Why Fewer Banks Do Not Automatically Mean Worse Mortgages
Bank consolidation has made the U.S. banking system far more concentrated. This series examines a narrower question: when one bank absorbs another, do households in the affected market end up paying more for a mortgage, losing access to credit, or receiving loans that perform worse? The evidence considered here concerns completed U.S. bank mergers and three borrower-facing outcomes—mortgage rates, approval decisions, and subsequent delinquency. Understanding the answer requires separating a national fact about the number and size of banks from the local competitive conditions in which a borrower actually shops for a mortgage.
That distinction matters because the intuitive story is powerful. If there are fewer banks, it seems there should be fewer choices. If there are fewer choices, the surviving institution should be able to charge more or ration credit. But each step in that chain is a claim about a different layer of the financial system. The number of banking institutions is not the number of mortgage originators in a county. A higher average rate in a merged lender’s post-merger portfolio is not necessarily a higher price imposed on the same borrowers. And a merger that passes regulatory review is not the same thing as every merger that could be proposed.
The central lesson is not that consolidation is harmless by definition. It is that the conclusion must be earned by following the connection between these layers.
The numbers make the concern reasonable
The concern begins with a genuine structural change. Between 1985 and 2020, the number of active U.S. banks and thrifts fell from 14,417 to 4,379—nearly a 70 percent decline. Over the same period, the number of institutions controlling half of all banking assets fell from 91 to 10. Those figures describe a banking sector in which scale and asset concentration increased substantially. They also help explain why policymakers and the public worry that mergers could reduce competition and weaken consumers’ bargaining position.
Mortgages make that worry especially consequential. Mortgage debt accounts for more than two-thirds of U.S. household liabilities, so a change in mortgage pricing or availability can matter far more than a small adjustment to an incidental financial product. For a household financing a home over decades, a slightly higher interest rate can increase total payments; a denied application can remove the opportunity to buy or refinance; and weaker underwriting can create trouble that appears only after the loan has been made. The stakes are therefore real even when the structural evidence is only the beginning of the argument.
But the bank-count figures cannot answer the mortgage question on their own. They count institutions at a broad industry level and describe control of banking assets. They do not tell us how many lenders compete for a particular mortgage applicant in a particular county, whether those lenders are banks, or how much business any one of them controls. A national concentration measure can signal that closer scrutiny is warranted without establishing that a household in a local mortgage market has lost meaningful alternatives.
This is the first distinction to keep in view: structural concentration is a reason to investigate, not a finding about borrower welfare. Treating it as a finding skips the market-definition step. It also risks attributing to a merger any later movement that may have come from interest rates, housing demand, borrower composition, or other changes shared by the local market.
What “worse mortgage terms” could mean
The primary subject is not consolidation as an abstract historical trend. It is the relationship between completed bank mergers and the mortgage decisions faced by households in markets where the merging institutions operated. The Federal Reserve study asks whether those events changed three parts of the mortgage experience.
The first is the price of credit. Mortgage rates are the most visible term, but a rate comparison has to account for what is being financed and who is borrowing. A lender serving borrowers with different credit scores, loan-to-value ratios, loan sizes, maturities, occupancy types, or government-insured products may show a different average rate even if its pricing policy has not changed. A credible comparison therefore asks whether the same kind of lending became more expensive relative to what other lenders were doing at the same time.
The second is access to credit. Approval rates capture whether applications are accepted, but they are not identical to total credit supply. They do not by themselves measure branch availability, loan size, product choice, application volume, or the experience of a borrower whose application never reaches a lender. Still, approval behavior is a distinct way a merger could affect households: a bank might keep its posted prices stable while becoming more selective about whom it serves.
The third is subsequent loan performance. A merger could alter underwriting standards or risk-taking without immediately changing rates or approval rates. Tracking whether newly originated loans later become seriously delinquent, enter foreclosure, or experience related adverse outcomes provides a different test. It asks whether the loans being made after the institutional change perform differently, not merely whether the initial contract looks different.
