How Reciprocal Deposits Build Franchise Value

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deposits-1-16-19.pngThere are many alternatives to core deposits that banks can utilize to fund loans. Internet listing services, for example, have become popular. Unlike brokered deposits, there are no regulatory deterrents against their use. Still, internet listing-service deposits tend to be more expensive and more price sensitive—hence less stable—than traditional core deposits because they often come from out-of-market customers who chase rates rather than from local customers looking to establish a relationship.

Banks have another important, and arguably better, deposit-gathering tool at their disposal—reciprocal deposits. Thanks to the Economic Growth, Regulatory Relief and Consumer Protection Act, most reciprocal deposits now receive nonbrokered status.

What are reciprocal deposits? These are funds received by a bank through a deposit placement network in return for placing a matching amount of deposits at other network banks. Why would banks exchange equal amounts of money with each other? The mechanics of different reciprocal deposit services vary, but the gist is that a bank that participates in a reciprocal deposit network can offer access to FDIC insurance beyond $250,000 to attract safety-conscious customers who might otherwise consider various alternatives, including:
Depositing large sums into a money-center bank, foregoing some access to FDIC insurance and perhaps relying on ratings agencies, like Standard & Poor’s or Fitch, to help assess bank stability
Requiring that a bank collateralize or otherwise secure a large deposit with Treasuries or other ultra-safe, highly liquid government securities
Manually splitting a large deposit among multiple banks, maintaining relationships with each and negotiating different interest rates, signing multiple agreements and receiving multiple statements

Banks that participate in a reciprocal deposit network like the ability to more effectively pursue these large-dollar deposits from local customers who were previously beyond their reach, or whose collateralization requirements raised tracking and opportunity costs and lowered margins. Banks like that they can take multi-million-dollar deposits and place them through a reciprocal deposit network into other banks participating in the same network in increments below $250,000. The spreading out of the funds into multiple banks makes the entire amount eligible for FDIC insurance. This process enables a customer to access FDIC protection from many banks while working directly with just one. And the originating bank maintains ownership of the customer relationship.

Banks that receive reciprocal deposits from another bank are willing to take those funds because they are doing the same thing with their customers’ money. All told, participating banks exchange funds on a dollar-for-dollar basis so each comes out whole—giving rise to the term reciprocal deposits.

“Reciprocal deposits are popular because they tend to be associated with multi-million-dollar depositors, enabling banks to attract deposits in large chunks with lower acquisition and maintenance costs as costs tend to be spread over much larger deposit amounts,” explains Mark Thompson, president of CenterState Bank in Davenport, Florida. “Moreover, they tend to come from local customers at rates that are more in line with local pricing norms. They also tend to come from customers who are more likely to be interested in a broader, more long-term relationship that may include mortgages, credit cards and other profit-generating services.”

“In stark contrast to listing-service deposits, reciprocal deposits help a bank build franchise value,” according to James Di Misa, executive vice president and chief operating officer of Community Bank of the Chesapeake in Waldorf, Maryland. “Quite simply, reciprocal deposits tend to be large, lower-cost, in-market deposits and, as such, offer greater potential for opportunity and efficiency. For this reason, many banks are replacing at least a portion of their listing-service deposits with reciprocal deposits.”

Banks that don’t want to trade out listing-service deposits entirely can still use reciprocal deposits to augment their usage of listing-service funding. For example, they can use a reciprocal deposit offering to lure more business from a safety-conscious listing-service customer who keeps funds protected at multiple FDIC-insured institutions and who might consolidate some, or all, of their deposits with a bank that can offer access to FDIC protection far beyond $250,000.

And of course, reciprocal deposits can be a good replacement for collateralized deposits and wholesale funding options.

As the competition for deposits heats up, now is a good time for every bank to consider making reciprocal deposits a larger part of its funding strategy.

To learn more, please visit www.promnetwork.com/game-changer.

