GOP deregulation fervor will spur bank merger boom

• The bank regulatory environment has seen dramatic changes in in the past year that make the environment ripe for merger activity.
• Technology is also playing a role in banks' desire to merge.
• BBT, Citizens Financial and PNC are among those on the prowl.

Andrew Harrer | Bloomberg | Getty Images

PNC Bank branch

The bank regulatory environment has seen dramatic changes in in the past year. The head of almost every bank regulatory agency has changed. Treasury Secretary Steve Mnuchin has released two "white papers" arguing for less banking regulation. And now, it appears that a bipartisan agreement in Congress could raise the asset hurdle at which regulation becomes more burdensome.

What's more, new banking technologies provide greater benefits to institutions with operational scale. That should make banks eager to acquire large customer bases through mergers - and in this environment the government is not going to stop them. I believe BB&T Corporation, Citizens Financial Group, Fifth Third Bancorp, Key Corp, M&T Bank, PNC Financial, Regions Financial, SunTrust Bank and U.S. Bancorp are among those on the prowl. The Midwest should see the most action as the industry tends to be more fragmented there than elsewhere in the country.

The regulatory environment has changed

First, consider the historic change in the bank regulatory sector. President Trump may have met with resistance in Congress to his legislative agenda but he has not been stymied in changing the banking regulatory establishment. Start with the Federal Reserve. Five new members are expected on the seven person Fed Board in 2018. This includes a new chairman, a new vice chairman, and a new head of bank regulatory activities. A new head is being sought for the Federal Deposit Insurance Corporation and four of the five directors on the board are to be changed.

Adjustments of this nature have already occurred or are about to occur at the Office of the Comptroller of the Currency, The Commodity Futures Trading Commission, the National Credit Union administration, and in early 2019, the Federal Housing Finance Agency. There is a new head at the Securities Exchange Commission and a new leader to be in place at the Consumer Financial Protection Bureau.

The Financial Stability Oversight Council was set up to oversee the operations of all of the banking regulatory bodies. There is a new head of this agency and seven of the 10 Board members are new or are about to be replaced.

Understand that while the Dodd Frank Act requires a number of broad changes in banking regulation, the law leaves the implementation of these changes to be dictated by the regulatory agencies. Thus, one can expect to see changes in the annual stress tests, the Living Wills, and in arcane rules like the Net Stable Funding Ratio and systemically important financial institution (SIFI) designations.

Without explaining these rules, what the changes mean for banking is lower capital and liquidity requirements and more freedom to merge. In addition, if Congress passes a law, as expected, raising the regulatory hurdle to $250 billion, from $50 billion, the ability to acquire other banking companies is made far simpler and less costly.

Why Merge?

Banking consumers have indicated their desire for digitally delivered services as, for example, millions begin to use mobile banking and tens of millions have already adopted Internet banking. Customers want these services because they are more convenient than a trip to a bank branch; because more analytics can be provided along with the transactional services; and because digital banking is faster and cheaper than traditional banking for the user.

Banks are spending billions of dollars to meet the market's demands. To make these expenditures economically feasible, the new systems require large numbers of customers – or operational scale. Mergers provide the necessary scale to validate the expenditures on the new systems.

However, even without the technological push to merge; there are business reasons to do so. Bank loan growth has slowed appreciably in commercial and real estate markets. Even some consumer sectors, like auto lending, have slowed. In periods like this it has been traditional for banks to seek to acquire large customer bases. The reason is usually big banks can eliminate the acquired company's operating system and sell more products to an underserved market segment – i.e., the smaller bank's customer base.

It would have been normal, therefore, to have seen multiple mergers in recent years. Yet, this was not possible since the old regulatory crew, the Obama administration, would not approve them.

This is no longer the case. The game is on again.

Commentary by Richard X. Bove, an equity research analyst at the Vertical Group and the author of "Guardians of Prosperity: Why America Needs Big Banks" (2013).

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