It’s been more than 35 years since I began my post-collegiate working career in the commercial banking business. At that time, there were well more than 17,000 federally chartered banking institutions in the United States.
The reasons for the high tally were clear. Most states didn’t allow commercial branch banking across state lines. And quite a few others – mainly in the Midwest and Plains regions – put severe restrictions on state branch banking as well.
That’s why states like Illinois and several others could have as many as 1,500 or more independent banking institutions each.
Of course, this hardly meant that these banks were operating in a vacuum. Not only were there efficient automated clearing houses to process interbank transactions, there were also robust correspondent banking networks interlinking smaller and larger banks.
These networks enabled community banks to offer many of the same deposit, lending and cash management services provided by the larger institutions.
“Bigger is Better …”
Beginning in the late 1980s and early 1990s, many of the regulatory barriers began to fall. States relaxed prohibitions on branch banking, while branching across state lines became common. It wasn’t long before a string of acquisitions created large, consolidated banks. The banking system began to look a lot more like Europe and Canada and a lot less like … well, the United States.
And it wasn’t just the small banking institutions that got swallowed up during this era of consolidation. Many of the most venerable names in regional banking ceased to exist – institutions like National Bank of Detroit, Marine Midland, Maryland National Bank, Girard Bank and United Bank of Denver.
But then a countervailing trend developed, and it wasn’t the proverbial “dead-cat bounce.” Consolidation caused voids in local banking coverage in many regions. As a result, some businesses and consumers sought a return to banking institutions where ownership and management were part of the community, and where decision-making was based on a more intimate knowledge of the local economy.
So the commercial banking industry actually witnessed an uptick in the number of institutions during the late 1990s and early 2000s.
… Until the Great Recession of 2008/09 hit.
Today, the number of federally chartered U.S. banking institutions now stands at its lowest level since the Great Depression.
The stark facts are these: A sluggish economy, low interest rates and ever-more complex regulations have diminished the number of federally chartered institutions to below 6,900. The tally, according to FDIC stats, had never fallen below 7,000 since the mid-1930s.
Almost entirely, the recent numerical decline has come among smaller institutions – those with fewer than $100 million in assets. And of the more than 10,000 banks that are now gone, it isn’t only because of mergers and consolidations. Nearly 20% of them simply collapsed.
We’re not simply dealing with a reduction in banking charters; the number of physical bank locations is also declining – by about 3% since late 2009, thanks in part to the rise of online banking in addition to institutional consolidation.
I asked banking industry specialist John Barlow for his thoughts on the latest bank figures. Not only is this expert head of Minneapolis-based Barlow Research, Inc., a nationally recognized financial services industry market research and consulting firm that counts the largest U.S. institutions among its client base, Barlow is also chairman of Iowa Falls State Bank, a family-owned institution that could be characterized as the quintessential “local bank.” (He’s also a former boss of mine back when I was working in the banking industry during the 1970s.)
Barlow noted an additional point about small banks: “By their very nature, community banks are typically closely held – often family-owned enterprises. A significant headwind for continued ownership is the transition of the business to a younger generation. The Baby Boomers had smaller households, and their children are more likely to move away from the business – mentally as well as geographically.”
… or Is it Not Better?
There may be something of a silver lining in the recent trends, however. Actual bank deposits have continued to grow, and consolidations have helped alleviate concerns that an abundance of separate banks leads to lower efficiencies in the financial system and more difficulties in conducting regulatory oversight.
… But only to a degree. “It remains to be seen where the economies of scale exist in banking. According to our studies at Barlow Research, larger banks do appear to be more efficient at generating income. But that’s because they’re more aggressive at charging fees, not because of lower costs,” Barlow reports.
David Kemper, CEO of Missouri-based Commerce Bancshares, may have a point when he notes, “There’s no reason why we need [so] many banks, especially if those smaller banks have a much lower return on capital. The small banks’ bread-and-butter is just not there anymore.”
[To that point, Barlow contends that one of the reasons smaller banks have a lower return on capital is that they have too much capital.]
There’s an important counter-argument to the “consolidation is better” view. It goes like this: Community banks remain critically important to the economy because they are the ones more likely to engage in small-business lending.
Barlow Research’s statistical studies show that the small businesses that deal with community banks are more likely to be able to secure a loan. And the average size of that loan will be larger than one obtained from a large institution.
The Most Startling Trend?
Another FDIC statistic might be the most startling trend of all. Over the decades, each year has witnessed new bank startups – ranging from at least a handful to the low hundreds in any given year. But that’s all changed since the Great Recession.
In fact, there has been just one new federally approved bank charter issued since 2010.
That institution, the Bank of Bird-in-Hand (located in Lancaster County, Pennsylvania), was able to raise approximately $17 million in investment capital. But it also had to expend nearly $1 million in consulting and legal fees to properly prepare its application for a new charter — including spelling out policies and procedures detailing its systems to guard against cyber-attacks and other security risks.
