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Banking's future: The big will get bigger

Sept. 8, 2011 |

This story is being co-published with

The American banking sector apparently is going to be vastly different when it finally emerges from the financial crisis that took hold more than three years ago. It is going to be significantly smaller, and the domination of a relative handful of behemoth institutions is going to increase.

At the end of June, there were 7,522 commercial banks, down from 8,542 on Dec. 31, 2007. That is a decline of nearly 12 percent in just three and a half years. Of those, about 370 failed. But the rest of the decrease came through mergers and acquisitions, as a decades-long pattern of consolidation continued.

Most banks in the United States are fairly small. The median size of a bank at the end of June, according to an analysis of data from the Federal Deposit Insurance Corp. was about $155 million in assets.

But those numbers seriously skew the nature of the industry. About 40 percent of all bank assets are held by just four banks: JPMorgan Chase, Bank of America, Citibank and Wells Fargo, each with more than $1 trillion in assets. In other words, the U.S. banking industry resembles a tall cake, with a very thick layer of icing on top.

While the Senate was debating a measure last year that would have forced some of the biggest banks to shed some of their parts, the megabanks were actually growing. Since 2007, the share of assets held by banks with more than $50 billion in assets grew from about 65 percent of total assets to nearly 69 percent.

Some of the growth of the biggest banks occurred through mergers between huge institutions assisted by — or at least, encouraged by — the federal government, as part of the Federal Reserve and the Treasury response to the crisis of 2008. For example, Wells Fargo acquired Wachovia; Bank of America took over Merrill Lynch and Countrywide.

Meanwhile, banks continued to make a slow recovery in the second quarter as loan losses continued to moderate. As a group, banks made a profit of $28.8 billion, down slightly from the first three months of this year.

Loan volume actually increased modestly for the first time in three years, but remains sluggish.

An analysis of FDIC data by the Investigative Reporting Workshop shows a decrease in the amount of nonperforming loans and foreclosed properties to $280.7 billion at the end of June, down from a peak of $382 billion in March of 2010. The number of banks with more troubled assets than capital and reserves also went down, to 366; that number hit 411 in March 2010.

The FDIC also reported the first drop in the number of banks on its troubled list — it doesn’t identify the banks — to 865, down from 888 in the first quarter. It was the first time since September 2006 the FDIC troubled banks list shrank.

Industry analysts see no end in sight for bank consolidation. In fact, some see a quickening of the pace.

“I personally believe we are at the very beginning of the consolidation,” says Serge Milman, founder and chief executive of, a bank marketing agency. "In the next 12 to 18 months we are going to see a huge number of acquisitions. Hundreds of banks will fail, either taken over by FDIC, or taken over and acquired (by other banks) for pennies on the dollar.”

Milman, whose firm helps banks find deposits and consumers find the best rates on certificates of deposit, says a new competitive landscape, increasing regulations and a sluggish economy are putting heavy pressure on banks, particularly smaller community banks.

In particular, he says smaller banks are having trouble competing with a new breed of large, aggressive institutions that operate primarily online, banks such as Ally (now three-fourths owned by the federal government as part of the General Motors bailout), Charles Schwab Bank, Discover Bank and others.

“Five years ago, 10 years ago, it was fair to say banks needed to have physical presence in a geography to compete,” Milman says. “Today, that need doesn’t exist at all. No need for branches, tellers, staff, property taxes, electricity. I can now take all that cost and translate it into a premium for my customers.”

Customers, he says, don’t mind that they don’t have offices to go to. “The only people who think people want to go inside a bank branch are bankers. There is a huge divide between what consumers want and what bankers think consumers want,” Milman says.

Instead, many consumers use online services to move money, ATM cards, direct deposit, mobile applications to replace many of the functions that used to require a trip to the bank.

The result of more consolidation might well mean that some banks will remain “too big to fail,” despite pressure in Congress and elsewhere to make sure the government isn’t forced to bail out large institutions in the event of another financial crisis.


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