Why Investors Are Still Hungry for New Bank Equity

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capital-10-12-18.pngThe U.S. economy is riding high. Bank stocks, while their valuations are down somewhat from their highs at the beginning of the year, are still enjoying a nice run. For most banks that want to raise new equity capital, the window is still open.

The banking industry is already well capitalized and bank profitability remains strong. According to the Federal Deposit Insurance Corp., the industry earned $60.2 billion in the second quarter of this year, a 25 percent gain over the same period last year, thanks in no small part to the Trump tax cut, which has also helped prop up bank stock valuations. The truth is, in the current environment, banks don’t need to raise new equity just to increase their capital base—they can do that through retained earnings. The industry is awash with capital and most banks don’t necessarily need even more of it.

“The industry overall is enjoying capital accretion,” says Bill Hickey, a principal and co-head of investment banking at Sandler O’Neill + Partners. “Capital ratios industry-wide have continued to increase as banks have earned money and obviously enjoyed the benefits of tax reform. … I think the need for equity capital has lessened slightly as a result of capital ratios continuing to increase.”

Over the last few years, banks have clearly taken advantage of the opportunity to repair their balance sheets, which were ravaged during the financial crisis. According to S&P Global Market Intelligence, there were 123 bank equity offerings in 2016, which raised nearly $6 billion in capital at a median offering price that was 125 percent of tangible book value (TBV) and 52.8 percent of the most recent quarter’s earnings per share (MRQ EPS). There were 146 equity offerings in 2017 that raised nearly $7.5 billion, with offering price medians of 66.3 percent of TBV and 16.6 percent of MRQ EPS. (The industry was much less profitable in 2016 than in 2017, which explains the wide disparity between the median values for the two years.) And through Sept. 26, 2018, there were just in 66 offerings—but they have raised $7.6 billion in equity capital, with a median offering price that was 175 percent of TBV and 13.3 percent of MRQ EPS.

As the median offering prices as a percentage of TBV have gone up over the last two and a half years, while also declining as a percentage of the most recent quarter’s earnings per share—which means that institutional investors are in effect paying more and getting less from a valuation perspective—you might think investor appetite for bank equity would begin to wane. But according to Hickey, you would be wrong.

“There is a lot of money out there looking to be deployed in financial services and banks,” he says. “So there are folks who need to deploy capital—pension funds, funds specifically focused on investing in financial institutions. They have cash positions they need to deploy into investments. So there is a great demand for equity, particularly bank equity at the current time.”

Hickey says most of this new equity was raised to fuel growth, either organic growth or acquisitions. But any bank considering doing so needs to provide investors with a detailed plan for how they intend to use it. “You have to be able to articulate a strategy for the use of the capital you intend to raise,” says Hickey. “That seems obvious, but it needs to be explained quite well to the investment community so they understand how the capital is going to be deployed and have a sense of what their return possibilities are.”

And if you’re going to tap the equity market to support your strategic growth plan, make sure you raise enough the first time around. “Arguably, a company [should] raise enough money that will allow it to fund their growth for at least 18 to 24 months,” Hickey explains. “Investors don’t like it when they’re investing today and then 12 months later the same company comes back looking for more capital. Investors would [prefer] to minimize the number of offerings so they’re not diluted in the out years.”

The Case for Rating Community Banks Investment Grade

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investment-9-18-18.pngFor years, legacy rating agency thinking held that community banks could not be rated investment grade. They were too small, the thinking went, and therefore could not compete with scale-advantaged larger banks. Moreover, this structural deficiency likely made community banks riskier, as they were naturally subject to adverse selection in terms of loan originations.

All of this is intuitive. But it doesn’t stand up to further scrutiny.

If we consider the history of bank failures, we see that very small banks and very large banks are disproportionately represented. Meanwhile, well-run community banks, with long-standing ties to local markets, core deposit funding and well diversified risks have a long history of successfully riding out credit cycles. That piqued our interest. But we still needed to get over the hump of competitiveness. How could a community bank’s cost structure—the basis for pricing assets and liabilities—match the efficiency of the largest banks? We took a closer look.

