Ask an economist what the underlying theme of the late 19th century United States economy was, and he’ll probably reference robber barons, the Sherman Antitrust Act, Standard Oil, etc. The consensus opinion was that many major industries were suffering from anti-competition: too many assets ending up in too few hands, existing players in an industry ought to be prohibited from erecting artificial barriers to upstarts.

However, today the four largest consumer banks in the United States – Bank of America Corporation (BAC), Citigroup, Inc. (C), JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC) – average $2.05 trillion in assets. The smallest of those, Wells Fargo, has quadruple the assets (and an even greater multiple of the deposits) of the nation’s fifth-largest bank. Add investment bank Goldman Sachs (GS) to the Big Four, and you’ve got an oligopoly with assets that represent around 60% of the entire nation’s economy. The comparable figure for the five largest banks in 2006 was 43%.

Their sheer size gives large banks an inherent advantage. The reporting requirements are onerous for all banks, but the larger ones have the wherewithal and labor to complete every currency transaction report and other piece of Treasury Department paperwork. If you’ve never attempted to deposit $10,000, try it sometime. Note how long the transaction takes and how many quires of red tape you have to plow through in order to testify to the satisfaction of regulators that you are neither a drug dealer, a gambler, nor a prostitute. Smaller banks have trouble dedicating educated manpower to the task of ensuring that every regulatory “t” is crossed and “i” dotted.

In 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. Dodd-Frank was the largest overhaul of an already heavily regulated banking industry in many decades. The law put more financial institutions than before under the jurisdiction of the Federal Reserve and created additional regulatory agencies. At the consumer level, Dodd-Frank increased federally insured deposit limits and set caps on debit card fees. But the legislators responsible failed to understand that reducing one profit center for banks meant that they would attempt to make up the money elsewhere.

The affected banks, even the large ones (in fact, especially the large ones), compensated for the new requirements by essentially eliminating free checking accounts. Such accounts used to entice new depositors in a healthy form of competition. In the post-Dodd-Frank world, you need to maintain a large minimum balance and/or withdraw regular amounts – which, by the way, are two mutually contradictory activities – to qualify for free checking. Or prepare to pay as much as $108 annually for what used to be free.

In the United States, banks are regulated by both the feds and each state, and occasionally the regulations of one are incompatible with the other’s. When a bank starts charging larger overdraft fees to make up for lost revenue, and then a state in which the bank operates decides to order it to offer more generous overdraft protection, sometimes it is easier for the bank to close shop or sell itself to a larger entity. 

Community banks are losing market share faster than ever. In the last 24 years, smaller community banks have lost 18 percentage points of the overall market. The Big Five gained it all and then some.

When the real estate market began to crumble in the late aughts, community banks were hardest hit. Small institutions with $4 billion or $5 billion in total assets couldn’t petition Congress for taxpayer funds and claim to be too vital to the economy at large or “too big to fail”. When assets fall, equity and liquidity follow, leading to a reduction in capital. No fewer than 536 banks (and counting) have gone under since 2000, practically all smaller banks. And none were anywhere near as mismanaged as, say, Bank of America, which received $45 billion from the infamous Troubled Asset Relief Program. Bank of America’s viability was never seriously in question, as its perceived importance to the economy at large was taken for granted.

US regulators use the CAMELS system (capital, assets, management capability, earnings, liquidity, and sensitivity) to quantify banks’ worthiness. This involves not merely examining audited financial statements, but also regulators showing up in person and sniffing through the records. In the wake of the financial crisis, CAMELS regulations were tightened, resulting in a death spiral for many smaller banks.

Most noteworthy of all, smaller banks’ performing loans whose underlying collateral is no longer appraising get called even when payments are being made as agreed. The loans are then designated as “non-performing”, even though they aren’t, which necessarily reduces a bank’s equity and capital position. To compensate, banks have to put more money in loss reserve, meaning worse capital and liquidity ratios. The circle is vicious, and is purely regulatory.

The Bottom Line

Banking consolidation starts to seem inevitable. With only a few dozen players remaining, and only four of any real influence, bank customers’ options continue to dwindle.