Noticeably absent from the bank M&A market in 2012 were the megadeals of years past that have often helped stimulate takeover activity. The market made a modest rebound last year, with 230 acquisitions of healthy banks totaling $13.6 billion, according to SNL Financial. But while there were only 150 bank deals in 2011—the third lowest volume since 1989—they totaled $17 billion. In other words, there were more takeovers in 2012 than the year before, but they were generally smaller in size.
Also absent last year were traditional acquirers like JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., three highly acquisitive companies that traditionally have been a driving force behind the industry’s consolidation beginning in the mid-1980s. Indeed, the 15 largest U.S. banks were shut out of the M&A market last year.
The largest transaction in 2012 was the $3.8 billion buyout of Hudson City Bancorp by M&T Bank Corp., the 16th largest U.S. bank, followed by Japanese-owned Mitsubishi UFJ Group’s purchase of Pacific Capital Bancorp for $1.5 billion, according to SNL. When the bank M&A market was really rocking in the 1990s–the high-water mark for the number of transactions was 524 in 1994, and for aggregate deal value, $288.5 billion in 1998—last year’s “big deals” would have been mere chicken feed.
There are good reasons why the big banks were standing on the sidelines last year. For one, JPMorgan and Wells Fargo are dangerously close to the 10 percent nationwide cap on bank deposits—and Bank of America actually exceeds it by 2.62 percent, according to SNL Financial–so those three companies in particular don’t have room to squeeze in another meaningful acquisition. Also, most bank takeovers—particularly very large ones—are paid for with the acquirer’s stock, and of the 10 largest U.S. banks, the common equity of all but two trades below their book value. (The exceptions are Wells Fargo and U.S. Bancorp, whose stock currently trades at a premium to the underlying book value.) With such a weak currency, few of these mega banks are in a position to make a large acquisition even though several of them do have ample room under the deposit cap.
But apparently there is another reason why large banks haven’t been doing deals. According to a Wall Street Journal story that ran last December, the Federal Reserve has been telling very large “systemically important” U.S. banks to forget about doing anything but the smallest of acquisitions for the time being. The Fed, which has been very focused on the issue of systemic risk since the financial crisis of 2008-2009, was given expanded authority under the Dodd-Frank Act to supervise large banks whose failure might tank the U.S. economy. And if the Federal Reserve thinks the growth of very large institutions after decades of M&A-driven consolidation has created a higher level of systemic risk in the banking system, why would it allow them to get any larger?
In a speech last October at the University of Pennsylvania Law School, Federal Reserve Gov. Daniel Tarullo most likely signaled the central bank’s position on large bank mergers for the foreseeable future. “[I] would urge a strong, though not irrebuttable, presumption of denial for any acquisition by any firm that falls in the higher end of the list of globally systemically important banks developed by the Basel Committee for the purposes of assessing capital surcharges,” Tarullo said. “Firms at the lower end of the Basel Committee list, or that U.S. authorities may later designate as domestic systemically important banks…might have a slightly less robust, but still significant presumption against acquisitions.”
Tarullo said he was speaking “for myself only” and not the Fed’s Board of Governors, although I doubt he would have ventured so far out on a limb if he thought it might be sawed off behind him since Fed governors tend to be pretty cautious in their public statements.
I have covered the banking industry as a financial journalist since the mid-1980s, including that period of tremendous consolidation in the ‘90s, and now find it somewhat ironic that the Fed apparently has a much less accommodating view of mergers between large banks than it used to. Back in the day (which is to say, the ‘90s), large bank deals were rarely challenged by the regulators—including the Federal Reserve—on grounds other than Community Reinvestment Act considerations.
The two most important pieces of financial deregulation legislation passed by the U.S. Congress in the 1990s—the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which accelerated a process of nationwide banking that was already underway regionally, and the Gramm-Leach-Bliley Act of 1999, which repealed the Depression-era Glass-Steagall Act and allowed commercial and investment banks and insurance companies to be owned by the same corporate parent—were largely supported by the federal banking regulators.
Riegle-Neal (which imposed the 10 percent cap on bank deposits) helped create the scale, and Gramm-Leach-Bliley (which largely formalized the Fed’s gradual loosening of the Glass-Steagall restrictions on commercial and investment banking that had begun in the 1970s) helped create the complexity that regulators worry about today. The potential havoc that the failure of systemically important institutions like Bank of America, JPMorgan and Citigroup could wreck on the U.S. financial system is a result of their size and complexity, and as a nation we started down this road to perdition decades ago whether we recognized it at the time or not. Consolidation and deregulation were de facto national policies through most of the 1990s, and the growth of large and complex institutions is its natural consequence.
As their stock prices gradually recover in the years ahead (as I’m sure they will), it will be interesting to see what stance the Fed takes if and when institutions like Citi (which controls just 4.44 percent of U.S. bank deposits), Capital One Financial Corp. (2.58 percent), U.S. Bancorp (2.47 percent), PNC Financial Services Group Inc. (2.27 percent) and BB&T Corp. (1.51 percent) want to reenter the bank M&A market. All, with the exception of Citi, have been active domestic acquirers in recent years.
If the Federal Reserve can devise a system of regulation for systemically important banks that it has confidence in, then perhaps some of these very large banks will someday be allowed to grow a little larger. But without such confidence at the Fed, we might have reached the end of an era in which the growth of very large and highly diversified financial institutions that could compete on a global stage was something to be encouraged rather than feared.
Is this just a timeout for large bank mergers, or is this game over?