Did you know the Government – both the Federal Reserve and Federal Govt- policies dropped the number of community banks from around 8000 in the 2000s to only about 4,200 today? It’s something most people are not aware and perhaps more importantly, in my opinion, this makes our system more fragile than ever.
It’s my personal belief that this consolidation will continue, and the system is set up to give us just hand full of banks. From here the control will be in the hands of less people and ultimately its juts easier to bring about CBDCs and a cashless society.
But back to the importance of small banks and why they are getting hurt by government policies.
First, net interest margin. This is the main driver of income for the banks. It’s simply the difference between the savings rate being paid to depositors and lending rates charged by the banks to consumers. This is a huge part of profitability with commercial banks. We know that an increase in interest rates by the Federal Reserve will widen the spread between deposit rates and the lending rate.
The last 20 years, keeping the feds fund rate near zero hurt smaller banks much more than bigger banks for a number of reasons. First, unlike bigger banks, they can’t rely on economies of scale to ensure profitability. So larger banks originate higher volumes of loans, so they are going to be able to handle a smaller spread for the net interest margin.
So, the Fed has a lot of culpability here since they have been keeping that rate near zero since the days Alan Greenspan was the Federal Reserve Chair. We’ve seen the large banks bailed out, but no one discuss the number of small ones that have been hurt and closed.
There’s even more evidence that quantitative easing has hurt the small banks when we look at the number of new banks created since really the great recession. But let me focus too more recently. The number of entrants in 2021 was only 9 new banks. And here lies the problem, it used to be the case that small banks would fail and be replaced by new banks, but this is no longer the case. The small banks are not getting created. It’s been negative since the 1990’s, meaning more banks leave each year than enter.
In addition to having to deal with the low rates, small banks are having to deal with excessive regulations that are either not needed or don’t provide the real picture of what’s happening at their firm. So, we know that the Silicon Valley Bank (SVB) failure was caused by putting on such a huge portion of their portfolio in bonds in the lowest interest rate environment possible. It was a huge gamble and one that executives were happy to make. They clearly knew that if rates went up, they would be in trouble, once the bond prices drop. There was no regulation on having such an extreme duration mismatch, and we are paying indirectly for it.
What does fewer banks mean for us?
With more and more banks merging, we might get to a place where there are only 10 banks in the country. It’s terrible news for consumers and not that farfetched. It could make getting loans and credit harder, especially for people with lower credit scores. We can only expect big banks will have similar methods to evaluate credit and decide on loan eligibility.
Small Businesses will suffer as community and regional banks lend most of the money to small businesses. With larger banks. they aren’t able to quantify the risk like consumer loans (auto, mortgage, etc.) as the volume isn’t as high.
So, with fewer banks, we can expect the consumer will suffer. Rates will be higher on loans as there is less competition. Deposits will pay less too.
