The banking industry has been in something of a deal drought – but that is about to change.

U.S. banks are on track for their slowest consolidation year in decades. They’ve only announced 78 mergers announced so far in 2025.

Five years ago, the banking industry averaged more than one merger-and-acquisition (M&A) deal per day. Today that figure sits at roughly two per week. 

From 2020 to 2023, the industry averaged 370 M&A deals per year. But if this year’s trend holds, that number is about to be sliced in half.

Both large and midsized banks still have an appetite for mergers. And smaller community banks are facing more pressure than ever to consolidate.

However political resistance and red tape has stalled deals for years.

The Biden administration took a firm stance on banking consolidation. Regulators across the Federal Reserve, Federal Deposit Insurance Corporation (“FDIC”), and Department of Justice (“DOJ”) were far more skeptical of mergers, especially among large institutions.

In 2023 alone, two-thirds of major U.S. banks were rated “unsatisfactory” under the Fed’s opaque supervisory framework. That rating effectively barred them from making acquisitions.

And for years, it has been a burden for banks to grow.

Banks have to jump through more regulatory hoops as soon as they pass certain thresholds for assets. A bank with $200 billion on its balance sheet deals with far more red tape than one that only has $25 billion.

Many banks grow until they’re just under these thresholds, then wait for the chance to make a big merger to soften the regulatory blow. But with all those unsatisfactory ratings, many banks found themselves in a position where they were ready to buy, but unable to get deals approved.

But policy has begun to pivot under the new administration.

Michelle Bowman, the Fed’s new vice chair for supervision, has vowed to overhaul the merger review process. Bowman has criticized the current regime as “outdated and opaque.” She pledged to replace it with a faster, more transparent system.

That shift is already playing out. In April, the Fed signed off on Capital One Financial’s (COF) $35.5 billion acquisition of Discover Financial Services.

It was the largest approved bank merger since 2019. That decision broke a five-year M&A drought and signaled a broader regulatory change. It also reflects mounting pressure for the banking industry to reconcile with the fact that there are far too many banks today.

Most developed countries have a few hundred banks. The United Kingdom boasts a mere 344. Japan only has 112. Germany has quite a few, with 1,368.

But the U.S. has more than all three of those nations combined, sitting at around 4,500 banks.

Community banks are struggling to keep up with the scale of the largest players. The big banking institutions have a huge advantage. JPMorgan Chase (JPM), for example, is spending $18 billion on tech this year. That’s nearly the entire budget of NASA.

As regulations fade, regional and mid-tier banks will be racing to grow. And with the M&A pipeline clogged for years, there’s a backlog of buyers and sellers waiting for the green light.

Market conditions are finally emerging for a merger revival. Regulatory friction is easing, and banks clearly want to consolidate.

The next wave of deals won’t come from Wall Street giants. It’ll come from regional and super-regional banks trying to compete for the long term.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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