Wednesday, December 4, 2013


That has been the talk of the town Over Here lately.  It seems that someone did the numbers and we are down to a mere 7,000 or so banks from nearly 20,000 about 30 years ago which is a hell of a drop but still a hell of a lot of banks.  If one considers that Great Britain at one point in time dominated the world of finance and commerce with something like 5 or 6 indigenous banks and a handful of Colonial institutions (Hankers & Shankers, Standard, Chartered and merchant banks galore), it seems like an even more enormous number.  But consider:  the United States is an enormous and incredibly diverse country, in population, industry, geography and economy.     What plays in Boston may not play on Broadway much less Omaha, so is there rightful concern that 7000 may not be enough as some have suggested to service this marketplace?

It is a really good question one having no easy answer.  Throw into the equation that the banks no longer around tend to be the smaller, community banks who were unable to compete and closed or merged, or those that tried to compete and ran into trouble trying to remain profitable, or those that were simply badly managed and were shut down.  Their market areas were assumed by bigger, often far removed institutions with no ties to the communities they supposedly served and hence, little understanding or empathy with the customers inherited.  There was no Ben the Banker who would approve an equipment loan to his schoolmate Fred the Farmer despite two years of flood followed by drought because Ben knew that Fred would auction his first-born to pay him back.  A credit officer far from the scene would approve or more likely than not disapprove that transaction.  And so would be lost the first rule of credit: Know Your Customer.

This is not a little thing especially when the country finds itself desperately needing to grown to get us out of this economic malaise.  In addition, in this period of consolidation caused in no little extent by the need to protect depositors through mergers, forced or otherwise, the result has been in too many cases punishment delivered to acquiring institutions for the sins of the acquired. resulting in a chilling effect on future credit-related operations.

Oh, I'm not trying to say that the Morgans and the B of As of this world are without sin, but after a while politically effected prosecutions and enforcement actions accompanied by clearly politically directed regulations take their toll.  The reaction is, "who needs this," and banks stop doing what they are in the business of doing which is to take risk.  And when that happens, well, you can see the result; diminished economic activity all-around.

Another thing happens.  Scared out of making money in traditional ways, banks cast afield for new opportunities for profit in non-conventional areas.  Disaster is often the result.  We have seen this happen with conventional lending with the move to areas such as "structured finance," and capital market activities which all but a very few institutions understand well enough in which to be involved.  Real danger there, but couple that with the coming implementation of the Volker Rule…about which I am damn near certain Mr. Volker wishes he had never begun the discussion…and another source of bank profitability is cut off and it will not be long before we are down to 5,000 banks and heading south.  We haven't thought this thing all the way through I'm afraid as we tend to do most things.  I mean, this is complex stuff…not something simple like providing health care for 325,000,000 people.

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