“Intense” doesn’t tell the half of it when describing the effort needed to obtain a new Federal bank charter.
Considering those hurdles, what made the Bird-in-Hand investors think they could run a profitable banking operation in today’s economic and business climate? It’s because they see an opportunity in serving a local community heavily populated by Amish and other rural/farming families. Banking-wise, it’s an underserved community.
There once was a local independent bank, of course … but that one was acquired by a larger entity in 2003. The new bank’s investors believe they can provide services that are better suited to the needs of the local community – which, in turn, will make their new bank successful.
John Barlow adds this observation about community banking: “A well-managed community bank is one of the best investments you can make, as long as you do not make bad loans. Do that, and it’s all over in a couple years.”
And about the degree of governmental regulation in the industry, he remarks: “I grew up in a banking family. My grandfather and father complained about regulators all the time. Banks are regulated businesses: What’s new about that?”
Barlow and the Bird-in-Hand bank investors may well be right about the prospects for smaller banks in America. Still … one wonders how many new banking institutions will be starting up in the current economic and regulatory environment.
… Or that the prospective investors will determine that it’s even worth the effort.
Nones Notes 
This, I believe, is the longest column you have written yet. So let me be brief …
Please check out http://www.honest-money.com. Whatever the details in John Tomlinson’s recent addresses, the premise of his thoughts, as outlined in the main book – available for download at the site (also in German, BTW) remains.
In my words of today, I paraphrase it as follows: The inherent dishonesty of the money lending system creates an addictive spiral of covering up yesterday’s lies with today’s inflation.
So much about that.
As to our bank here, locally: It is a community bank with 3 or 4 branches. It is enormously civic-minded and community-involved … spends an enormous amount on local arts/cultural projects … and had not a single bad mortgage loan when everyone else was teetering on the brink of dark-red.
Most other banks around here, with a few exceptions, were sold or traded off or merged. Of the large ones, only Chase (formerly Washington Mutual) and US-Bank remain.
BofA is still around, but trying to get the hell out.
And now for a global perspective:
FDIC statistics indicate that the U.S. population per bank (population divided by the number of banks) is 46,000. How does this compare to other parts of the world?
Here are the data for a selection of countries and regions based on the latest statistics I could find:
United States: 46,000
Eurozone: 61,600
EU excluding Eurozone and UK: 104,649
UK: 178,400
Japan: 860,000
China: 973,200
Thailand: 1,883,600
India: 7,153,000
(Besides the UK, the other EU countries outside the Eurozone include Bulgaria, Czech Republic, Croatia, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia and Sweden.)
Interestingly, the number of banks has been declining in recent years within all these geographies except China, where the number of village banks has grown dramatically during the last 5 years, particularly in the country’s remote central and western provinces.
Based on this quick surveillance, I think it’s a fair bet that even though the number of U.S. banks has dropped to a record low, the U.S. banking industry is still the least-concentrated in the world.
I have so much to say about this – its unbelievable. If people are asking themselves why – oh why – the economy isn’t rebounding as fast as the Feds want with 80 billion in bond purchases a month…it’s because something VERY STRUCTURAL changed in the U.S.: It was the ‘pressure’ mistakenly placed on small banks and institutions (to pay for the crimes of the big ones).
1) Major structural changes, including rapid consolidation among institutions, have altered the shape of the banking industry. Structural changes were driven by technology implementation costs, and other efforts to increase efficiency, the general performance of the economy, and the globalization of financial services markets. Deregulation of various aspects of banking, including a relaxation of regulatory restrictions on the ability of banking organizations to purchase other institutions and to establish branch offices, has also contributed significantly to the changes in banking structure consolidation is motivated by strategic considerations and may, in some cases, have anticompetitive effects. The number of banking institutions has fallen from about 18,600 to under 10,000. The percentage decline is much larger for savings associations than for commercial banks—52 percent. Small banks that once accounted for over 35% of all U.S. banks now account for less than 10%.
2) The Germans are doing very well, thank you. How did they get there? Well Germany has a higher number of banking institutions per capita (in Europe). Right up to 1999, the U.S. had 3.9 banks per 100,000 people. This has dwindled to below 3 now in 2011. Germany on the other hand boasts 3.6 (interestingly sick Europe (the rest of Europe) – has a ratio of 1.1). The Germans invented community banking, and what they call saving societies. They can take a long-term approach, because their local banks do. The President of one company can talk to the President of a local bank – and work their way through problems. They have the power to make decisions locally.
Banks in Germany and Japan are highly involved with commerce. They care. The Japanese, even have a term for it – the Keiretsu! 7 Banks in Japan are invested in basically every major business in Japan – like 7 national mafias and they ‘back’ their companies globally – extending export financing and support.
