Three disturbing trends in commercial banking

By Christopher Papagianis
March 13, 2012

The recession officially ended in July 2009, and yet the speed and scope of the subsequent recovery have been disappointing. Recent economic data have been encouraging, but there are three ominous trends in the consumer banking space that signal the waters ahead may be choppy.

1. No new banks were chartered in 2011

The Financial Times reported recently that not one new, or de novo, bank was created in 2011. (The FDIC actually lists three new bank charters for 2011 — the lowest number in more than 75 years — but they all involved bank takeovers of other failed banks.) What are some of the possible implications?

First, investors are clearly still gun-shy about banking. The dearth of new small banks is also a negative sign for small businesses generally, as they are particularly dependent on small banks for loans. Since most employment growth in the U.S. comes from small businesses that use external finance to grow into large businesses, a decline in these businesses’ access to loans could limit future employment growth as well.

The dominant narrative in 2011, like the 2010 version, was one of bank failures and distressed acquisitions. The FDIC reports that about a hundred banks failed and another hundred were absorbed this past year. But industry consolidation has been prevalent since the 1990s, as this excellent image-graphic from Mother Jones (where you can click on the image to enlarge it) reveals.

Overall, the number of banks declined by 15 percent in the past five years, to 7,357, while revenues decreased for the fourth consecutive year, to $737 billion. Although this is partly due to the Federal Reserve’s low-to-zero interest-rate policy, which reduces interest income, non-interest income also fell in 2011 for the second consecutive year.

2. The big are getting bigger

Today, about two-thirds of all U.S. commercial bank assets are at five banks: Wells Fargo, Bank of America, Citigroup, U.S. Bancorp and SunTrust Banks. A related and troubling trend is that much of the growth in lending in 2011 was also concentrated at the largest banks. The implication is that the “bigger are getting bigger” trajectory shows no signs of slowing down.

The graph below shows the trend in assets by bank size. Since 1993, big banks’ share of assets has skyrocketed while smaller banks’ share has been in a near-terminal decline.

In addition, the FDIC reports that banks with assets over $1 billion witnessed an increase in business lending in 2011, while firms under that threshold actually saw lending decline. David Reilly’s speculation on what may be fueling this trend is noteworthy:

The difference in lending may be due in part to the fact that bigger banks tend to have a client base that itself is bigger, more credit worthy and more export oriented. Such companies are likely seeing an earlier benefit from a firming of economic conditions in the U.S.

Meanwhile, bigger banks are going after more middle-market clients in a bid to win market share. And while the biggest banks suffered some of the worst blows during the crisis, they seem to have worked through problems at a somewhat faster clip…

In part, that may be because the biggest banks have large credit-card portfolios where losses are quickly flushed out. Smaller banks with mostly residential or commercial real-estate loan books tend to take longer to work their way through problems. Or it could be that bigger banks capitalized on the fact that they received the most government assistance during the crisis and continue to enjoy a cost-of-funding advantage.

According to the FDIC, big banks’ average funding costs are one-third lower. The average funding costs for banks with more than $10 billion in assets is 0.66 percent, compared with about 1 percent for banks with less than $1 billion in assets. Why is that the case? Well, the largest banks have about 20 percent less core capital as a share of total assets compared with smaller banks (8.7 percent of total assets relative to about 10.5 percent for smaller banks). Less equity and lower funding costs result in a return on equity (the key measure for bank profitability) for big banks that is almost double that of banks with less than $100 million in assets.

3. The government dominates consumer credit through big banks

A war is brewing between the private bank sector and the government over who exactly controls the allocation of consumer credit in this country. Consumer credit is probably too tight today. A popular refrain that often follows this observation is that if only the government would return some of the decision-making power to the private sector (i.e., let lenders decide who gets approved or denied for a loan), then there would be more lending and the economy would recover faster.

There is undoubtedly some truth to this argument, but the scary proposition is that many of the largest banks are perfectly happy to allow the government to maintain its broad guarantees on consumer loans, effectively absolving private banks from having to evaluate and manage credit risk while simultaneously ensuring that they receive a steady stream of fee income.

