Bank consolidation: Those two words have been getting more attention as turmoil continues in the banking sector, and apparently there’s some room for it. Yesterday, we covered how the United States has more banks than any other country. And why is that?
The U.S. is a country of capitalist contradictions. Only four companies make nearly all of our baby formula. Four airlines run most of our flights. As for banks? This country has more than 4,000.
“Banking in this country is way more restrictive than in any other of the industrialized countries,” said Richard Grossman, an economics professor at Wesleyan University. “We’ve been super suspicious of the centralization of financial power.”
Grossman said, at its peak, the U.S. had somewhere around 25,000 banks. That was before the Great Depression. Back then, lenders couldn’t operate across state lines, and some states had even stricter laws, which forced companies to get creative.
“Banks weren’t allowed to have branch offices,” Grossman said. “But a bank in Illinois that was sort of running out of room bought the right-of-way under a street so that they could expand their operation.”
Community banks were places where small business owners could more easily get a loan. Same as today. But David Weiman, an economic historian at Barnard College, said they also carried the same risks.
“Most regional banks, obviously prone to the ups and downs of the regional sort of economies, the sectors that they tend to specialize in,” he said.
When railroad construction dropped off in the late 1890s, so did business at railroad industry banks. If farmers had a tough year, so did their bank. This is what we saw with Silicon Valley Bank’s demise. It mostly served tech startups.
In the last 50 years, deregulation has allowed lenders to operate across state lines, making it easier for them to merge when they’re in trouble. Alas, here we are with 4,000 banks. Elinda Kiss, who researches financial regulation at the University of Maryland, expects that number to shrink.
“Yes, I think we will see more consolidation. I don’t have an idea what’s the perfect number of banks,” she said.
She said no one really knows the magic number between too many banks and too few with too much market power.
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