Started with funding costs. Turns out that government guaranteed deposit funding—available to all FDIC-insured institutions, large and small, is a great equalizer. In fact, most community banks derive substantial amounts of their funding via core deposits, giving them an advantage over the largest banks that require substantial sums of more expensive market-sourced funding.

What about operating costs? Surely, the largest banks enjoy substantial economies of scale relative to community banks. That may be true, especially in terms of being able to absorb things like the significant increases in regulatory reporting and compliance costs. What we found interesting, however, is that the efficiency ratios of community banks in many cases compare favorably to those of the larger banks. Our research came up with two explanatory considerations. First, according to the FDIC, the benefits of economies of scale are realized with as little as $100 million in assets, and second, among larger banks, the benefits of scale are typically offset by the added costs brought on by complexity and administrative friction. This serves as a reminder that, in terms of competitiveness, banking, especially small to mid-sized commercial banking, is a local scale business, not a national (or international) one.

Now, you might point out, broader and more sophisticated product offerings must tip the scale in favor of larger banks. And there must be some benefit to the substantial technology and marketing spend of the larger banks. We wouldn’t disagree. But we also believe community banks can punch back with value of their own created out of local market knowledge and relationships as well as superior responsiveness. And most small businesses really don’t demand a sophisticated product set, and marketing spend generally creates value in consumer financial services, much of which left community banking some time ago.

So, what about the risk side of the equation? Larger banks by definition will have greater spread-of-risk than community banks, where risks are more concentrated, certainly in terms of geography, and quite possibly loan type (most notably CRE). What our research found was that through cycles, community banks’ loss rates per loan type were typically better than those of larger banks. In other words, no evidence of adverse selection, and a realization that most markets in the U.S. are relatively well diversified economically.

This is not to say that all community banks are investment grade. Well-run community banks can be rated investment grade. Therein lies an essential element of our rating determination—an in-depth due diligence session with senior management. Here, we look to understand the framework and priorities for managing risk, key aspects of growth strategies, and the rationale underpinning capital and liquidity structure. This is a story sector, and the management evaluation is critical to our rating outcome.

Our research suggests that well-run community banks can compete successfully with larger banks, and generate solid fundamental performance through the cycle. We rated our first community bank in 2012, and today that figure stands at 115 and counting, testament that our approach has resonated with investors and depositors alike.

Rethinking the FICO Score

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FICO-6-20-18.pngFor decades, pre-dating many banking careers today, the tried and true method to evaluate credit applications from individual consumers was their FICO score. More than 10 billion credit scores were purchased in 2013 alone, a clear indicator of how important they are to lenders. But is it time for the banking industry to reconsider its use of this metric?

The FICO score, produced by Fair Isaac Corp. using information from the three major credit bureaus—Equifax, TransUnion and Experian—has been considered the gold standard for evaluating consumer credit worthiness. It focuses squarely on the concentration of credit, payment history and the timeliness of those payments. FICO scores have generally proven to be a reliable indicator for banks and other lenders, but in an age operating at light speed, in which many purchases can be made in seconds, a score that can fluctuate in a matter of days might be heading toward obsolescence.

Some believe a person’s credit score should be considered only in parity with other, more current indicators of consumer behavior. A study released in April by the National Bureau of Economic Research says even whether people choose an Apple or Samsung phone “is equivalent to the difference in default rates between a median FICO score and the 80th percentile of the FICO score.”

Consider the following example. A consumer pays off an auto loan, resulting in a reduction in their FICO score. This is largely due to the reduced amount of credit extended. That reduced score could become a deciding factor if the customer has applied for, but not yet closed, a mortgage 60 or so days before paying off the vehicle and could affect the interest rate of the applicant.

