William Demchak is stuck in the middle. The boss of America’s sixth-biggest bank, he enjoys neither the heft of the largest lenders nor the political patronage of the smallest.
It’s not for want of trying. His bank, PNC Financial Services Group Inc., operates a network of nearly 2,300 branches and sits on over half a trillion dollars of assets. And as fast as he wins new business, he’s unable to keep pace with his two largest competitors. Over the past 10 years, JPMorgan Chase & Co and Bank of America Corp. have increased their combined retail deposit share by a quarter to 20.3%. Meanwhile, Demchak’s has barely budged at 3%.
Yet because of his bank’s size, policymakers are sour on him doing deals. Last month, the Federal Deposit Insurance Corporation issued a proposed statement of policy that puts mergers involving banks with assets over $100 billion under greater scrutiny. “By codifying this, boards of directors and management at large firms can understand that the likelihood of approval of megamergers will be low,” commented Rohit Chopra, director of the Consumer Financial Protection Bureau. Another regulator, the Office of the Comptroller of the Currency, proposes an even lower threshold of $50 billion, above which merger applications may not get ready approval.
PNC got to where it is through acquisition, so, if enacted, these rules would be especially punitive. Over three decades, it has completed at least 65 acquisitions, most recently its 2021 purchase of BBVA USA, the Birmingham, Alabama-based subsidiary of Spain’s Banco Bilbao Vizcaya Argentaria SA. It rescued two banks from collapse – Riggs National Corp. in 2005 and National City Corp. in 2008 – and lost out on picking up significant parts of both Silicon Valley Bank and First Republic Bank after they failed in early 2023.
No surprise then that Demchak is pushing back. Last week, he fired off a letter complaining that the regulator’s proposal “would only serve to further accelerate the unhealthy consolidation at the very top of the banking industry by allowing the biggest banking organizations to continue to grow unchecked.”
He makes a compelling point. Scale lavishes increasing competitive advantage on banks and if the market is frozen in its current structure, those benefits will accrue to JPMorgan and Bank of America. Already over the past four years, they have grown assets by more than the total size of PNC and two similarly sized peers combined.
There are a number of reasons why scale matters. First, it helps accelerate deposit market share since customers value size, especially during times of stress. Demchak’s letter calculates that the largest US banking organizations capture deposits and market share through branches at a rate roughly twice that of their next level competitors.
Scale also funds necessary investments in technology and compliance. According to Barclays Plc research analysts, the four largest US global systemically important banks (which include Citigroup Inc. and Goldman Sachs Group Inc. alongside JPMorgan and Bank of America) anticipate investing $44 billion in their technology platforms in 2024, outpacing the total investment of the next 20 largest banks combined by $7 billion.
Finally, scale funds investments in marketing, perpetuating the divergence in growth. In 2023, the two largest US banks booked $6.5 billion in marketing spend; PNC spent just $350 million.
Although big by absolute standards, PNC and its closest peers haven’t reached the optimal size to extract such economies of scale and, without acquisitions, they risk falling short of the requisite tipping point.
Policymakers are under pressure to protect the long tail of the thousands of smaller US banks, hence their distaste for further consolidation. “In 1990, the top 10 banks controlled 15% of banking sector assets,” said Chopra in a speech last month. “Today, they control 53%. This consolidation has eradicated many small and mid-sized relationship banks.” They worry about a market structure with just a handful of very large banks, “like in Europe and China.”
But small and mid-sized banks don’t present a challenge to the largest banks in a market where scale is increasingly important – only other large banks do. By purporting to help small players, regulators may end up helping the very largest more. The response should be to promote the creation of challengers by allowing large banks to consolidate.
Demchak is ready. “Longer-term, we are a natural player in the consolidation of an industry where scale matters,” he told shareholders in January. Policymakers should ease his path.
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