Top Justice Department antitrust lawyers are weighing a revamp of how they scrutinize bank mergers, complicating further consolidation for an industry that’s facing some of its biggest challenges since the financial crisis.

Four banks have collapsed this year and regulators are seeking to thread a difficult needle. Although U.S. officials have said they’re going to maintain a tough line, there has been significant consolidation – including the purchase of First Republic Bank by JPMorgan Chase, which was already the biggest American lender.

President Biden has made more competition a key policy priority of the administration, but banks have largely avoided antitrust scrutiny. The U.S. last issued guidance on bank deals in 1995.

On Tuesday, the Justice Department’s antitrust chief, Jonathan Kanter, outlined how the Justice Department plans to revamp bank merger reviews at an event in Washington on the 60th anniversary of a landmark case confirming the authority of antitrust lawyers to police the industry.

“Bank competition is essential,” Kanter said. The Justice Department “is modernizing its approach to investigating and reporting on the full range of competitive factors involved in a bank merger to ensure that we are taking into account today’s market realities and the many dimensions of competition in the modern banking sector.”

The Justice Department and banking regulators, including the Federal Reserve, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., all examine deals. Justice Department antitrust lawyers focus on competition, while the other agencies examine issues such as how a merger impacts the safety and soundness of the banking system.

In examining mergers, the Justice Department will look at how a proposed deal impacts different customer segments and move beyond the traditional look at deposit concentration to examine fees, interest rates, branch locations, product variety, network effects, interoperability, and customer service, Kanter said.

The Justice Department is especially interested in how large, incumbent banks respond to disruptive threats such as fintechs, he said.

Twenty-eight bank deals were announced in the first four months of 2023, less than half of the total announced in the same period a year earlier, according to S&P Global Market Intelligence. But S&P and other banking analysts expect that to tick up as small and medium-sized banks seek to repair their stock prices.

Treasury Secretary Janet Yellen and Acting Comptroller of the Currency Michael Hsu have both made public statements generally supportive of increased merger activity among banks.

CALLS FOR MORE SCRUTINY

Although the Fed already prevents Wall Street giants from combinations, Democratic lawmakers have been arguing that more scrutiny is needed for regional banks.

Concerns about a lax bank merger regime aren’t solely a product of the recent banking crisis. For the past several years, regulators have been thinking about how to modernize industry reviews.

In late 2020, the Justice Department under President Donald Trump sought public comments on the bank merger process with an eye toward taking a lighter approach. The Justice Department under Biden again asked for public input in February 2022.

Critics argue that regulators are too focused on how a deal impacts the share of deposits and don’t consider how mergers affect other activities, like mortgages or small business loans. There are also complaints that there’s been insufficient consideration of consumer issues in light of research that indicates mergers tend to increase fees and reduce customer service.

BAD DEALS

Commissioners at the FDIC also have been trying to request public comment on its merger review policies since Biden’s July 2021 executive order directing agencies to seek ways to boost competition in industries they supervise.

The efforts initially sought to see regulators take a tougher stance on banks, boost competition, and tackle thorny issues including community lending rules, climate change and cryptocurrencies.

The push led to a power struggle that saw the Republican FDIC chair resign from her post.

Now, the FDIC and other agencies seem to be changing their stance.

The implosions this year of crypto-friendly lender Silvergate Capital and regional banks Silicon Valley Bank and Signature Bank came on the heels of a bank-deal boom. The year 2021 marked a 15-year high in bank deals, according to advisory firm Deloitte, as smaller banks sought to take advantage of a Trump-era regulatory rollback and bulk up to better position themselves to compete against the biggest banks.

Regulators are concerned that some of those deals may have contributed to weaknesses in the banking system. The Federal Reserve’s report on the SVB collapse, for example, noted that regulators okayed SVB’s $900 million merger with Boston Private Financial Holdings in 2021 and concluded the deal wouldn’t raise concerns about the financial stability of the U.S. But they didn’t ensure that SVB had a plan to comply with the more stringent requirements required of large banks, nor did the Fed have a strategy for greater supervision.