Now that banking reform is beginning to be discussed in Washington, much of the conceptual discussion about new legislation surrounds “systemic risk” and “too large to fail” institutions.
Left behind is another structural challenge that faces regulators: “too puny to ever succeed”.
The FDIC puts out quarterly banking statistics, which are quite a good source for stat buffs like myself. LINK.
Here’s a tidbit: as of December, there were 8,012 banks in the US, with over $13 trillion in assets.
I know large numbers are difficult, so I’ll say it again: EIGHT THOUSAND BANKS. That’s a lot of banks. I mean, how many banks do you really need? Obviously something very wrong happened on the way to industry consolidation.
The UK consolidated its banking industry in the early 20th century. Other countries, like Germany (with over 2,000 banks) have yet to see the shakeout. The US is on its way, with the total slowly coming down from over 14,000 in the 80s. But there is still a long way to go.
Here’s a pie chart with the banks by size.
What stands out here is that there are 2,845 banks with under $100 million in assets and almost 4,500 with under $1 billion. I know a billion sounds like a lot, but in terms of the total market, it represents less than 0.01%.
So we’re talking about a market where 92% of the market players are puny. Individually, they are tiny, minute, and perhaps insignificant. As a group, however, they control 11.5% of the system’s assets, including 17% of the real estate loans. (Can you say “systemic risk”?).
So what? You may say. More competition is great and it leads to greater efficiency. The fact is that in an efficient marketplace, these banks have no chance of long-term survival in their current form. Just think of the characteristics of the industry:
Retail banking has commoditized/standardized products and services. A checking account is still a checking account (even if people don’t write as many checks anymore).
Economies of scale exist. Processing two hundred transactions or whatever costs less per transaction than processing one hundred.
Technology has not only drastically reduced transaction costs (enhancing economies of scale), but is destroying the geographical barriers that protected the small fries. Let’s face it, do you really need to go the bank (branch) anymore? If a bank’s competitive advantage is being “close” to the consumer, how much closer than a click on your computer screen?
Close to 100,000 bank branches operate throughout the US, but although their number continues to grow (slower now), branches are shrinking in size and staffing. Last year, the WSJ reported that Bank of America was going to close 10% of its branches. The report was later denied by the bank, but you have to believe that the issue has been discussed in the bank.
BTW, just to get an idea, there are about 30,000 supermarkets in the US. Three bank branches for every one supermarket, seems a bit much, IMO. LINK
In any case, industry consolidation is now accelerated by the credit crisis. The FDIC can’t shut down these micro-banks fast enough. Of the 30 banks closed by the FDIC this year, 25 have total assets of less than $1 billion. Their challenge has been finding “less puny” and financially stable banks to absorb the operations of these failing banks.
So long Waterfield Bank, Marshall Bank, Evergreen Bank and Charter Bank (etc etc). We hardly knew ye. You were too puny to succeed.