Shrinking Number of Banks Raises Concerns for Economy

Sunday, 03 Aug 2014 03:24 PM

By Michael Kling

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The number of banks in the U.S. is plunging along with the number of global U.S. banks — troubling trends that could mean bad news for the American economy, warns a top executive at the American Bankers Association.

"Taken together, they suggest a fire that is burning our national financial future at both ends," writes Wayne A. Abernathy, the ABA's executive vice president for financial institutions policy and regulatory affairs, in an article for American Banker.

Only one of the world's largest banks is based in the U.S., while four are headquartered in China, he says, citing a report from SNL Financial. In 1999, six of the world's largest banks were based in the U.S., including the world’s two largest.

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Consolidation is prompting small banks to disappear, Abernathy says, pointing to an FDIC report. The number of financial institutions with less than $100 million in assets declined by 85 percent between 1985, while the number with over $10 billion of assets almost tripled and their total assets increased more than 10-fold, according to that report.

Banks are crucial for economic success, Abernathy stresses. "We cannot afford to be complacent about the industry’s future."

Regulators must work to charter new banks to promote a banking system that includes a range of small, medium and large banks, he urges.

The growth of "bank substitutes" proves there's a demand for banking services. However, those stand-ins are less safe, more vulnerable to fraud, and less likely to survive financial troubles.

American banks, by contrast, Abernathy argues, have recovered from the financial crisis and boast strong balance sheets.

While they should not abandon reasonable regulations, government officials should let banks run the banking business. That move will help speed up the economic recovery, he asserts.

"Regulatory oversight has played a role in promoting the industry’s financial health. But regulators cannot run a successful banking business," he argues.

Many community banks blame the Dodd-Frank Act, a comprehensive law passed to prevent another financial crisis, for forcing small banks to close.

The act caused 80 Texas banks to close, Dale Wilson, chairman and CEO of First State Bank of San Diego, Texas, told Congress, reports the St. Louis Business Journal.

"These banks did not fail," Wilson said. "Texas has one of the healthiest economies in the country — we call it 'the Texas miracle.' These were community bankers who could not maintain profitability in an environment where the regulatory compliance costs are increasing between 50 and 200 percent."

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