AI Is Expensive. Small Banks May Pay the Price
At the largest banks, AI is embedded in core workflows. For smaller institutions, the cost of keeping up may accelerate mergers
Analysts at JPMorgan Chase & Co. told clients that rising artificial-intelligence spending could increase pressure on smaller U.S. banks and contribute to consolidation, according to Bloomberg yesterday. For the week, the KBW Bank Index fell 5.5%, compared with a 1.4% decline in the S&P 500.
Whether AI contributes to consolidation depends on scale. The spending can be measured. So can the industry’s response to earlier cost expansions.
Large AI Spending at the Biggest Banks
Reuters reported that JPMorgan Chase & Co.’s annual technology budget in 2025 was approximately $18 billion. Bank of America Corp. has disclosed technology spending of roughly $13 billion, including about $4 billion allocated to AI and digital initiatives, according to Reuters. These figures place AI within large, recurring technology budgets at the biggest institutions.
Public reporting indicates that AI deployment at the largest banks extends beyond pilot programs. JPMorgan has said it has about 450 potential AI use cases across its operations, spanning areas such as fraud detection and client analytics, as reported by Reuters.
Bank of America Corp. has reported that more than 90% of its roughly 213,000 employees use internal AI tools embedded across business lines, according to American Banker.
Production deployment introduces ongoing operational requirements. AI systems require data infrastructure, monitoring, cybersecurity controls, and model validation processes. As these systems are integrated into underwriting, fraud prevention, and customer service, the associated governance and infrastructure become part of routine operations.
Community banks operate on smaller revenue bases. The Conference of State Bank Supervisors reported in its 2025 Annual Survey that 59% of community bankers identified rising spend rates as a primary challenge to adopting new technology, compared with 1% the prior year.
The consolidation mechanism outlined by JPMorgan analysts centers on cost absorption and competitive positioning. If large banks use AI to improve operating efficiency, they may lower unit costs or redirect savings toward growth initiatives. Smaller banks attempting comparable deployments may face vendor contracts, integration expenses, and governance overhead. Prolonged margin pressure can reduce return on assets and affect valuations, factors that banking research has historically associated with merger activity.
Existing supervisory frameworks apply to advanced analytics and AI systems used in banking. The Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation require banks to maintain model risk management and third-party oversight processes for systems used in credit decisions, compliance, and operational risk. Federal Reserve supervisory guidance on model risk management is outlined in SR 11-7.
How Current AI Spending Compares With Past Cost Shocks
Historical statistics from the Federal Deposit Insurance Corporation document a long-term decline in the number of U.S. banking institutions.
Research from the Federal Reserve Bank of San Francisco has linked consolidation to economies of scale, finding that fixed operating costs are more easily absorbed at larger institutions.
After the 2008 financial crisis, statutory reforms including the Dodd-Frank Wall Street Reform and Consumer Protection Act expanded compliance obligations across the sector. Research summarized by the Baker Institute for Public Policyestimates that total noninterest expenses in the U.S. banking system increased after 2010 by an estimated $64.5 billion per year, with a range from $58.7 billion to $86.1 billion annually.
That post-crisis expansion was broad and largely mandatory. It affected institutions across the system.
Current AI allocations are reported as strategic technology investments concentrated at the largest banks. Public disclosures do not describe AI spending as a regulatorily mandated, system-wide fixed-cost expansion of comparable magnitude. The available data show significant investment at scale, heightened cost sensitivity among smaller banks, and supervisory oversight applied to AI systems. In banking, persistent cost gaps tend to resolve through consolidation.