[OPE] Big US banks grow even bigger

Banks 'Too Big to Fail' Have Grown Even Bigger
Behemoths Born of the Bailout Reduce Consumer Choice, Tempt Corporate Moral
Hazard

By David Cho
Washington Post Staff Writer
Washington Post Friday, August 28, 2009

When the credit crisis struck last year, federal regulators pumped tens of
billions of dollars into the nation's leading financial institutions because
the banks were so big that officials feared their failure would ruin the
entire financial system. Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that
dominate U.S. finance. A series of federally arranged mergers safely landed
troubled banks on the decks of more stable firms. And it allowed the
survivors to emerge from the turmoil with strengthened market positions,
giving them even greater control over consumer lending and more potential to
profit.

J.P. Morgan Chase, an amalgam of some of Wall Street's most storied
institutions, now holds more than $1 of every $10 on deposit in this
country. So does Bank of America, scarred by its acquisition of Merrill
Lynch and partly government-owned as a result of the crisis, as does Wells
Fargo, the biggest West Coast bank. Those three banks, plus
government-rescued and -owned Citigroup, now issue one of every two
mortgages and about two of every three credit cards, federal data show.
(...)

"The dominant public policy imperative motivating reform is to address the
moral hazard risk created by what we did, what we had to do in the crisis to
save the economy," Treasury Secretary Timothy F. Geithner said in an
interview. The worry for consumers is that the bailouts skewed the financial
industry in favor of the big and powerful. Fresh data from the FDIC show
that big banks have the ability to borrow more cheaply than their peers
because creditors assume these large companies are not at risk of failing.
That imbalance could eventually squeeze out smaller competitors. Already,
consumers are seeing fewer choices and higher prices for financial services,
some senior government officials warn. (...)

Officials waived long-standing regulations to make the deals work. J.P.
Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more
than 10 percent of the nation's deposits despite a rule barring such a
practice. In several metropolitan regions, these banks were permitted to
take market share beyond what the Department of Justice's antitrust
guidelines typically allow, Federal Reserve documents show. "There's been a
significant consolidation among the big banks, and it's kind of hollowing
out the banking system," said Mark Zandi, chief economist of Moody's
Economy.com. "You'll be left with very large institutions and small ones
that fill in the cracks. But it'll be difficult for the mid-tier
institutions to thrive." (...)

In the last quarter, the top four banks raised fees related to deposits by
an average of 8 percent, according to research from the Federal Reserve Bank
of Dallas. Striving to stay competitive, smaller banks lowered their fees by
an average of 12 percent. (...) In Santa Cruz, Calif., Wells Fargo, Bank of
America and J.P. Morgan Chase hold three-quarters of the deposit market.
Each firm was given tens of billions of dollars in bailout funds to help it
swallow other banks. The rest of the market, which consists of a handful of
tiny community banks, cannot match the marketing power of the bigger banks.
(...)

Last October, when the Fed was arranging the merger between Wells Fargo and
Wachovia, it identified six other metropolitan regions in which the combined
company would either exceed the Justice Department's antitrust guidelines or
hold more than a third of an area's deposits. But the central bank thought
local competition in each of those places was sufficient to allow the merger
to go through, documents show. (...)

Large banks with more than $100 billion in assets are borrowing at interest
rates 0.34 percentage points lower than the rest of the industry. Back in
2007, that advantage was only 0.08 percentage points, according to the FDIC.
Such differences can cause huge variance in borrowing costs given the
massive amount of money that flows through banks. Many of the largest banks
reported a surge in profit during the most recent quarter, including J.P.
Morgan Chase and Goldman Sachs. They are prospering while many regional and
community banks are struggling. Nearly three dozen of the smaller
institutions have failed since July 1, including Community Bank of Nevada
and Alabama-based Colonial Bank just last week. (...)

If the government continues to back big firms over small, regulators worry
that reckless behavior could return to Wall Street. The administration's
regulatory reform plan takes aim at this problem by penalizing banks for
being big. It would require large institutions to hold more capital and pay
higher regulatory fees, as well as allow the government to liquidate them in
an orderly way if they begin to fail. The plan also seeks to bolster
nontraditional channels of finance to create competition for large banks. If
Congress approves the proposal, Geithner said, it would be clear at launch
which financial companies would face these measures. Economists and
officials debate whether these steps would address the too-big-to-fail
problem. Some say, for instance, that determining the precise amount of
capital big financial companies should hold in their reserves will be
difficult.

Geithner acknowledged that difficulty but said the administration would
probably lean toward being more strict. Taken together, the combination of
reforms would be a powerful counterbalance to big banks, he said. "Our
system is not going to be significantly more concentrated than it is today,"
Geithner said. "And it's important to remember that even now, our system
remains much less concentrated and will continue to provide more choice for
consumers and businesses than any other major economy in the world."
http://www.washingtonpost.com/wp-dyn/content/story/2009/08/28/ST2009082800437.html

_______________________________________________
ope mailing list
ope@lists.csuchico.edu
https://lists.csuchico.edu/mailman/listinfo/ope
Received on Sat Aug 29 12:08:20 2009