US megabanks are being asked the wrong questions

US regulators and some politicians seem not to know the true history of US banks. The merger freeze and rising capital charges were the top financial questions put to the CEOs of seven US megabanks by congressional committees this week, when financial issues were still being heard amid the most overtly political grills.

But what will be far more important to the future shape of the banking sector is technology. The largest, highest-earning banks are already investing far more in digital apps that are faster, cheaper, and easier to use than smaller banks can afford. The technology is helping large banks gain market share and are more likely to drive consolidation in the years to come than regional bank mergers. On the Republican side, a concern for the future was that the new Federal Reserve Vice President, Michael Barr, will increase capital demands while aligning US rules with global standards. Jamie Dimon, JPMorgan Chase & Co. Citigroup Inc. CEO and Jane Fraser, angered by recent capital increases, put a sign ahead of the hearings, saying rising demands would hurt loans to the US economy. The CEOs repeated the message in front of the committees. JPMorgan said it is holding back loan growth as it builds more capital, although the bank hasn’t said what types of loans or quantified the impact. But capital concerns are a red herring. According to Bloomberg Intelligence, the Fed, like European regulators before it, will likely aim to have a neutral effect on the capital needs of big banks 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 indications on which deals will be allowed.

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

For example, JPMorgan’s investment budget for technology and growth in consumer and small business banking this year is $ 7.5 billion. It is higher than the 2021 revenue of all but nine banks in the S&P 500. Of that investment, $ 2.8 billion is solely for technology, which is roughly the same as the income of three S&P 500 banks: Signature Bank, Comerica Inc and Zions Bancorp NA. Brian Moynihan, CEO of Bank of America Corp, told the House Financial Services Commission Wednesday that Truist Financial Corp was a stronger competitor now than the two banks that merged to form it three years ago had been individually.

Like JPMorgan, Bank of America is a large investor in digital technology and as a result both have gotten a disproportionate share of deposit growth, according to Wells Fargo analyst Mike Mayo.

Both banks have around $ 1 trillion in consumer deposits, and JPMorgan increased its market share nationwide from 8.9% to 10.3% between 2017 and 2021. Its share is larger and has grown more in the United States where it has been operating for the longest time. And Dimon said there’s no reason why he can’t one day reach 20% of the US market. Both banks also have a high and growing share of customers joining them digitally rather than via a branch. Mayo estimates that the two banks have increased total deposits over the past two years by an amount equivalent to the sixth largest US bank’s total deposit base. The proposed new law to restrict regional banking deals “could also be called the Protect Jamie Dimon Act,” Mayo said.

Banking is increasingly a game on a scale where the biggest players are better able to absorb high fixed costs and generate the best returns. Advantage generates advantage as profits can be reinvested to make services cheaper and continue to build smarter technology that customers want to use.

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

If politicians and regulators want to worry about market power and financial stability, they shouldn’t block mergers or even worry so much about capital levels, they should think about the power of technology. Will Never Have An Easy Life: Paul J. Davies Real Stress Hurtes Bank Repurchases More Than A Test: Paul J. Davies Apple, JPMorgan Move on to Pay Now Grow Later: Paul J. Davies

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This column does not necessarily reflect the opinion of the editors 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.

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