Home Business US Megabanks are being asked the wrong questions

US Megabanks are being asked the wrong questions

US regulators and some politicians are missing the real story in American banking. Blocking mergers and higher capital charges were the main financial questions put to the CEOs of seven US megabanks by congressional committees this week – at least when the financial issues were heard amid a more bare-bones political grill.

But what will be far more important to the future shape of the banking industry is technology. The biggest banks with the biggest profits are already investing heavily in faster, cheaper, easier-to-use digital programs than smaller banks can afford. Technology is helping big banks gain market share and is more likely to lead to consolidation than regional bank mergers in the coming years. Concerns about the future from Republicans were that the Federal Reserve’s new vice chairman for oversight, Michael Barr, will loosen capital requirements as he aligns U.S. rules with global standards. increase. Jamie Dimon, CEO of JPMorgan Chase & Co., and Citigroup Inc.’s Jane Fraser — wary of recent increases in capital requirements — signaled ahead of the hearings that increased requirements would hurt lending to the U.S. economy. CEOs reiterated the message before the committees. JPMorgan said it halted loan growth while building more capital, though the bank did not say which types of loans or quantify the impact. But capital fears are a red herring. According to Bloomberg Intelligence, the Fed, like European regulators before it, will aim to have a neutral impact on big banks’ capital needs after any rule changes. Barr could have a more chilling effect on regional bank mergers, where he has pledged to protect competition and is considering new guidelines on what deals will be allowed.

With nearly 5,000 banks, the US financial sector is highly fragmented compared to many other countries. That sounds like a lot of competition, but it’s not when you’re too small to compete in a world where the fixed costs of regulation and reporting are high and technology is moving away from those who can’t afford to spend. billions every year.

As an example, JPMorgan has an investment budget of $7.5 billion this year for the development of technology and consumer and small business banking. That’s more than all but nine banks in the S&P 500 made in 2021. $2.8 billion of that investment is in technology alone, roughly the same as the revenue of three S&P 500 banks: Signature Bank, Comerica Inc and Zions Bancorp Bank of America Corp CEO Brian Moynihan told the House Finance Committee on Wednesday. Services Committee, Truist Financial Corp. is now a stronger competitor than the two banks that merged to create it three years ago.

Like JPMorgan, Bank of America is a big investor in digital technology, and both are getting a disproportionate share of the resulting growth in deposits, according to Wells Fargo analyst Mike Mayo.

Both banks have about $1 trillion in consumer deposits, and JPMorgan has increased its national market share from 8.9% to 10.3% between 2017 and 2021. Its share is larger and has grown more in the US states where it has been active the longest. And Dimon said there’s no reason it can’t one day reach 20% of the US market. Both banks have a high and growing share of customers who connect with them digitally rather than through a branch. Mayo estimates that the two banks have increased their total deposits in the past two years by an amount equal to the total deposit base of the sixth bank. The largest bank in the United States. Mayo said the proposed new law to curb regional bank deals “might as well be called the Jamie Dimon Protection Act.”

Banking is increasingly a game of scale, where the biggest players can absorb high fixed costs and generate the best returns. Advantage begets advantage, as profits can continue to make services cheaper and build smarter technology that customers want to use.

In areas such as stock and bond trading, the largest US banks have already outperformed their weaker European rivals. The same dynamic is coming to corporate and consumer banking – perhaps not at the same levels of industry concentration, but you better believe that JPMorgan and Bank of America, for example, will be bigger tomorrow than they are today.

If policymakers and regulators want to worry about market power and financial stability, they shouldn’t be blocking mergers or even worrying so much about capital levels — they should be thinking about the power of technology. More from Bloomberg opinion: Sorry, bankers, you It’s never going to be an easy life: Paul J. Davies Real Stress Hurts Bank Recovery More Than a Trial: Paul J. DaviesApple, JPMorgan Turn to Pay Now Grow Later: Paul J. Davies

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This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.

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.

More stories like this one are available at bloomberg.com/opinion

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