Consolidation of the Banking Industry

Last week the Federal Deposit Insurance Corp. (FDIC) issued a report studying the consolidation of the banking industry during the past 30 years. The report arrives at some unbelievable conclusions. It concludes that banking institutions between $100 million and $1 billion in assets have increased — in the number of institutions, as well as in total assets — respectively by 7 percent and 27 percent! It further finds that both the number of banks and total assets of banks in the $1 billion-to-$10 billion range also increased, respectively, by 5 percent and 4 percent.

Apparently the consolidation has only taken a toll on the smallest and the largest banks, according to the FDIC report. The number of banks under $100 million in assets has declined by 85 percent, while banks over $10 billion in assets have tripled in number and have seen their assets grow by 1,000 percent. Yet somehow the study concludes that the rate of consolidation has been higher among the largest banks than among smaller banks. The study does recognize that there were more than 20,000 bank and thrift charters 30 years ago, compared to only 6,800 remaining today.

I understand that inflation makes banks larger, thus many banks that had been in the smallest category would have grown into the next-higher category. I also understand that banks that had been part of multibank holding companies have largely been rolled up into one bank, through the collapsing of charters. But I cannot buy the conclusion that all of the consolidations and failures that have occurred have only had a net effect on the banks under $100 million. The report seems to cleverly use rate of change, which camouflages what has really occurred.

I have had a seat at the table of consolidation in Indiana for the past 24 years. Consolidation has affected banks of all sizes, charters and ages of institutions. There were more than 600 bank and thrift charters in Indiana 30 years ago; when all of the recently announced mergers are completed, we will be down to a little over 120 remaining charters. What is not revealed in this data is the number of small, rural communities that no longer are anchored by a locally owned bank … and there are thousands of them. What effect will this trend have on rural America over the next 20 years? Rural America continues to shrink, as jobs disappear and poverty rates climb.

I do appreciate that the FDIC has been studying this issue. The researchers did an impressive job of collecting and analyzing data. They factored in mergers, acquisitions and failures. They factored in de novo banks, many of which should never have received a charter or FDIC insurance and, thus, failed within the past few years. I wish the FDIC had reported the data more realistically to show that consolidation is definitely changing the banking landscape in this country. I wish FDIC had factored in the growth of the fully tax-subsidized credit union industry, which has had a negative impact on tax-paying community banks.

It is obvious to anyone watching that there are many, many fewer banks today than 30 years ago. It is also obvious that those remaining banks are larger. The very largest banks have enjoyed the most growth, while the very smallest have disappeared. Regulatory burden, unfair competition, ridiculous accounting standards and wrong-minded policy directives have all contributed to the complicating of the banking business for all traditional banks, regardless of size. Banking is too important to the economic vitality of communities, states, regions and the country at large to allow these constraints to continue. That is what the FDIC report should have concluded, instead of: “The net result is a community banking sector made up of institutions that tend to be somewhat larger than was the case in 1985, but that otherwise continue, as before, to make loans and take deposits within a fairly limited geographic area.” Duh.

S. Joe DeHaven

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