That leaves a bitter taste for anyone with average or above average credit who has demonstrated financial responsibility and, it could be reasonably argued, would be a much better candidate for credit extension than someone with the same score who doesn’t give two flips about the regular ebbs and flows in their credit.

For all its inherent benefits to the industry, the traditional credit score isn’t perfect. Banks could be using their own troves of customer data to evaluate their credit applications more accurately, more fairly or more often. This could be a boon for institutions hoping to grow their deposit base or enhance their loan portfolios. Some regulators have indicated their attention to this approach as well. The Federal Deposit Insurance Corp.’s Winter 2017 Supervisory Insights suggests data could be a helpful indicator of risk and encouraged member institutions to be more “forward-thinking” in their credit risk management.

“As new risks emerge, an effective credit [management information system] program is sufficiently flexible to expand or develop new reporting to assess the effect those risks may have on the institution’s operations,” the agency said.

That suggests the FICO score banks are currently using might not tell the full story about how responsible credit applicants might be.

“My personal opinion is that among most people, if you have someone who thinks about [their digital footprint and credit], you’re already talking about people who are financially quite sophisticated,” Tobias Berg, the lead author of the NBER study and an associate professor at Frankfurt School of Finance & Management, told Wired Magazine recently. The study examined a number of data points that go far beyond what is incorporated in a FICO score.

That certainly has value for banks. The data they already collect about their customers could be used to determine credit worthiness, but there’s a counter argument to be made. Digital footprints are much easier to manipulate more quickly over time by changing usernames, search history, devices and the like. Using an Android over a more expensive iPhone could be a negative in the study’s findings, for example, which might not reflect the customer’s true credit profile.

But FICO scores are not reviewed as regularly as they could be, and a swing of a couple dozen points from one moment to another can significantly sway some credit applications.

For now, fully abandoning the FICO score isn’t a likely or manageable option for banks, nor one that’s favored by regulators, but the inclusion of digital data in credit applications is something that could be adapted and be beneficial to both the bank and customers eager to expand that relationship with their institution.

Use Compensation Plans to Tackle a Talent Shortage

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Can you believe it’s been 10 years since the global financial crisis? As you’ll no doubt recall, what was originally a localized mortgage crisis spiraled into a full-blown liquidity crisis and economic recession. As a result, Congress passed unprecedented regulatory reform, largely in the form of the Dodd-Frank Act, the impact of which is still being felt today.

Significant executive compensation and corporate governance regulatory requirements now require the full attention of senior management and directors. At the same time, shareholders continue to apply pressure on management to deliver strong financial performance. These challenges often seem overwhelming, while the industry also faces a shortage of the talent needed to deliver higher performance. As members of the Baby Boomer generation retire over the coming years, banks are challenged to fill key positions.

Today, many banks are just trading people, particularly among lenders with sizable portfolios. Many would argue the war for talent is more intense than ever. According to Bank Director’s 2017 Compensation Survey, retaining key talent is a top concern.

surey-chart.png

To address this challenge, many banks have expanded their compensation program to include nonqualified benefit plans as well as link a significant portion of total compensation to the achievement of the bank’s strategic goals. Boards are focusing more on strategy, and providing incentives to satisfy both the bank’s year-to-year budget and its long-term strategic plan.

For example, if the strategic plan indicates an expectation that the bank will significantly increase its market share over a three-year period, compared to competition, then executive compensation should be based in part upon achieving that goal.

Achieving Strategic Goals
There are other compensation programs available to help a bank retain talented employees.

According to Federal Deposit Insurance Corp. call report data and internal company research, nonqualified plans, such as supplemental executive retirement plans (SERPs) and deferred compensation plans, are widely used and are particularly important in community banks, where equity or equity-related plans such as stock options, restricted stock, phantom stock and stock appreciation plans are typically not used. These plans can enhance retirement benefits, and can be powerful tools to attract and retain key employees. “Forfeiture” provisions (also called “golden handcuffs”) encourage employees to stay with their present bank instead of leaving to work for a competitor.

