Though the U.S. banking sector was in recovery mode in 2010, it still managed to reach some highs and lows. There were 157 bank failures in the country last year, the most since 1992, according to the Federal Deposit Insurance Corporation (FDIC). And the number of new bank charters was at an historic low -- 11, compared with 181 three years earlier.
With so many banks leaving the sector and so few entering it, a long-anticipated consolidation process is now under way. The U.S. is expected to end up with no less than 6,529 commercial banks and 1,128 savings institutions by the end of this year. That is a 4.4% decline from the previous year, and it leaves the country with nearly half as many institutions as it had 20 years ago, according to the FDIC. What does this consolidation mean for the banking sector's next 20 years? Should consumers be concerned about the shrinking number of banks?
Many experts expect consolidation to continue, and predict that the trend will leave the banking system better off in the long run. "We don't really need as many banks as we used to," says Jack Guttentag, a finance emeritus professor at Wharton and former economist at the Federal Reserve Bank of New York. "Banks now have the power to [set up branches] wherever they want to, so what really matters is how many options a customer has in a certain market."
Therein lies the challenge, according to Kenneth H. Thomas, a Wharton lecturer of finance. As he sees it, not all customers will benefit from greater consolidation. A market, such as the one in the U.S., that is "over-banked," with a supply of banking services exceeding demand, "is generally good for consumers and businesses because it results in lower prices -- i.e., lower loan rates, loan/deposit fees and higher deposit rates -- and higher output [in terms of] more varied and innovative products," he notes. "Some may argue that 'over-competition' [or over-banking] could drive weaker banks out of business" -- as happened to Washington Mutual, the savings institution that collapsed in 2008 -- "but then someone else comes in and replaces them, yet may reduce the number of offices and amount of services."
History Lessons
It is no accident that the U.S. has had such a large number of banks. Rather than setting up one, large national bank as other countries do, the U.S. federal government rolled out various laws in 1784 to encourage multiple banks in individual states. In 1863, a new banking act introduced a national charter that encouraged the establishment of more financial institutions even as it taxed banks with state charters. Nearly 70 years later, with the dawn of the Great Depression, the country had more than 30,000 banks. But the stock market collapse took its toll. In 1933 alone, about 4,000 commercial banks and 1,700 savings and loans institutions failed.
www.huffingtonpost.com/2011/04/28/banking-sector_n_855003.html
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