Bob Diamond, founding partner and CEO at Atlas Merchant Capital, London, characterizes the U.S. banking industry as being on the brink of a major transformation, with the number of financial institutions expected to decline significantly over the next few years. Diamond predicted this sea change—from approximately 4,000 institutions to 1,000–2,000.
The Economic Pressures Influencing Bank Consolidations
Diamond cites the drivers of the shift, seeing them as not just reactions to past crises but as a necessary evolution driven by:
- Economic forces
- Regulatory changes
- Competitive pressures
According to Diamond, the failures of Silicon Valley Bank (SVB) and First Republic in 2023 were catalysts but not the primary cause of consolidation. “The real issue is that many of the smaller community banks, which have been pillars of their local economies, are simply too small to succeed in today’s environment,” he explains. Rising technology costs and stricter bank regulatory requirements have made it increasingly difficult for these institutions to remain viable. “The smaller private institutions will need to merge with stronger regional banks in order to survive,” he asserts.
The Push for Cost-Cutting
Much of this movement is about reducing costs, Diamond emphasizes. “If cost reduction is the goal, then we’re likely to see many in-state or neighboring-state mergers.” The duplication of functions such as technology investments, compliance departments, and regulatory relations makes consolidation a logical next step. “For banks struggling to get their return on equity (ROE) above zero (let alone 10–15 percent), merging offers a direct path to improving profitability,” he explains.
While bank executives have historically resisted selling at valuations below their expectations, Diamond sees a shift in mindset. “People are much more willing to focus on the future,” he observes. “If merging allows these banks to better serve their middle-market, small-business, and family-office clients while cutting redundant costs, it makes sense.”
Regulatory Incentives for Bank Consolidation
The regulatory climate is another factor shaping the future of bank consolidation.
Diamond acknowledges that under the Biden administration, particularly with SEC Chairman Gary Gensler at the helm, regulatory approvals for bank mergers were largely stagnant. “That’s going to change,” he asserts, predicting a more constructive approach from regulators moving forward.
From a regulatory perspective, the incentives for consolidation are clear. “Do regulators want more capital in the banking system? Of course,” Diamond declares. With institutions ready to invest in these combinations, he believes that consolidation will ultimately be viewed as a win-win for both banks and policymakers.
The Evolving Competitive Landscape of Banking
Private Asset Managers
The rise of private asset managers in the lending space has also challenged traditional banks, but Diamond sees an opportunity for stronger regional banks to reclaim market share. “If we have fewer but better-capitalized banks, competition will actually improve,” he argues. “It’s not about having 4,500 institutions; it’s about having the right number of strong, sustainable players.”
Diamond’s Perspective: Fewer Banks, Greater Strength
Looking ahead, Diamond is confident that consolidation is not just inevitable but beneficial. “The U.S. economy doesn’t need 4,500 banks, but it does need a healthy banking sector that can effectively serve small businesses and middle-market clients,” he says. “This isn’t about reducing competition—it’s about making banks stronger, more efficient, and better positioned for the future.”
The complete version of this content can be found at Bloomberg.
