Is the Joe Biden-era blockade on US bank mergers and acquisitions finally over?

Bank investors and advisers are preparing for a new era of consolidation among smaller U.S. lenders that could help them fend off Wall Street giants.

The day after Donald Trump’s election victory, the KBW major and regional bank indexes each rose more than 10 percent, the strongest gain in four years and one that outpaced the 3 percent rise of the tech-heavy Nasdaq.

While shares of some banks such as Goldman Sachs have risen in anticipation of higher advisory fees and looser capital rules, the possibility of a more liberal stance on mergers has pushed up shares of small and medium-sized lenders.

One banking deal has already been struck: Old National Bancorp, a regional lender in Illinois and Indiana with $54 billion in assets, agreed late last month to buy Midwest group Bremer Financial for $1.4 billion to.

“It’s clear that the ‘Do Not Enter’ sign that preceded bank mergers has been removed,” said Bill Burgess, co-head of investment banking at boutique investment bank Piper Sandler.

“This is particularly true for smaller banks, where there are currently far more sellers than buyers, but all systems are geared towards revitalizing business.”

Although the number of U.S. banks peaked at over 14,000 in the 1980s and is steadily declining, there are still more than 4,000, the vast majority of which are local minnows with a few billion dollars in assets.

Investors believe these smaller banks could be ripe for consolidation as they are caught between rising regulatory and technology costs and the relentless advance of JPMorgan Chase’s asset-gathering machine.

“I’m pretty confident that consolidation in the regional banking sector over the next two to three years will reduce the number of banks from 4,500 today to 1,000 to 2,000,” Bob Diamond, the former deal-making CEO of Barclays, said on Tuesday at the Financial Times Global Banking Summit in London.

His current company, Atlas Merchant Capital, plans to invest in middle-market banks that are short on capital after suffering paper losses on securities or loan portfolios due to faster-than-expected interest rate increases.

Atlas planned to “provide enough equity capital to acquire one, two or three smaller private community banks where the synergies are immediate” because regulatory and technology costs could be shared, Diamond said.

Dealmakers are optimistic that Trump’s nominees to lead banking regulators will take a more relaxed approach to industry consolidation than the Biden administration.

Those proposals haven’t been mentioned yet, but the Republican’s initial choices for other financial and competition watchdogs are sending mixed signals. Incoming Securities and Exchange Commission Chairman Paul Atkins has strong libertarian leanings, but Gail Slater, chosen to lead antitrust at the Justice Department, is considered anti-competition.

Under Joe Biden’s administration, consolidation slowed to a minimum, hampered by regulators critical of corporate mergers. As of the end of September, 507 bank mergers had been completed during his presidency, 44 percent fewer than during Trump’s first term, according to data from S&P Global.

The average time to close a deal has also risen steadily under Biden, reaching a peak of about six months in 2024. In comparison, the peak under Trump was less than five months.

Larger deals worth more than $500 million closed more slowly under Biden, taking nearly 10 months on average, compared with six months under Trump, S&P data showed.

Regulators are examining one of the largest bank mergers in the last 15 years: Capital One’s proposed acquisition of Discover Financial. Since Trump’s victory, Discover’s stock price has risen 20 percent, a sign that the market believes the deal is more likely to close under his administration.

The slow pace of deal approval has had a disincentive effect for banks to move forward with some potential mergers, dealmakers said.

“You had to add it as an element of risk before you decided to merge your companies,” said Tom Michaud, chief executive of investment bank Keefe, Bruyette & Woods.

Nor was last year’s regional banking crisis, which followed the collapse of Silicon Valley Bank, the trigger for mergers that some had predicted. There were 112 U.S. banking deals completed in 2023 and just 71 completed this year, the lowest level since the turn of the century.

Mid-sized banks with hundreds of billions of dollars in assets complain about their difficulty striking deals to scale up and better compete with the biggest players like JPMorgan and Bank of America, which benefit from their size and must absorb increasing regulatory burdens -, compliance and technology costs.

In a letter to regulators this year, PNC CEO Bill Demchak argued that proposed rules for bank mergers would further promote the dominance of the industry’s biggest players, such as JPMorgan and BofA. Pittsburgh-based PNC has more than $420 billion in deposits, making it the sixth-largest bank in the country by deposits. However, it falls well short of JPMorgan’s $2.4 billion in deposits.

KBW’s Michaud said: “There is a real push to merge because of the scale implications, for lack of a better phrase.”

But despite the prospect of more lenient regulators, some of the country’s thousands of banks are reluctant to sell. There is renewed optimism about banks’ operations as interest rates may remain high for longer, and hopes for fewer new rules from a second Trump administration.

Part of the reluctance is because bosses fear they will appear to be abandoning their cities, where banks are often pillars of their communities as major employers and patrons that sponsor local parades and sports teams.

In one of the industry’s cautionary tales, the Philadelphia Inquirer called Terrence Larsen a CEO who “took the money and ran” and “made Philadelphia poorer” when he sold CoreStates for $17 billion in 1998.

A senior investment banker said, “If you’re a bank in Pittsburgh, Minneapolis or Cleveland, having the bank leave that city and sell is traumatic for those communities, and the CEOs of those banks know that.”

Bankers warned that stock market investors might be too presumptuous about how aggressive banks would be, even with lenient regulators.

Anu Aiyengar, global head of advisory and M&A at JPMorgan, said: “Stock markets are most enthusiastic about how life has changed (since Trump won). Banks tend to be more conservative by definition. In banking land, no one is jumping around yet saying, let’s go in (for mergers).”

M&A advisers warn that the new Republican administration is pursuing a strongly populist agenda that opposes mega-deals that could harm consumers.

Mitch Eitel, managing partner of Sullivan & Cromwell’s financial services group, said: “I think there will be a policy change that will enable deals.” But I think antitrust still remains a bit of a question mark because we don’t know , where this leads.”

“While a Trump administration is likely to be pro-business, it is also likely to be populist on antitrust enforcement and distrust of big banks,” he said.

Larger banks with pending regulatory issues may also have a harder time buying rivals under a more lenient Trump administration – nearly two-thirds of U.S. banks with more than $100 billion in assets had “unsatisfactory” controls in place, according to the Federal Reserve at least one supervisory area, which also includes combating money laundering and compliance.

“We view this as an indication that bank mergers and acquisitions may remain challenging next year, even after Donald Trump becomes president,” Jaret Seiberg, financial analyst at TD Cowen, wrote in a note to clients last month.

There may continue to be a gap between the expectations of potential buyers and sellers, particularly given the lack of certainty about the direction of US interest rates.

“Most banks view themselves as buyers,” said John Esposito, who leads the financial institutions group at Morgan Stanley. “And we need sellers to stimulate the M&A market again.”

Esposito added: “It’s a cautious optimism from bank customers about mergers and acquisitions.” Things should be better under Trump. If we could figure out the discrepancy between buyers and sellers, that would be helpful.”

Additional reporting by Stephen Gandel and Brooke Masters