The U.S. Federal Reserve’s board should consider relaxing bank merger guidelines focused on branch concentration, last updated in 1995, to take into account competition from financial technology companies, Michelle Bowman, a Federal Reserve Board governor, said on Wednesday.
Major banks such as JPMorgan Chase & Co. JPM,
and Bank of America Corp. BAC,
have adjusted their businesses to meet threats from fintech rivals, Bowman said, but the Federal Reserve has used the same framework to evaluate competition for the past 27 years.
“We need to capture these detailed competitive effects across different geographic and product markets,” said Bowman, who heads the Fed’s bank competition efforts. “One way to do this is to relax deposit market-based [bank-concentration] thresholds in current bank merger guidelines to reflect the increased competitive leverage banks face from non-banks today.”
See: Bank of England actions have no immediate implications for Fed policy, analyst says
Bowman did not provide a timeline for the proposed changes, but she noted the need to update the Herfindahl-Hirschman Index thresholds that the central bank uses to determine market competitiveness when banks propose a merger.
Typically, when banks merge, the Fed will consider the number of branches the combined business will have in the banks’ respective communities. If concentration is too high, regulators may encourage banks to sell some branches to protect competition and stave off the potential for higher fees and fewer choices for consumers in a given area.
But fintech challengers have given consumers alternative delivery channels for “the cluster of banking products and services they want,” Bowman said, and the Fed must take appropriate steps to “understand the competitive pressures they exert and modernize our approaches to measuring the competition.”
Also read: Fintech company Ocrolu’s co-authors are studying how automation can reduce bias in lending
The Fed’s current framework aims to promote a competitive marketplace for
banking products and services, but if it doesn’t take into account all competitors, “we’re just constraining banks from making strategic merger choices while allowing outsiders to proliferate,” Bowman said
Bowman’s remarks came in her speech Wednesday at the annual Community Banking Research Conference, which takes place 28-29. September.
Although the Fed’s bank merger guidelines regarding branch concentration have not been revised since 1995, bank regulators are working on a major overhaul of the Community Reinvestment Act, which was passed by Congress in 1977 and last updated in the 1990s.
Also read: Can an attempt to revamp anti-redlining lending laws survive the swamp?
