US megabanks are being asked the wrong questions

US regulators and some politicians seem to be missing the real story of US banking. Stalling mergers and increasing capital charges were the top financial questions posed to the CEOs of seven US megabanks by congressional committees this week – when the financial questions were heard amid the most naked political grilling in all. way.

But what will be far more important to the future shape of banking is technology. The biggest banks, with the biggest profits, are already investing far more in faster, cheaper and easier-to-use digital apps than smaller banks can afford. Technology is helping big banks gain market share and is more likely to drive consolidation in the coming years than regional bank mergers. On the Republican side, a concern for the future was that the Federal Reserve’s new vice chairman for oversight, Michael Barr, would increase demands for capital as he aligns US rules with global standards. Jamie Dimon, CEO of JPMorgan Chase & Co., and Jane Fraser of Citigroup Inc. – prompted by recent increases in capital requirements – put a marker ahead of the hearings, saying the rising demands would hurt lending to the US economy . CEOs repeated the message to committees. JPMorgan said it was dampening loan growth while it accumulated more capital, although the bank did not specify what types of loans or quantify the impact. But fears about capital are a red herring. 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, according to Bloomberg Intelligence. Barr could have a more chilling effect on regional bank mergers, where he has pledged to protect competition and is considering new guidelines on what transactions 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’s not when so many are too small to compete in a world where the fixed costs of regulation and reporting are high and technology is moving away from those who cannot afford to spend billions each year.

For example, JPMorgan’s capital budget for technology and growth in retail and small business banking this year is $7.5 billion. That’s more than the 2021 revenue of all but nine S&P 500 banks. Of that investment, $2.8 billion is purely for technology, which is roughly the same as the revenue 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 Committee on Wednesday that Truist Financial Corp was now a stronger competitor than either of the banks that merged to form it three years ago. years had not been individually.

Like JPMorgan, Bank of America is a big investor in digital technology and the two have thus won a disproportionate share of deposit growth, according to Wells Fargo analyst Mike Mayo.

The two banks hold approximately $1 trillion in consumer deposits, and JPMorgan grew its market share nationally from 8.9% to 10.3% between 2017 and 2021. Its share is larger and has grown more in the US states where it has operated the longest. And Dimon said there’s no reason he can’t reach 20% of the US market one day. Both banks also have a high and growing share of customers who reach them digitally rather than through a branch. Mayo estimates that the two banks have increased total deposits over the past two years by an amount equivalent to the total deposit base of the sixth-largest US bank. The proposed new law to limit regional banking transactions “might as well be called the Protect Jamie Dimon Act,” Mayo said.

Banking is increasingly a game of scale where the biggest players are the most capable of absorbing high fixed costs and generating the best returns. Benefit breeds benefit, as profits can be reinvested to make services cheaper and continue to develop smarter technology that customers want to use.

In areas such as stock and bond trading, the biggest US banks have already outpaced their weaker European rivals. The same dynamic is taking hold in corporate and consumer banking – perhaps not quite at the same levels of industry concentration, but you better believe that JPMorgan and Bank of America, for example, will much bigger tomorrow than today.

If politicians and regulators want to worry about market power and financial stability, they shouldn’t be blocking mergers or even worrying so much about capital levels – they should be thinking about the power of technology. I’ll Never Have an Easy Life: Paul J. Davies Real Stress Hurts Bank Takeovers More Than a Test: Paul J. DaviesApple, JPMorgan Pay Now, Grow Later: Paul J. Davies

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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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