2021 is in the books…another eventful year on so many different fronts. For financial institutions, it was a year in flux, with various governmental appointments taking on new importance in the day-to-day life of banks. Below, we have shared our top five takeaways from 2021 and what to expect in 2022.
1. M&A is a big question mark. The bank merger market was very active in 2021, including some very large transactions involving the pending sales of Bank of the West and MUFG Union Bank. Community and regional banks tied the knot in order to realize efficiencies of scale and to better compete with other banks and fintechs. But a few big question marks were thrown into what otherwise has been relatively smooth sailing for mergers. On July 9, 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy. Included within the order is a sweeping recommendation that the Attorney General, in consultation with the heads of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, review current practices and adopt a plan within 180 days for the “revitalization” of bank merger oversight to provide more extensive scrutiny of mergers. In his companion comments to the executive order, the President noted that the United States has lost, over the past four decades, 70% of the banks that once populated the country and that federal agencies have not formally denied a bank merger application in more than 15 years. In addition, he cited increased costs for consumers, restrictions on credit access and harm to lower-income communities as direct by-products of bank consolidation. This effort, coupled with the departure of Jelena McWilliams following attempts by Democratic members of the Board of the FDIC to force review of the Bank Merger Act, means that at the very least large bank mergers face real risks of not being approved in a timely fashion. Whether this possibility will trickle down to smaller acquisitions is an open question. At the community bank level, higher interest rates should improve margins and enhance stock prices to be used as currency in acquisitions.
2. The market for debt will not be as warm in 2022. While low interest rates have been attractive to many banks and bank holding companies to take on debt as “just in case” capital to cushion their overall capital levels, rising interest rates coupled with the fact that most issuers who have needed any capital cushion have already tapped the debt market (and primarily subordinated debt) means that the market for debt will not be as hot in 2022 as it was in 2021. Look for more common equity capital raises in 2022 but at slower levels than we have seen in the debt market.
3. Fintech partnerships with banks will continue to grow. We anticipate continued enhancements in bank/fintech partnerships in the coming year as well as some inevitable crowding in the fintech field, with fintechs looking to scale in any way possible. Lots of chatter about whether or not we are in a tech “bubble” could drive banks and certain established fintechs closer, as both look for concrete business models with proven management teams. Fintechs will also have their own challenges in gaining bank charters as a result of leadership changes at bank regulatory agencies, including the Office of the Comptroller of the Currency, where a renewed focus on safety and soundness may discourage risk-taking.
4. The great resignation may enhance board quality. Much has been written about how COVID-19 has brought the “great resignation”—employees moving on to new jobs or leaving the workforce altogether. While potentially disruptive for employers, high-quality employees with more time on their hands can provide a wealth of experience in boardrooms, where unique skill sets are highly valued and more important than ever before. Community bank boardrooms likely will no longer be comprised exclusively of owners of local businesses—rather, boards should bring on experts with diverse views, ages and experiences in technology, data privacy, finance, economics, human resources and capital management, in addition to traditional areas of expertise. Different voices enhance the depth of boardroom conversations and ultimately lead to better-managed institutions, which enhances shareholder value.
5. Investing in talent. Last year we wrote that the pandemic has taught us that the right talent excels even in the most challenging of circumstances. People who are able to adapt and find new opportunities to drive growth even in unprecedented times are critical to an institution’s stability, success and growth. This reality was further bolstered by the ongoing dislocation caused by COVID-19 and the “two steps forward, one step back” feeling we all have as we further adapt through challenging times. Financial institutions need to spend resources not only to acquire the right talent, but also to continue to develop that talent so it prospers in times of crisis and in times of change. This kind of training involves more than pure subject-matter expertise. One of the lessons behind the great resignation may not only be that people are moving from one job to another or resigning, but that people may well be coming back into the workforce after an extended break. Employers should look favorably on these potential hires as rejuvenated employees, many of whom will be older, wiser and more dynamic contributors to a company’s culture. These mid-career and senior talent professionals who have lived through the ups and downs of prior economic cycles and have been shaped by more personal experiences that only age can bring may be among the best resources.