Mega-bank status weighs on U.S. banking’s B-team

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A Wall Street subway stop sign is seen in New York October 10, 2008. REUTERS/Shannon Stapleton

NEW YORK, Sept 26 (Reuters Breakingviews) - Elevation leads to aggravation. U.S. banks operating in the shadows of JPMorgan (JPM.N) and Wells Fargo (WFC.N) are increasingly being regarded by authorities as more like their larger rivals. The perception could lead to annoyance for them and less effective competition.

The bosses of PNC Financial Services (PNC.N) , Truist Financial (TFC.N) and U.S. Bancorp (USB.N) joined jumbo-size counterparts on Capitol Hill for a grilling last week, their first appearance as what Congress terms mega-banks. The term doesn’t quite fit. While all three have grown briskly, their $1.7 trillion in combined assets are only half those of Bank of America (BAC.N). They’re also simpler than their trading-heavy competitors. Weighed on systemic significance, U.S Bancorp is around one-eighth as risky as JPMorgan, according to a U.S. Treasury analysis.

Mega-bank is more than just a political slur, though. The Federal Reserve and the Office of the Comptroller of the Currency are considering tougher rules for so-called super-regional banks to make a potential failure easier to manage. One option is to make them issue more long-term debt so that if a lender fails, there are investors who can be forced to convert their holdings into equity.

The super-regionals, however, already draft so-called living wills outlining how they could be safely dismantled in a crisis. They are also much simpler than their bigger rivals, lacking international networks and complex trading businesses. PNC boss Bill Demchak noted that his office is on Fifth Avenue, but the one in Pittsburgh, not Manhattan.

Yet because junior mega-banks fund a greater share of their business from cheap deposits than their bigger brethren, raising long-term debt would cause financial disruption too. Fitch Ratings reckons PNC, for example, might need to raise $20 billion. Assuming a 5% coupon, it could cost $1 billion a year, equivalent after tax to more than 10% of the bank’s bottom line. A lender might try to absorb that by reshuffling its investments, reducing debt elsewhere, or even making riskier loans to offset lost profit.

The regulatory plan also is half-baked if the idea is to make the financial system more competitive. Watchdogs say they fear a scenario where, say, U.S. Bancorp fails and needs to be absorbed by JPMorgan, making the biggest banks even bigger. That would be a bad outcome. A better way to keep mega-banks in check is to allow their smaller rivals to grow larger.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

The chief executives of PNC Financial Services, Truist Financial and U.S. Bancorp testified in congressional hearings on Sept. 21 and Sept. 22 alongside their counterparts at larger U.S. banks, marking their first collective appearance on behalf of what the Senate and House panels dubbed mega-banks.

PNC CEO Bill Demchak and U.S. Bancorp CEO Andy Cecere had not previously appeared in front of Congress alongside the larger lenders. Truist boss Bill Rogers was grilled by politicians when the bank he ran, SunTrust, merged with rival BB&T in 2019.

Regulators including the Federal Reserve and Office of the Comptroller of the Currency, both of which help oversee large lenders, have mooted the idea of subjecting large regional banks to more stringent capital rules similar to those applied to bigger banks, including JPMorgan and Bank of America.

Demchak argued on Sept. 22 that doing so would divert funds to “crowd out other financings that are needed in the market” and lead to “funds being used for something other than supporting our economy.”

Editing by Jeffrey Goldfarb, Peter Thal Larsen and Amanda Gomez

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