But what will be far more important for the future shape of the banking industry is technology. The biggest banks, which make the most profits, are already investing heavily in digital applications that are faster, cheaper, and easier to use than smaller banks can afford. Technology is helping big banks gain market share and is likely to drive consolidation in the coming years more than regional bank mergers. On the Republican side, one of the concerns for the future has been that the Fed’s new Vice Chair of Supervision, Michael Barr, will do so. Capital demands increase as it aligns US rules with global standards. Jamie Dimon, CEO of JPMorgan Chase & Co., and Jane Fraser of Citigroup – swayed by the recent increase in capital requirements – flagged ahead of the hearings, saying the increased demand would hurt lending to the US economy. The CEOs reiterated the message to the committees. JPMorgan said it is holding back loan growth as it builds more capital, although the bank did not say what types of loans or specify the impact, but capital concerns are a hoax. The Fed, like European regulators before it, will likely aim to have a neutral influence on the capital needs of large banks after any rule changes, according to Bloomberg Intelligence. Barr could have an even more chilling effect on regional bank mergers, as he pledged to protect competition and is considering new guidance on which 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 many are too young to compete in a world where the fixed costs of regulation and reporting are high, and where technology races away from those who can’t afford to spend billions each year.
For example, JPMorgan’s investment budget for technology and growth in retail and small business banking this year is $7.5 billion. That’s greater than the 2021 returns for all but nine of the banks in the S&P 500. NA Brian Moynihan, CEO of Bank of America Corp., told the House Financial Services Committee on Wednesday that Trust Financial Corp. was a stronger competitor now than any of the banks that merged to form it three years ago was single.
Like JPMorgan, Bank of America is a big investor in digital technology and both are winning a disproportionate share of growth in deposits as a result, according to Mike Mayo, an analyst at Wells Fargo.
Both banks have about $1 trillion in consumer deposits, and JPMorgan has grown its market share nationwide from 8.9% to 10.3% between 2017 and 2021. Its share is larger and has grown the most in the US states where it has operated for the longest time. Dimon has said there is no reason why he can’t reach 20% of the US market one day. Both banks also have a high and growing share of customers joining them digitally rather than through a branch, and Mayo estimates that both banks have increased total deposits over the past two years by an amount equal to their sixth year’s total deposit base. The largest American bank. Mayo said the proposed new law to limit regional banking deals “may also be called the Jimmy Dimon Protection Act.”
Banking is increasingly becoming a game at scale as the largest players are better able to absorb higher fixed costs and generate the best returns. A feature that generates an advantage where profits can be invested back into making services cheaper and continuing to build smarter technology that customers want to use.
In areas such as stock and bond trading, the largest US banks have already raced against weaker European competitors. The same dynamic is coming to corporate and consumer banking — you probably don’t reach the same levels of industry focus, but you’d better believe that JPMorgan and Bank of America, for example, will be much bigger tomorrow than they are today.
If politicians and regulators want to worry about market power and financial stability, they shouldn’t prevent mergers or even worry too much about capital levels – they should think about the power of technology. You’ll Never Have an Easy Life: Paul J. Davis, Real Stress, Hurts Bank Repurchases More Than a Test: Paul J. Davis, Apple, J.P. Morgan, Head to Pay Now, Grow Later: Paul J. Davis
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Paul J. Davies is a columnist for Bloomberg Opinion covering banking and finance. Previously, he worked as a reporter for the Wall Street Journal and the Financial Times.
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