By Patrick Sims, (202) 822-1205,

Merger activity in the banking sector faces a fundamental tension in the years to come: new regulation has made efficiency gains from mergers more attractive; and at the same time, regulatory scrutiny of mergers has increased, especially for larger firms. The implication of this dynamic is that firms that are better able to navigate public scrutiny and the regulatory approval process for mergers will be at a strategic advantage versus their competitors.

We expect an increase in mergers due to incentives in economies of scale and increased regulation:

  • Operating efficiency and profitability favor large firms by 49 and 75 percent, respectively.
  • Increased regulation disproportionately hurts smaller firms, as they have historically seen higher compliance costs than their larger peers.
  • Consolidation will continue on its historical trend, as there were over 7,500 FDIC-regulated banks as of 2011, compared to roughly 9,700 just 10 years prior.

We expect that it will be harder for large firms to merge:

  • U.S. banking markets have become more concentrated since the financial crisis of 2008, with the top 5 firms gaining 17 percentage points in market share since the crisis.
  • New scrutiny surrounding too-big-to-fail (TBTF) and systemically important financial institutions (SIFIs) have brought about new rules associated with the merger process.
  • In addition, TBTF and SIFI concerns have added to the public fear of bigness.
  • In 2011, merger targets with assets of greater than $10 billion took 74.2 days longer to close than for targets with assets less than $1 billion.

This report provides additional insight detailing the HPS framework for establishing a regulatory competitive advantage:

Patrick Sims is a senior analyst at Hamilton Place Strategies. Prior to joining HPS, Patrick acted as a lead research analyst in the financial institutions’ group at SNL Financial and worked for CFA Institute. He is a finance and international business graduate of James Madison University and studied EU Policy at the University of Salamanca, Spain.

HPS Mergers Ahead