Ex-FDIC Chair Sheila Bair says it's wrong for regulators to 'discourage' regional bank mergers

By Steve Gelsi

The U.S. banking system may become more of a barbell made up of the biggest and smallest banks if more regional banks go away: Bair

'Regional banks are really important for small and medium-sized business, local government, nonprofits-they use those regional banks. If they fade away, the options are going to be go to the megabanks which are probably going to be more expensive and they're gonna give less personal attention.'Sheila Bair, FDIC chair 2006-2011, at the Peterson Institute for International Economics, March 27

Sheila Bair, who led the Federal Deposit Insurance Corp. through the bank failures of the 2008 Global Financial Crisis, said this week that regulators should support the survival of big regional banks by encouraging mergers instead of scrutinizing deals more closely.

Bair fears the U.S. banking system may soon resemble a barbell shape of the super-sized banks such as JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C) on one end, and smaller community banks on the other end.

Bair said the federal government's recent set of updated merger guidelines for bank tie-ups amount to the wrong policy at the wrong time.

Also read: New bank-merger regulations could be undone if Biden loses in November

The new rules include additional scrutiny for banks with $100 billion or more of assets.

Currently, the U.S. banking system has seven banks with $500 billion or more in assets, 12 with $200 billion to $500 billion in assets, 10 banks with between $100 billion and $200 billion, and 12 banks with between $50 billion and $100 billion. More than 2,000 range from $50 billion in assets down to $300 million.

"I'm very concerned about current efforts to discourage M&A activity among regional banks," Bair said. "We should be doing just the opposite. If we want to prevent regional failures, we should be encouraging the healthy ones to buy the weaker ones and not the opposite direction which is what we're doing."

In the last year alone, Silicon Valley Bank, Signature Bank and First Republic Bank all failed and were sold by the FDIC.

All three banks were components of the S&P 500 SPX and they amounted to the largest bank failures since the Global Financial Crisis.

Since then, New York Community Bancorp Inc. (NYCB), the parent of Flagstar Bank, has run into problems after it acquired Signature Bank, due to a need to raise capital to cover stressed commercial real-estate loans and meet the higher regulatory threshold of being a larger bank.

Also read: New York Community Bancorp's stock crushed on surprise loss, dividend cut and cost of two loans

Just this week, S&P Global Ratings issued a negative outlook on five U.S. regional banks facing an increased challenge from higher office vacancies, as well as an increasing number of loan maturities on the horizon.

Also read: S&P issues negative outlook on five U.S. regional banks due to risky office space exposure

"Regional banks are being squeezed," Bair said. "They're having to fight to keep their uninsured deposits or having to pay up. This is a problem with the distortion of the too-big-to-fail perception which we haven't teased out of the system. Nobody thinks JP Morgan Chase is going to go down or Citi or BofA. They're all assuming the government is going to bail them out no matter what."

The U.S. should avoid a banking system that's even more dominated by the megabanks, Bair said.

"If we ignore these problems, the regional sector is going to shrink," Bair said. "A lot of them may not survive-even healthy ones. I do think this requires an urgent focus and priority and again it just seems to me like the policy response is going in the opposite direction."

Regional banks remain important providers of financial services for small and medium-sized business, local government and nonprofits. Some of the bigger regional banks offer a source of healthy competition with the largest banks.

"If they fade away, the options are going to be go to the megabanks which are probably going to be more expensive-they're gonna give less personal attention," Bair said.

Meanwhile, community banks are more secure in some ways than larger regional banks because they rely less on uninsured deposits on their balance sheets, she said.

Bair, who is registered as a Republican, currently serves on the boards of the boards of Bunge Ltd. (BG) and The Lion Electric Co. (LEV).

She is also senior adviser to the CFA Institute Systemic Risk Council, a private sector, non-partisan group formed by the CFA Institute and The Pew Charitable Trusts.

Bair made her comments on Wednesday at the Peterson Institute for International Economics during the presentation entitled, "The future structure of the U.S. banking sector."

Last week, the FDIC issued a 93-page proposal to provide for closer scrutiny of deal-making by banks with more than $100 billion in assets and for the incorporation of forward-looking assessments of community impact, competition and other factors. It would also likely result in more public hearings on merger applications.

The planned rule changes come at a time when banks are facing pressure to merge as a way to handle exposure to office-space loans and other industry headwinds.

From 2023: Flagstar Bank to take over most of Signature Bank's deposits, FDIC says

-Steve Gelsi

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03-29-24 0949ET

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