market power and financial stability, they shouldn’t be blocking mergers or even worrying that much about capital levels – they should be thinking about the power of technology.More from Bloomberg Opinion: Sorry, Bankers, You’ll Never Have an Easy Life: Paul J. Davies Real Stress Hurts Bank Buybacks More Than a Test: Paul J. DaviesApple, JPMorgan Turn to Pay Now Grow Later: Paul J. Davies
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Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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