3) And here is an article about several local companies’ (including my own) experiences with M&T bank. (It’s long – but so is Phil Nones’ blog post.)
“The Worst Bank in Delaware – M&T Bank”
As the rumor mill goes, one day the President of Allens Family Foods (based in Seaford, DE) received a letter in the mail from M&T bank calling in their line of credit. No phone call, no warning – just a letter. A few months later one of the region’s oldest and most established poultry companies was out of business, with literally thousands of employees out of work across Delaware and Maryland. As the Allens family has put it publicly, “After banking with them for three generations, that’s how we were treated! One day we had a line of credit, next day we didn’t!” It wasn’t high grain prices that killed Allens, it was M&T Bank.
It wasn’t that long ago, when one of my companies too received a letter in the mail when they opened some branches in Maryland (this was before M&T moved into Delaware) asking us to close our operating accounts for those locations. No phone call, no notice. Just a simple letter! No reason.
And today in the news, I heard that one of Georgetown’s most precious properties – the Brick Inn – is up for foreclosure because M&T bank simply hasn’t been able to communicate with the owners to get a property inspection made. How ridiculous is that?
M&T Bank might want you to think they don’t mess around. But in my opinion it’s more than that; it’s bureaucratic cowardice when people can’t seem to discuss issues with clients and hide behind letters in the mail. No one wants to take responsibility. No one wants to stand up and take ownership of decisions.
In a large bank, people can hide behind their institution and be faceless – abstract. But this is NOT how to provide service. People should not have to chase around a major bank to find out what the problem is — and better yet, what to do to fix it.
When Wilmington Trust was taken over by M&T Bank, Delaware and Sussex County in particular lost a valued business partner. Many of our local business leaders knew people at Wilmington Trust on a first-name basis.
Banks, after, all are the keys to prosperity. One of the great secrets of American wealth creation has been its banking system. In no country in the world were there so many banks per capita. Having lived and travelled in virtually every corner of our planet – I can vouch for this first-hand. America was once the great engine of the world economy – because it had the best banking system in the world. Local bankers identified local leaders and financed their growth. This was America’s Darwinian ‘economic selection processes’ at work. It’s at the core of U.S. prosperity.
Sadly, this is in America’s past.
Major structural changes, including rapid consolidation among institutions, have altered the shape of the banking industry. Structural changes were driven by technology implementation costs and other efforts to increase efficiency, by the general performance of the economy, and by the globalization of financial services markets.
Deregulation of various aspects of banking, including a relaxation of regulatory restrictions on the ability of banking organizations to purchase other institutions and to establish branch offices, has also contributed significantly to the changes in banking structure consolidation is motivated by strategic considerations and may, in some cases, have anticompetitive effects.
The number of banking institutions has fallen from about 18,600 to under 10,000. The percentage decline is much larger for savings associations than for commercial banks: 52%. Small banks that once accounted for over 35% of all U.S. bank institutions now account for less than 10%.
Despite some increase in branches, most banking services are actually remote now. Local branch officials take your information and pass it along. You are nothing more than a bunch of numbers on an application form. Loans are now solicited by remote calling centers overseas, there is remote document processing, and application follow-up is done via phone calls from remote calling centers that are out of state, or even out of the country.
Plus, with over 20% of U.S. banks being foreign-owned, major decisions are in many cases not even made in the U.S. – pushing decision making even further away.
There has also been a serious decline in the number of banking offices in low- and moderate income areas – rural areas as well as inner cities – precisely the areas that need financial support to grow.
This is not the way to build a thriving economy –- locally or nationally. Entrepreneurs need access to capital, which means access to banks. And not just anyone at the bank, but decision-makers at banks. Real decision-makers not paper-pushers. Not people that hide behind paper, but seasoned individuals who are fully aware of the story behind the numbers. This is vital to prosperity.
Large banks counter this argument that it is precisely these personal relationships that have damaged banking and resulted in poor collateral loans. An impersonal approach, they say, makes for better loan decisions.
This is absolute garbage (or if you like, “malarkey”). Banking in America crumbled in 2008 and 2009 because of wide-scale fraud by big banks, not small ones.
Check out the recent multi-billion dollar suits against giants like Bank of America. Banking in America crumbled because big banks were taking big bets with derivative products that even their own boards could not understand. In fact, these major banks sit, right now, on over $50 trillion dollars in phony derivative products. They could singlehandedly bring down the world economy.
The truth is the Feds are scared of them. That is why they haven’t put a single banker in jail.
Yes, big banks destroyed the economy. And with their destruction, “big” banks led the destruction of real estate prices. And then subsequently, small banks were affected as a second-order issue having to deal with lower-value collateral. The prime, first-order problem was created by big banks. The origins of the crisis had nothing to do with small banks.
