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Reuters columnist Rob Cox issued a hot business opinion in a column today. He called the community banker "the most endangered species in finance." Cox isn't talking merely about the community banks that have failed over the past several years, but the many community banks that "will disappear in the next few years — a consequence, unintended or otherwise, of government and regulatory decisions codifying the biggest banks as infallible."
With that set-up, you might think that Cox would bemoan this prospect. To the contrary, his "hot opinion" is that he thinks it's likely to be a good thing for regulators, shareholders, and "perhaps surprisingly, even consumers."
As proof of how great things will be, he points to our cousins to the north.
[H]aving a few, heavily-regulated banks might actually be safer. Canada has just five giant institutions. But because they were regulated like utilities, the country’s financial system averted the need for big bailouts. It’s also more profitable for shareholders. According to the FDIC’s third-quarter industry survey, big banks have better efficiency ratios and generate higher returns on assets and equity.
Finally, consumers might benefit from a smaller universe of stronger banks competing for their affections. At the very least, there might be more credit available to them. In the third quarter, for every dollar of deposits customers stowed in the vaults of big banks, 96 cents were extended to borrowers, according to SNL Financial. Smaller banks lent out just 84 cents for every dollar of deposits.
George Bailey may have been a nice banker. But he might have been even more effective working as a senior loan officer for Bank of America.
There's no question that life would be easier for regulators in one respect if they didn't have many banks to regulate. That's one reason why you don't see (and won't see for awhile) many de novo applications being approved by the FDIC. But would it be "safer" for the financial well-being of the banking system to have "five giant banks" in the US (or even 50, as former OFHEO head James Lockhart has proposed)? With that kind of concentration of power comes the very real risk of regulatory capture, a concern voiced by pundits on both ends of the political spectrum (albeit for different reasons).
Arguing that big banks have economies of scale, efficiencies of operation, and greater opportunities to deploy capital profitably, and, therefore, that's good for their shareholders does nothing to convince me that what's good for the shareholders of five giant banks translates into what's good for the rest of us. Why stop at five? Why not one giant bank, run by the US government, or perhaps one giant bank which runs the US government. Those who loved the bail outs handed to Wall Street will love that result. It certainly would be "efficient" and "easy to regulate."
As for the proposition that consumers will be better off because in the last quarter, large banks loaned out a greater percentage of deposits than did smaller banks, I'd point out that traditionally, smaller banks use deposits as a larger percentage of their total funding sources than do big banks. That was the principal reason that community banks liked, and large banks did not, the recent change to calculating FDIC insurance assessments on the basis of "assets" rather than "deposits." I don't think using deposits as the funding source for the comparison is support for the contention that big banks will be better lenders to consumers than will smaller banks. Also, community banks have had greater difficulty raising capital than large, publicly traded banks and, as a consequence, have had to be more conservative in making loans over the past two years than have big banks. Hank Paulson didn't call nine of the nation's smallest community banks to the White House in the fall of 2008 and shove TARP capital down their throats, did he?
Does anyone really believe that if the commercial banking business of this country is concentrated in a few large banks, US consumer and small business borrowers will be better served than they are when large banks compete with community banks? Apparently, Rob Cox does.
You can put me in the "extremely skeptical" camp.