SERPs
SERPs can restore benefits lost under qualified plans because of Internal Revenue Code limits. Regulatory rules restrict the amount that can be contributed to tax-deferred plans, like a 401(k). A common rule of thumb is that retirees will need 70 to 80 percent of their final pre-retirement income to maintain their standard of living during retirement. Highly compensated employees may only be able to replace 30 to 50 percent of their salary with qualified plans, creating a retirement income gap.

retirement-income-gap.png

To offset this gap, banks often pay annual benefits for 10 to 20 years after the individual retires, with 15 years being the most common. SERPs can have lengthy vesting schedules, particularly where the bank wishes to reinforce retention of executive talent.

Deferred Compensation Plans
We have also seen an increasing number of banks implement performance-based deferred compensation plans in lieu of stock plans. Defined as either a specific dollar amount or percentage of salary, bank contributions may be based on the achievement of measurable results such as loan growth, increased profitability and reduced problem assets. Typically, the annual contributions vest over 3 to 5 years, but could be longer.

While deferred compensation plans have historically been linked to retirement benefits, we see younger officers are often finding more value in cash distributions that occur before retirement age.

To attract and retain millennials in particular, more employers are expanding their benefit programs by offering a resource to help employees pay off their student loans. According to a survey commissioned by the communications firm Padilla, more than 63 percent of millennials have $10,000 or more in student debt. Deferred compensation plans can also be extended to millennials to help pay for a child’s college tuition or purchase a home. Because these shorter-term deferred compensation plans do not pay out if the officer leaves the bank, it provides a strong incentive for the officer to stay longer term.

Banks must compete with all types of organizations for talent, and future success depends on their ability to attract and retain key executives. The use of nonqualified plans, when properly chosen and correctly designed, can make a major impact on enhancing long-term shareholder value.

Insurance services provided by Equias Alliance, LLC, a subsidiary of NFP Corp. (NFP). Services offered through Kestra Investment Services, LLC (Kestra IS), member of FINRA/SIPC. Kestra IS is not affiliated with Equias Alliance, LLC or NFP.

Innovation Spotlight: Howard Bank

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innovation-10-3-17.pngScully-Mary-Ann.pngMary Ann Scully, CEO and chairman
As a lifelong banker with over 30 years of varied executive experiences, Mary Ann Scully headed the organizing team for Howard Bank of Baltimore, Maryland, and currently serves as a board member of the Baltimore Federal Reserve and a community advisory board member for the Federal Deposit Insurance Corp. Under her leadership, Howard Bank recently announced its fifth acquisition in five years, which will make it a $2.1 billion asset institution. It has maintained a commitment to high touch service throughout each integration.

When you started at Howard Bank, what did you want to do differently with innovation?
We have always viewed our differentiation as high touch expertise and advice. Therefore, we tried not to be leading edge from an innovation perspective. However, we also recognized that to attract small and medium-sized businesses that we should not and would not ask our customers to make a choice between competitive products and delivery available at larger banks and our high touch advice. So we have always had to be competitive and with a more sophisticated customer base, the bar was set higher.

Over the years, how has your digitization strategy changed?
We opened the doors in 2004 with online banking, online check images, hand scan safe deposit boxes—not your typical start-up community bank mix. Over time, we have become more and more committed to being leading edge in the utilization of information to inform our decisions, optimize our processes and advise our customers. Our recent project with [commercial lending platform] nCino is an example of this commitment. Our commitment to a new universal banker branch model is another.

You were once quoted as saying, “Thriving is different than survival and relevance is more than profitability.” What does it take for a bank to thrive AND stay relevant in this competitive environment?
It requires, first, great clarity of strategy: “What do you want to do, how and when, for whom?” And that requires being able to articulate the more painful, “What do you not want to do or whom are you not targeting?” The second requirement is a long-term vision because relevance requires constant investment in the business—in people and technology. It also requires access to capital, both financial and human, to facilitate those investments.

