Tuesday, July 20, 2010

Battling for the Soul of 21st Century Banking: Mega Banks Pressure Smaller Players

BY DAN FITZPATRICK AND ROBIN SIDEL, Wall Street Journal

JULY 20, 2010

ORLANDO, Fla.—At the end of May, Florida Business Bank shut down the loan office it opened here just a year ago. It wasn't doomed by the economy. It was surrounded by giant banks that keep getting bigger and bigger.

Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co., which hold about $3.50 of every $10 in local deposits, are "squeezing" and "hoarding" customers "any way they can," says Jeff Wagner, chief financial officer at Florida Business Bank. Corporate customers are being told by the biggest lenders not to move their deposits to other banks or else they might not get a new loan, he says.

The financial-overhaul bill that will be signed into law by President Barack Obama on Wednesday won't address one of the most far-reaching consequences of the recent crisis: Market power is concentrating in the hands of the nation's largest banks.

Fortified by infusions of taxpayer capital and takeovers of other large institutions killed or wounded in the crisis, a handful of hulking banks is emerging from the mess to dominate everything from mortgages to checking accounts to small-business loans. The financial-regulation law will bring new shackles and oversight, likely to cost the big banks billions in revenue. But their growing supremacy will help them absorb the blow.

Bank of America, J.P. Morgan and Wells Fargo now have 33% of all U.S. deposits, up from 21% in mid-2007—the fastest shift of such a large chunk of deposits in U.S. history. Much of the gain came from their acquisitions of Countrywide Financial Corp., Washington Mutual Inc. and Wachovia Corp., respectively.

The three huge banks made 57% of all home mortgages in the first quarter, up from 28% in 2008, according to Inside Mortgage Finance, an industry newsletter. In 2008 and 2009, they got $95 billion in capital from the U.S. government, all of which they have repaid.

Measured in loans and other assets, Citigroup Inc. and the three other giants had $7.7 trillion as of March 31, up 56% since the end of 2007. Their combined assets are nearly twice as big as the assets of the next 46 biggest banks, according to SNL Financial, a research firm in Charlottesville, Va.

By providing more branches, ATMs and features like free online bill payment, the newly consolidated banks have made many basic services more convenient and cheaper for customers. The banking giants often offer lower mortgage rates and other types of loans than smaller players.

"At the end of the day, consumers and small businesses will benefit" from consolidation, says Bank of America executive Mark Hogan, who runs retail branches on the East Coast.

To keep their costs down, however, the big banks generally pay lower rates on certificates of deposit and other types of savings products than the small players, meaning less interest income for millions of depositors.

The mega-banks are preserving capital as they brace for lost revenue from parts of the financial-services overhaul that don't impact smaller banks, such as new restrictions on proprietary trading and derivatives. As a result, they have cut their lending more than small banks, leading to a smaller supply of loans.

"Concentration on the national level is something that ought to be of concern to policy makers" because it means "fewer choices and less-competitive pricing" for small businesses and consumers, says William Isaac, the chairman of the Federal Deposit Insurance Corp. from 1981 to 1985.

Possibly even worse, the consolidation puts more risk "in fewer and fewer hands, so when mistakes are made, they are doozies."

Bank consolidation has become an issue outside the U.S. as well. In Britain, the six largest banks increased their share of the mortgage market to 78% in 2008 from 66% in 2007, according to the National Audit Office. Lawmakers there recently asked for an inquiry into the power of the banking industry.

U.S. banks that hold 10% of all U.S. deposits already are banned from buying rivals in many circumstances. The financial-regulation bill toughens that threshold to prohibit banks from making acquisitions that would put them over 10% of all liabilities—not just deposits—in the banking system. The curbs will hardly make a difference. The bulk added during the crisis already is pressuring small banks.

Bank of America, J.P. Morgan and Wells Fargo "can make money beyond belief" because of their low costs and volumes of scale, and "there is no chance of anyone challenging them," says Arnold Danielson, a bank analyst in Bethesda, Md.

J.P. Morgan's takeover of Washington Mutual's failed banking operations in September 2008 increased the asset size of the New York company by more than $300 billion, or 20%. Bank of America bought Merrill Lynch & Co. and Countrywide as those two companies, with nearly $1 trillion in combined assets, were sinking. Wells Fargo acquired Wachovia, the biggest bank on the East Coast, when Wachovia was on the verge of collapse in late 2008.

The three bulked-up giants now hold more than a third of all deposits in 25 metropolitan areas that are home to 70 million people, or nearly one-fourth of the U.S. population, according to consulting firm Oliver Wyman.

In Madera, Calif., Bank of America, J.P. Morgan and Wells Fargo have a combined market share of about 60%.

"Between their pricing and their number of locations, they are a very strong competitor for the consumer," says Daniel Doyle, chief executive of Central Valley Community Bancorp, in Fresno, Calif. Central Valley has one of its 16 branches in Madera. Rather than fight the giants head-on where they are strongest, it focuses on business customers.

In Orlando, the landscape's tilt toward the big is obvious up and down Orange Avenue, a 17-mile thoroughfare that runs through much of this city of 267,000 residents. Built as a one-lane dirt road in the late 1800s to carry oranges by horse-drawn cart, Orange Avenue now carries a stream of cars past office buildings, hospitals, trailer parks, churches and auto-repair shops.

Orange Avenue also has been Orlando's banking hub for decades. Since the start of 2008, though, about a quarter of the branches on the street have changed hands. Other buyers of shaky or failed banks include regional banks BB&T Corp. and Centennial Bank.

Bank of America, J.P. Morgan and Wells Fargo are making life harder for local bankers. Right after J.P. Morgan barreled into town, the bank hired a top commercial banker from SunTrust Banks Inc., a regional bank based in Atlanta, to woo corporate customers.

Billboards, print and television ads and junk mail have surged. SunTrust, the biggest bank in town, responded with more than 20 of its own "SunTrust is still SunTrust" billboards. It also hired away two top Wells Fargo executives shortly after the Wachovia acquisition, according to Tom Kuntz, who runs SunTrust's Florida operations.

"You can definitely see the powers blasting the market," says Jeffrey Cowherd, senior vice president for First Commercial Bank of Florida, a nine-branch bank that promotes "hometown" service."

Banking regulation has do nothing but make big banks richer at the expense of the smaller ones and now we may end up seeing the end to community banks thanks to 'financial overhaul'. I guess this is what they mean by no more bailouts right?