The consumer credit market comprises about $13 trillion in outstanding loans or debt. The mortgage market, or home loans, make up the overwhelming majority of this total (a little over $10 trillion). The other major categories are student loans, credit cards and auto loans (about $2.5 trillion). Today, the government has outstanding guarantees on close to 60 percent of all mortgage-related debt, or almost $6 trillion in aggregate. Moreover, practically every new home loan made today is backed by the government, so this percentage and aggregate dollar amount is only climbing. And for certain mortgages, the government is happy to offer special benefits to the banks or lenders that are responsible for the most loan volume (see page 8 of this report).

The effect is that the government is determining the underwriting standards — who gets qualified for a loan and who doesn’t — and is bearing 100 percent of the credit risk on loan defaults, while private banks and lenders serve effectively as middlemen processing paperwork and helping to match consumers with the right government-guaranteed loan product.

The government has also increased its direct-lending activities over the past four years from $680 billion to nearly $1.4. trillion. Most of this growth in direct government lending has come from a quadrupling of student loans, from $98 billion to more than $425 billion. Today, the government now practically stands behind all new student lending.

With credit cards, private banks are still responsible for underwriting standards and default or credit risk, but Congress has introduced new command-and-control price caps on certain products. Auto loans remain relatively untouched, but the Fed did establish in the heat of the crisis the Term Asset-Backed Security Loan Facility (TALF). The TALF provided government financing for banks and other financial institutions to buy billions in auto loans. Plus, it is important to recognize that the Fed’s quantitative easing programs have been the biggest government lending program of all, as the Fed’s asset purchases have amounted to over $2 trillion in loans to the government-sponsored entities, or GSEs (i.e., Fannie and Freddie), and the U.S. Treasury.

What’s particularly disturbing about these three trends is how the underlying dynamics are interrelated and actually reinforcing one another. Small banks are being pushed to the side by big banks. The banks that are “too big to fail” are only getting larger and adding to their market share of consumer loans. But then a closer examination of who exactly is responsible for the losses when a consumer defaults on a loan (increasingly, it’s the taxpayer) reveals the true depths of the government’s influence, if not control, over consumer credit.

Snapping this vicious vortex is perhaps the greatest challenge that policymakers and the U.S. economy face in the coming years. A future where the provision of consumer credit is increasingly dictated by big banks and government bureaucrats is not consistent with the image that Americans like to project across the world, namely that the U.S. is a beacon or defender of private markets and capitalism.


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The big are getting bigger because retail banking is not what it used to be. It’s online, it’s debit (not checks), it’s app-driven, it’s chat with India rather than wait in line next to somebody’s sick kids to talk to some teller who barely made it out of high school single. In all, banking has become far more like Paypal than “Stodgy Bastard Loan and Trust” located next to the Post Office. And I don’t see the point of turning back the clock.

Posted by AlkalineState | Report as abusive

Community banks do provide more personalized service and support the local community. They are limited in the scope of their lending by being local, unlike the larger banks which have a presence in multiple cites and states and the resources for funding larger projects beyond the capabilities of small, community banks and credit unions. They each address market demand, but the larger banks have exhibited less accountability and responsibility by virtue of their excessive size and influence on Congress.

Posted by Greenspan2 | Report as abusive

[...] upon tiny banks for loans. Since many practice expansion in a US comes … Read some-more upon Reuters Blogs (blog) Post a comment — Trackback URI RSS 2.0 feed for these comments This entry (permalink) was [...]

Until government prosecutes people or groups of people within these big banks, the big banks will continue to gobble up more and more of the country.

Posted by KyuuAL | Report as abusive

Let’s make one thing clear. Those “assets” are not just those of the bank but also those of its customers …

They can leave that bank as easily as they arrived. It’s mostly a question of value-for-money, meaning that customers obtain the service that they seek.

Quite frankly, all that money concentrated in just five banks is nonetheless asking for trouble. Should it ever come … the fit hits the shan.