Finally, it requires flexibility because the world changes at a faster rate than ever before and it is important to be able to reallocate resources to what our customers feel is relevant for them. Our high growth trajectory requires a mindset throughout the organization that acknowledges the need for change. For example, we have attracted five teams from other banks in five years. We’ve done five acquisitions in five years, the most recent and largest just announced in August. We’ve accomplished seven capital raises in 13 years, the most recent and largest in January of this year.

After being involved in several M&A deals, what lessons have you learned about integrating technology platforms to ensure business continuity?
First, we always remember to view integration from a customer’s perspective. There is always disruption involved in a merger, some sense of “I did not ask for this,” and flowery promises do not alleviate the skepticism even when an in-market merger is perceived by a community as being positive. So we plan, plan and plan to ensure that customers never lose functionality and if possible, gain something in the process. This means being willing internally to change the “host” systems as well as the acquired bank systems. It means viewing integrations as an opportunity, not a necessary evil, to take the best of both and occasionally the best-of-breed, not just as a way to save costs and slam things together but as a way to enhance the combined systems. We have a cross-functional team who has worked together on each transaction, some who started on the acquired side who are now sitting as an acquirer and their experience and perspective are invaluable. That team always has representatives from each bank for each function. Conversions are not for amateurs or the faint of heart so constant communication between providers and users is also important for successful platform integration.

How Future Consolidation Will Change the Value of a Branch

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consolidation-3-3-17.pngTwo long-term trends that have helped shape the banking industry as we know it today are consolidation and the shift from physical distribution built around branches to digital channels, including mobile. Although we tend to think of consolidation and the shift toward digital as separate but parallel evolutionary forces, they are beginning to interact in ways that could impact the bank mergers and acquisitions (M&A) market going forward.

The number of bank branches has been steadily declining since 2009, when they peaked at 89,775, according to Federal Deposit Insurance Corp. data. There was a glut of de novo branches from 2004 to 2007 when, according to veteran bank analyst Tom Brown, founder and CEO of the New York-based hedge fund Second Curve Capital, the popular deposit gathering strategy of many banks was to flood their markets with lots of new brick and mortar in order to sell free checking programs. “Before long, the landscape was littered with redundant, expensive, new bank branches,” writes Brown in his February 17 weekly newsletter. “All this at a time, remember, when consumer behavior was starting to move away from branch banking and toward online banking.”

The seminal event in 2008 was, of course, the collapse of the U.S. housing market and the advent of the sharpest economic downturn since the Great Depression. Since 2009, the number of U.S. bank branches has declined to 83,768 at the end of the third quarter of 2016, or by 6.7 percent. Brown has argued for years that the industry needs to reduce the size of its brick-and-mortar distribution system at a much faster pace. “[As] I’ve said many times, that’s still way too many branches,” Brown writes in his newsletter. “Consumer behavior toward online, non-branch banking isn’t growing at a slow, linear pace, but rather exponentially. A mere 7 percent reduction this decade after the reckless expansion the prior decade isn’t nearly enough.”

And this is where these separate trend lines of consolidation and distribution could begin to merge. For one thing, the quickening pace of the industry’s shift toward digital distribution—most banks have been seeing declines in branch traffic for several years now, which is the primary reason they’ve been closing branches in the first place—could have an impact on a seller’s valuations. If branches are a fixed asset of declining importance (and therefore declining value), how much will an acquirer be willing to pay for them? In an interview, Brown says this impact has already begun to occur. “In the ‘80s and ‘90s, when you did your due diligence on a target, you wanted to see that their branches were owned,” he says. “Today when you evaluate a target, the last thing you want to see is branches with long-term leases.”

