Home -> Law Blog Directory -> Banking Law Blogs -> Bank Lawyers Blog

OR PHONE (866) 635-1838 for Bankruptcy Help, (866) 635-6190 for Divorce,
(866) 635-2689 for Personal Injury or (866) 635-9402 for Criminal Defense

Find a Local Lawyer

Bankruptcy (866) 635-1838
Divorce (866) 635-6190
Personal Injury (866) 635-2689
Criminal Defense (866) 635-9402

Banking Law

: Bank Lawyers Blog

The Smaller They Are, The Harder They Fall

ADVERTISEMENTS

?Community banks are the lifeblood of our nation?s financial system, supplying much-needed credit to countless individuals, small businesses, nonprofit organizations, and other entities in large and small towns around the country.?-- Sheila Bair, May 29, 2009

A thoughtful piece by Randall Smith and Robin Seidel in last week's The Wall Street Journal entitled "Banks Keep Failing, No End in Sight" finally made the front section of today's The Dallas Morning News retitled "Broke-bank Mountain." I guess that proves that either the story has legs or somebody needed an excuse to demonstrate his or her cleverness as a headline writer. My guess is that it's more the former than the latter.

The authors cite one bank analyst who estimates that the number of banks that will be left standing when the dust settles will be closer to 5,000 than the 6,000 we've been heard from other sources. However, it's the exact number that was estimated by the chairman of an old-line community bank in the mid-west in a recent e-mail to me. Whichever number turns out to be accurate, and lot more banks are going to fail or be merged out of existence in the coming years. That fact has troubling consequences for our economy, as Smith and Seidel articulate.

The largest number of bank failures in nearly 20 years has eliminated jobs, accelerated a drought in lending and left the industry's survivors with more power to squeeze customers.

[...]

The upside of failures is that they can represent a healthy cleansing of a sector that grew too fast, with bank assets more than doubling to $13.8 trillion in the decade that ended in 2008. Many banks that failed were opportunistic latecomers. Of the failed banks since February 2007, 75 were formed after 1999, according to SNL Financial.

Still, economists say, the contraction represents an enduring threat to capital, lending and the economy.

"When we step back and look at this financial disaster 10 years from now, the destruction of capital in our economy as a result of what we've endured will be the single greatest lasting impact on recovery and how the economy performs in the future," says Howard Headlee, president of the Utah Bankers Association.

[...]

Since 2008, the industry's assets have shrunk by 4.5%.

"If you reduce the amount of assets at a bank, it means they make fewer loans, and that has a negative impact on the economy," says Richard Bove, a bank analyst at Rochdale Securities in Lutz, Fla.

From small towns like Rockford, Ill., to Miami, the banks' disappearance means not only cutbacks in lending but fewer banking choices, lower interest rates on savings accounts, and lost jobs.

The recession and collapse of the housing bubble have cut bank-industry employment by 188,000 jobs, or 8.5%, since 2007, according to FDIC data. Failures alone have cost 11,210 jobs, or 32% of the employees at failed banks, according to FIG Partners, an Atlanta investment firm that specializes in the banking industry.

I made the point in connection with the 2009 failure of Charter Bank in New Mexico that what often gets lost in this quest to ensure the "survival of the fittest" (or "biggest," or "most politically well-connected," or [insert irritating exception category here]) is the fact that mowing down thousands of small banks eliminates thousands of jobs those banks provide. It's nice that some reputable journalists have taken notice, although that won't matter a fig to people whose primary motivator in life is retiring with a vested government pension. Still, a lot of the laid off bank workers may not only swell the rolls of those needing unemployment benefits and other forms of public assistance, they might also end up as bitter voters at the next election who understand the difference between small and large banks and how the federal government and the political class treats the two banking segments. That's just a guess, but based upon anecdotal evidence, it may be a correct one.

Smith and Seidel give space to the views of contrarians. Among the points they raise are:

The overall economic impact of bank failures has been "muted" because, thus far, there have been enough buyers.
The number and rate of failures have, thus far, not been sufficient to have a large "macro-economic effect."
Banks that fail are almost always constrained from lending, while the acquirers are better capitalized and able to lend.

However, the authors close with the observation that the end result of this consolidation appears to be that the big will get bigger.

Bank of America, J.P. Morgan Chase & Co. and Wells Fargo hold 33% of all U.S. deposits, up from 21% in 2006, according to SNL Financial. That gives them more market power to squeeze out smaller competitors.

I've also seen statistics (not cited by the authors) that the four largest banks completely dominate the residential loan origination business in this country. Little guys are finding little elbow room at that table.

Earlier this year, I heard James Lockhart, former head of the FHFA (and now a member of Wilbur Ross' team) interviewed on one of the cable business news channels, and he stated that this country didn't need 8,000 "little" banks, it needed 50 large regional banks. So, heck, why stop at 5,000 when 50 appears to be the optimal number for some eggheads?

If you think that result would be bad for the economy and for consumers, you'd better get off your duff and do something about it, because the train has left station and it's rolling down the tracks, gathering speed by the day.