Just 3 ‘superbanks’ now dominate industry

[Ladywriter 7,783]

Sudden consolidation raises questions about regulation, consumer impact

The financial crisis that has been sweeping the globe has reshaped nearly every corner of the economy, but no industry has been altered more radically than banking.Several of the nation's biggest banks have failed or been absorbed by healthier institutions, leaving three giant "superbanks" with an unprecedented concentration of market power: Bank of America, JPMorgan Chase and Wells Fargo.

While that may be good news for emerging giants and the failing companies they helped rescue, the new oligopoly raises troubling questions about regulation and competition, analysts and consumer advocates say.

"Bank fees are going up, up, up, and that’s the danger to consumers as more of these banks consolidate,” says Sally Greenberg, executive director of the National Consumer League. “It’s difficult for the average person to get a bank account that doesn’t involve fees, and if you get into financial distress you’re cooked, and you’ll be ‘fee-ed’ to death.”

According to a recently released banking fee study from Bankrate.com, ATM surcharges rose 11 percent this year to an average of $1.97, and the fee for a bounced checks rose 2.5 percent to an average $28.95.

"Consumers are going to be victims of higher and more punitive fees,” Greenberg predicts.

Moreover, many analysts worry about how federal and state authorities, who were unable to prevent the current financial industry meltdown, will be able to monitor the new giant banks that combine a wide range of operations from investment banking to consumer lending.

“Large institutions are impossible to manage prudently, let alone regulate,” says Amar Bhide, a professor at the Columbia Business School.

In fact, existing federal banking laws say that no bank can have more than 10 percent of the domestic deposit market — a threshold recently surpassed by all three superbanks.

When asked whether the government would take any action, a Justice Department official was noncommittal.

“It’s always something we’ve looked at and will continue to look at," said spokeswoman Gina Talamona. "It’s something we’ve looked at as part of our general antitrust review.”

The reason limits on market share were put in place were so banks didn’t get so big they’d become monopolies that could risk the whole economy, explains Atul Gupta, finance department chair for Bentley University in Boston.

But now the government appears to be pushing banks in the direction of more consolidation. The Treasury is pouring some $250 billion of taxpayer money into healthy financial institutions, and some of that is being used by stronger banks to snap up weaker rivals.

“The government is convinced that allowing any of these firms to fail would have catastrophic implications,” says Gupta. “So the government is saying, ‘This bank is in trouble, so I want this bank to buy that one.’ And everyone holds their noses and hopes things work out.”

In the current environment, such rapid consolidation is a “no brainer," says Gregory F. Udell, Chase Chair of Banking and Finance at the Indiana University Kelley School of Business.

The risk of creating monopolies, he says, “is a lot less than the risk of having a lot of zombie institutions out there.”

He also points out that consolidation in the banking sector, though recently at a fever pitch, is nothing new.

Indeed, the number of commercial banks and savings & loans in the United States has fallen in the past 20 years to 8,451 as of June, compared to 16,574 in 1988, according to FDIC data.

Espen Eckbo, finance professor at Dartmouth’s Tuck School of Business, believes economies of scale will only help the troubled financial sector.

He maintains the banking sector got into trouble because of out-of-control risk taking — not because banks got too big.

CONTINUED 'Exit strategy'?