Is everything about the banking industry destined to consolidate? Would it be a bad thing? Under the next administration and the planned Department of Government Efficiency, we may find out. The Heritage Foundation’s Project 2025 proposes merging the OCC, FDIC, the NCUA, and the Federal Reserve’s “non-monetary supervisory and regulatory functions.” Given the number of US banks and credit unions has fallen, there may be too many regulators for too few financial institutions (FIs). This complexity doesn’t even account for state-level banking regulators, likely with thousands of employees between them.

Problems with the banking industry include government bloat and overlap between agencies. Based on some back-of-the-envelope math, in 1991, there was just under one supervision employee at primary federal regulators for every FI. In 2023, there were about three supervision employees for two FIs. Over that time, based on reports from regulators and some rough estimates, the number of federal bank and credit union supervision employees dropped by a little under 30%, from 20,000 in 1991 to 14,600 in 2023, and the number of insured FIs dropped by more than half, from 21,000 to 9,200.

Thinking about the consolidation of the banking industry from another angle: Will there always be so many traditional bank technology vendors? Do we need all of them? If the banking industry consolidates, should supporting technology come with it? The lifeblood of these vendors in the US market is that the vast number of community FIs buy instead of build and choose different solutions. Vendor lock-in has helped the big three or four grow across FI segments. But if we see consolidation across FIs and regulators, the number of traditional vendors could also fall to those best positioned in the market.

What does the banking industry and the regulatory landscape look like in 10 years? Just because things are a certain way now doesn’t mean they need to stay that way. Today, we have too many agencies supervising too few banks, and too many vendors offering the same solutions. In that context, consolidation isn’t bad.

Even with the election behind us, there is a lot of uncertainty in the banking industry. We recommend that boards start planning now for potential outcomes, so if major changes are around the corner, they’ll be prepared. Here are some areas to think about:

• Competitive strategy: How to survive and thrive, particularly as a smaller FI, in a market with a higher proportion of big players with more resources and geographic reach putting pricing pressure on competitors.
• Technology strategy: How to negotiate contracts, assess gaps, and articulate needs to larger vendors while independently planning a technology roadmap. Decide how to execute a modernization plan in context.
• Mergers and acquisitions: Important considerations include due diligence on balance sheet quality, compliance practices, and infrastructure compatibility, and planning for the integration of strategy, systems, and employees.
• Regulatory change management and compliance: Assess the potential impact of a consolidation in banking regulators, or at minimum substantial changes in supervisory and enforcement activities.

No matter how things turn out, we also want to make sure there are enough banks to cater to different markets — cities and rural areas — and that fintechs bring enough technological innovation to create competition. This will require a delicate balance that positions consolidation against another pillar of a healthy banking system — growth.