Furthermore, how many of those banks hav Investment Banking arms? For instance, Merrile-Lynch is now part of Bank of America …

Posted by deLafayette | Report as abusive

I switched my banking from a Wall Street bank to a credit union. I pay all my bills online, i get a better interest rate, my money gets reinvested in my neighborhood, and no one is getting fat.

Posted by breezinthru | Report as abusive

Allowing the government to keep so much control over the big banks will only invite more risk taking for profit since they will expect to be bailed out again when things go bad.

The government needs to do what they did to Ma Bell – break these banks up into smaller entities to foster competition. They also need to replace the seperation between community banking and investment banking they dismantled when they revoked the Glass-Stegall act – that’s what lead to the mortgage crisis.

Posted by thegovtmule | Report as abusive

Feel free to add reason # 4: increased regulatory costs, which can be regressive pending the size / scope of the institution. Regulatory costs hit them all, especially the ones who managed capital, were prudent lenders & had no use for the TARP money (therefore, those bankers took $0.0 TARP money).

New institutions are, or were not, chartered since the OCC / others were onerous on placing restrictions on the uses / deployment of capital (another thought to add).

Posted by McGriffen | Report as abusive

Modern big “banks” are simply another transfer system to empty the pockets of the weak and fill the pockets of the strong, all systematically reinforced by the power of Government to privatize profits and publicize losses.

To fix the mess, Government guarantees must be withdrawn from large banks, and limited to consumer deposits, as originally intended. Government has taken trillions from ordinary citizens and given it away to “banks”. Bring back Glass-Steagall and do it now.

If you listen to large organization lobbyists, the USA will fail as a political entity. Time for an intelligent statesman at the helm. But the closest one to that is Ron Paul, anathema to big Wall Street and to Israel and to the big militarists. And a rigged political system.

Posted by txgadfly | Report as abusive

I have all my money in a mattress and I sleep well at night

Posted by whyknot | Report as abusive


I’ll never forget the day JP Morgan-Chase told me that my small business account was not big enough for me to see the branch manager. I was there to demand an explanation as to why my business checking account was suddenly in the red, when I had a balance of a few thousand the day before, had made no charges or withdraws, in fact I had only made a very large check deposit from my client. It turns out the night before they had double posted this large check and to fix it, they charged it to my account, which went into the red, since my client’s check needed two days to clear. All my funds were held up for five days, and no one there was able or even wanted to help me.

Posted by GMavros | Report as abusive


Posted by GMavros | Report as abusive

The article: “… by big banks and government bureaucrats”.
I know progressives who want to delete “big banks” from that sentence. My question: what would our banking, lending, economy and freedom look like if (Washington-level) government bureaucrats and only government bureaucrats were in charge of it?

This is, after-all, the government that thinks loaning money to Solyndra provides a good return on money lent.

Posted by a2plusb2 | Report as abusive

No offense, but never trust a writer named “Papagianis” when it comes to banking. Have you SEEN the condition Greece is in? :)

Posted by AlkalineState | Report as abusive

[...] Three disturbing trends in commercial banking The consumer credit market comprises about $ 13 trillion in outstanding loans or debt. The mortgage market, or home loans, make up the overwhelming majority of this total (a little over $ 10 trillion). The other major categories are student loans, … Read more on Reuters Blogs (blog) [...]

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[...] American banks fail stress tests, and Christopher Papagianis shares three disturbing trends in commercial banking. The Fed plans to simplify rules for community banks. PayPal plans a point of [...]

[...] American banks fail stress tests, and Christopher Papagianis shares three disturbing trends in commercial banking. The Fed plans to simplify rules for community banks. PayPal plans a point of [...]

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[...] Three disturbing trends in commercial bankingReuters Blogs (blog)First, investors are clearly still gun-shy about banking. The dearth of new small banks is also a negative sign for small businesses generally, as they are particularly dependent on small banks for loans. Since most employment growth in the US comes …and more » [...]

[...] too big to fail. Despite the criticisms leveled at these firms, the largest banks have only gotten bigger over the last few years – and U.S. regulators still appear underprepared to resolve a future [...]

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Three disturbing trends in commercial banking

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Three disturbing trends in commercial banking