Bank consolidation can fuel innovation up to a point, but once a market is dominated by a few large institutions, it tends to slow the most disruptive forms of technological progress, according to new research from North Dakota State University.
The study, published last month by the university’s Challey Institute for Global Innovation and Growth, examined bank mergers and acquisitions across the U.S. from 1994 to 2020. Researchers measured innovation by patent activity and sorted patents into incremental and disruptive types.
The relationship is not linear. Patenting tended to rise at moderate levels of consolidation, where a market still has several meaningful competitors even if a few banks are large. But when concentration climbed to the point that a handful of institutions dominated, more radical innovation declined.
Larger banks built through acquisition can lend more and pass along savings, but they may also grow more cautious, favoring established companies over smaller, riskier borrowers. Community banks with long-standing relationships are often more willing to back an unproven entrepreneur. As markets concentrate, that relationship lending can fade.
The effects were not uniform. The researchers found stronger results in the Northeast and South and weaker ones in the Midwest and West, which they tied to differences in local economies and the availability of alternative financing.
The findings land as bank dealmaking picks up. With Trump-appointed regulators viewing M&A more favorably, the odds of approval have risen and timelines have shortened, prompting more banks to pursue acquisitions.
Regulators weighing those deals should look beyond consumer access to banking services and consider who can actually get a loan. Private credit and venture capital are easier to find in places like Silicon Valley than in North Dakota.
The researchers stopped short of urging regulators to slow approvals, noting consolidation can be essential for banks seeking scale or fighting to survive. Instead, they suggested states explore their own tools, such as funds dedicated to local economic growth.