Anyone who has taken Economics 101, knows that at the end of the day new money (real growth, not fudged growth) is created by loan actions of the banking sector. When a local bank offers a lender a loan, it creates real money. It creates a real promise to pay. Cash. after. all is nothing but a promise to pay. Real money is created within our community banks, not by the Federal Reserve.
M&T bank is a darling of the Federal Reserve. A model for how banks should perform. But take a short trip up to Buffalo (where they are based) and you’ll see nothing but devastation in their home market. I had the occasion to make a client call up there only a few months ago, and all I saw was one derelict company another, shuttered. M&T, you have pissed on Buffalo — or at the very least dissed it.
Without Warren Buffett’s capital, M&T would be an empty shell; its true performance would be abysmal. It reminds me of how a rich owner can suddenly appear to change the fortunes of what would otherwise be a garbage sports team. The team will look good for a few years with some new star players, but in the long run those franchises always turn back to dreck. This form of banking –- the M&T model of banking — is what the Feds are pushing on the rest of the economy. It is wrong.
If you really want to know how a banking sector should perform, take a look at the only viable economy in Europe – Germany. While the rest of the Europeans are dying under a credit crunch, the Germans have been able to create a vibrant economy built on the basis of what they call the “Mittelstandt”.
Go to any small town in Germany (I go there every year – I have clients there) and you will likely stay at a small inn like the Brick Inn in Georgetown, DE – not a Holiday Inn. And your client will likely be a small- to medium-sized company that is a global leader involved in doing something very esoteric – like maybe building ship cranes, or specialty pencils or refractories for kilns. Our local equivalent would have been a company like Allens Family Food – a family outfit that generally put long-term interests ahead of short term rewards. These companies are at the very heart of Germany’s robustness and prosperity. And they pay good wages too, and generous benefits.
The Germans are doing quite well, thank you. How did they get there? For starters, Germany has a higher number of banking institutions per capita. Right up to 1999, the U.S. had 3.9 banks per 100,000 people. This has dwindled to below 3 as of 2011. Germany, on the other hand, boasts 3.6 (interestingly, the rest of Europe only has a ratio of 1.1). The Germans invented community banking, and what they call saving societies. They can take a long-term approach, because their local banks do. The President of one company can talk to the President of a local bank – and work their way through problems. They have the power to make decisions locally.
Banks in Germany and Japan are highly involved with commerce. They care. The Japanese, even have a term for it: the Keiretsu. Seven Banks in Japan are invested in basically every major business in Japan -– like seven national mafias — and they ‘back’ their companies globally, extending export financing and support.
The tragedy of all this is that the Feds and even local banking regulators don’t see it. Major banks screwed up our economy … yet regulators are taking revenge on the small banks. Ask any small bank President and you will sit there for hours hearing how regulators are battering them. Under the guise of anti-terrorism, anti-money laundering, anti-this and anti-that, they have increased regulations and imposed additional costs to banks …largely to protect and pay for “big bank screw-ups”.
Since when did Osama bin laden decide to open up a bank account in Sussex County, Delaware? Are you kidding me??
Here’s the big irony in all of this: With real advancements in software and technology, the case for big banking is largely diminished. The days of having to have a giant server from IBM to process your transactions and large back offices are gone. These days, with the internet and cloud computing, you can scan checks right at the teller station, send data to a data service; and all of your back room tasks can be done with Internet-linked systems. If the banking regulators were out of it, there would be a ton of small banks. In fact, small banks would become a huge growth industry, and they would lift America up with them.
Sadly, I’m sorry to say the state regulators in Delaware and other states have sold their souls to major banks like Bank of America. They can’t seem to understand the great damage that these banks are doing, not just to local economies but to the national economy as well.
Part of the problem is a national (Federal) one as well. The Feds are printing so much phony paper that they need large money-center banks to underwrite their Treasury Bills, and bring in large foreign buyers and depositors.
You can’t get the Chinese to deposit a trillion dollars in a U.S. bank if the bank itself doesn’t have several trillion dollars in assets to begin with. For a long time, the Feds have been pushing for the creation of super-size banks so they can borrow more money. (This, by the way, isn’t a problem just with the current administration; it’s been going on for decades. The Feds have sold their souls to these big banks and are basically taking orders from them.
We do not have a truly independent FDIC, or NCUA, or indeed Federal Reserve. These institutions serve at the pleasure of the big banks. But it’s a false economy; super-sizing anything makes you obese and lazy. And in the long-run, it hurts the U.S. economy.
Wealth is created locally, not nationally. If we want to increase America’s prosperity, we need to go back to a community banking mode; — to local decision makers and local processing. We need to migrate back to relationship banking. Big banks do nothing for us.
Will the next administration in D.C. take note? If you want to jump-start the economy and real jobs create the ‘most favorable environment possible’ for small banks. Big banks are friends to no one.
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