It could also be that consolidation will hasten the reduction of branches because they offer a plum cost-takeout target in an acquisition. If a bank’s branch system is one of the most significant components of its cost structure, and if branches are of declining value as the industry continues its shift toward digital distribution, then one of the best ways that a buyer can reduce costs in the combined bank is by closing branches. Cost-takeout deals aren’t new in banking. They were very popular back in the ‘80s when they were the principal merger model. But branches were a much more valuable asset back then, and therefore did not bear the brunt of post-merger cost cutting. It’s a different game today. “It’s not going to be about PNC Financial moving out to the West Coast and buying Western Alliance,” says Brown. “It’s going to be a $20 billion bank buying a $5 billion bank and closing all sorts of branches.”

Do the Regulators Want Bigger Banks?

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big-banks-12-2-16.pngOne of the more intriguing story lines of the banking industry’s consolidation since the financial crisis is the persistent belief that federal regulators privately want a more concentrated industry with fewer banks because it would be easier for them to supervise, and they signal their support for this laissez-faire policy every time they approve an acquisition.

Consider this comment from a respondent to our 2017 Bank M&A Survey: “Regulators are actively trying to reduce the number of charters, to reduce their workload and to give them control, with fewer institutions to supervise. While they do not openly admit it, every agency has admitted to me that they would prefer fewer institutions. This will cause more consolidation.” Implicit in this perception is the assumption of regulatory bias against the thousands of small banks that dot the industry landscape. The aforementioned respondent to our survey was a director at a bank with less than $500 million in assets.

Are the regulators really guiding the industry’s consolidation with a hidden hand? Looking back to the mid-1980s, I think it’s impossible to argue that the last five presidents and 11 secretaries of the Treasury (not to mention numerous federal regulators) were opposed to the idea of consolidation as the industry shrunk from 14,884 insured institutions in 1984 to 6,058 as of June 2016, according to the Federal Deposit Insurance Corp. The most intense period of consolidation was probably a 20-year period, beginning in 1984, where the industry shrank to just 7,842 insured institutions by the end of 2003—nearly a 50 percent reduction!

I found this observation in a 2005 article in FDIC Banking Review, entitled “Consolidation in the U.S. Banking Industry: Is the Long, Strange Trip About to End?” “Over the two decades 1984 to 2003, the structure of the U.S. banking industry indeed underwent an almost unprecedented transformation—one marked by a substantial decline in the number of commercial banks and savings institutions and by a growing concentration of industry assets among a few dozen extremely large financial institutions. This is not news.” And if it wasn’t news in 2005, it certainly shouldn’t be news today.

I think a more interesting question is whether the collective governmental brainpower seriously considered the systemic ramifications of a more concentrated industry—especially the creation of megabanks like JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. Those three institutions, along with Citigroup, rank as the four largest U.S. banks and collectively held 40 percent of the industry’s total deposits and 42 percent of its total assets as of September 2016, according to S&P Global Market Intelligence.

It was the fear that a large bank would fail during the financial crisis, worsening the situation even further, that led to the controversial and much criticized industry bailout and provided the emotional fuel in Congress to pass the Dodd-Frank Act. Even today, approximately seven years after the crisis passed, we are still debating whether another unofficial governmental policy from years past—too big to fail—could be deployed in times of emergency despite the efforts of the framers of Dodd-Frank to kill it once and for all. I would say that Washington ended up getting exactly what it had wanted over the last three decades—a more concentrated industry with fewer banks—but doesn’t seem to be very comfortable with the outcome.

Another interesting question is when will consolidation end? It’s taken as gospel that the four megabanks will not be allowed to do any more acquisitions because they’re already too large, and most of the M&A activity in recent years has been in the community bank sector, where individual banks do not pose a systemic threat to the economy. But is there a number at which point the regulators, Congress or some future presidential administration would say enough? A more concentrated industry poses systemic risks of its own, so does Washington reverse its laissez-faire policy when we reach 5,000 banks, or 3,500, or even 2,000?

If anyone in Washington has an answer to that question, I’d love to hear it. Then again, President-Elect Trump fits the description of a laissez-faire capitalist as well as anyone, so maybe he’ll let the banking industry seek its own final number.