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.
His answer: “We need to educate the boards of these banks that ultimately are supposed to be a stopgap for these things. They need to have a bird’s-eye view of the organization and understand if the left arm is taking on debt while the right arm is taking on debt. They have to oversee that.”
But some analysts are arguing that the current wave of consolidation could be followed by a move to break up the biggest banks.
In a recent congressional hearing, Nobel Prize-winning economist Joseph Stiglitz said the consolidation of the banking industry is "a very serious problem."
"I think it’s part of a general failure to enforce antitrust laws in the last few years. So one of the things I think is part of your exit strategy is that we have to think about breaking up some of the big banks.”
Even American Banker, which covers the industry, predicts in a story titled “Pressure Builds to Corral the Giant Firms” that “the financial services companies considered ‘too big to fail’ may face a political backlash next year.”
Another major issue will be how successfully these merged banks will be able to integrate their operations, from staffing to technology.
Even in the best of circumstances where companies have months to plan for a merger things can go awry, says Carol M. Beaumier, executive vice president of global industry programs at Protiviti, a business consulting and internal audit firm.
“The level of due diligence and planning doesn’t exist,” says Beaumier of the rapid consolidations that have resulted from the financial meltdown. “We are creating a daunting task for companies that have to carry out these mergers. It creates uncertainty among employees (and) customers, and the government will be looking over its shoulder.”
Good employees at some of these institutions may be lost in the shuffle because, she says, “You don’t have time to prepare and identify those key performers.”
As they grow, the megabanks could end up shooting themselves in the foot when it comes to service, says Standard & Poor’s analyst Stuart Plesser.
“When they get really big they may lose some relationships in the end because there’s certainly some impersonal banking going on when they get that big,” he says.
The National Consumer League’s Greenberg believes government should move quickly to keep banking fees down for consumers, just as Congress capped executive compensation as part of the bailout bill.
“The system isn’t working now, and all this consolidation means less competition,” she says. “It is incumbent on regulators and Congress to step in and say, ‘Wait a second. You don’t get to impose exorbitant fees.'”
“These banks have to get away from a business plan that’s based on fines and penalties, she adds, “and get back to providing consumers, farmers and small businesses credit at a reasonable rate that serves both the lender and the borrower.”
Until a new administration takes action, consumers and small businesses can always vote with their feet and use a smaller, community bank.
“Many consumers (are) turning to local banks, saying, 'I’m much more comfortable having my money with you,’” says Nancy Atkinson, senior analyst with Aite Group, a research firm that covers the financial services industry. “And small businesses say, 'I know my local banker, and I trust that person.’”