Taken together, these outcomes give the question a more disciplined shape. A claim of harm could mean higher risk-adjusted rates, fewer approvals, worse subsequent performance, or some combination. A result showing stability in all three would not prove that every borrower had the same experience, but it would make a simple story of systematic merger-driven harm harder to sustain.
The study’s headline result is correspondingly specific. Using confidential micro-level data covering about 44 million mortgages and nearly 5,000 bank mergers over almost three decades, the authors report no systematic changes in mortgage rates, approval rates, or delinquency rates after completed mergers. The result is a finding about averages and estimated effects in the study’s selected sample. It is not a promise that every borrower, product, branch, or merger was unaffected.
That scope is important because the paper is a Finance and Economics Discussion Series working paper. The Federal Reserve publication page states that the research is preliminary and circulated for discussion; its conclusions are those of the authors and do not indicate concurrence by the Board or its staff. The appropriate response is neither to dismiss the result because it is preliminary nor to treat it as a final universal law. It is evidence that changes the burden of explanation: if completed mergers do not systematically worsen the measured mortgage outcomes, the next question is why.
The missing link is local competition
The most useful way to approach that “why” is to look at the market a borrower encounters rather than stop at the corporate boundary between two banks. The study’s local mortgage analysis counts active lenders at the parent-company level and includes both banks and nonbank mortgage companies. That matters because a bank merger may eliminate one bank name while leaving many other firms competing for originations. A mortgage market can remain fragmented even as the banking sector becomes more concentrated.
The local picture in the study is much more competitive than the national bank-count story suggests. The typical county-quarter contains dozens of active mortgage lenders, and the bank-weighted observations average more than 100 competitors. Individual lender shares are generally small, while nonbank companies provide additional alternatives beyond insured depository institutions. This does not mean every borrower enjoys identical access or that every rural market is as competitive as a large metropolitan area. It means that the relevant question is empirical: how many credible substitutes exist in the market and product being studied?
The distinction also changes how we read a concentration statistic. A lender count tells us how many firms are active, while the Herfindahl–Hirschman Index, or HHI, gives more weight to large shares. Neither one is itself a mortgage rate or an approval decision. Both are proxies for the competitive pressure a lender faces. A market with many tiny lenders may still have a dominant firm; a market with fewer lenders may be competitive if their shares are balanced and entry is plausible. The measure must match the product and geography of the claim.
Merger type matters for the same reason. The study separates community–community mergers, large-bank acquisitions of community banks, and large–large mergers. These are not interchangeable events. Community banks tend to operate more locally and may retain a different share of loans in their own portfolios. Larger institutions may bring broader funding capacity, technology, and securitization infrastructure. A merger between two institutions with similar scale can therefore have a different economic purpose and different integration effects from a large bank acquiring a relationship-focused local lender.
Finally, completed mergers have already passed through a regulatory process. Under the Bank Merger Act framework described by the FDIC, covered transactions require prior approval and are assessed for competitive effects, financial and managerial resources, community convenience and needs, anti-money-laundering effectiveness, and financial stability. The FDIC’s competitive analysis considers relevant product and geographic markets, other providers, market shares, concentration, and possible entry. That review does not guarantee a benign outcome, but it means the completed mergers observed by the study are not a random sample of all imaginable combinations. They are transactions selected by banks, local conditions, and regulatory screening.
That is the practical judgment this series supports. When a future debate says that a merger will worsen mortgages because the banking system has fewer institutions, ask what has been left out. Which mortgage market is being measured? Are nonbank competitors included? Did a raw average change because two different portfolios were combined, or did the same lender change its pricing or underwriting relative to local alternatives? Which type of institutions merged, and what did regulatory review select into the observed set?
Those questions do not settle every concern about bank consolidation. They establish the right starting point. The next step is to define the local mortgage market precisely enough to see why the number of banks, the number of lenders, market shares, and HHI can tell different stories about the same merger.