- Corporations have lots of cash around; private equity firms have lots of cash around; and big banks also have lots of cash hanging around.
- Large banks have come to dominate the United States banking system as the financial collapse and technological changes have all played into the hands of the survivors.
- Big bank dominance will continue into the future and there is every indication that these institutions have the resources and will to create even more concentration of financial assets.
AUTHOR: John M. Mason
Recently, I have discussed the fact that the last ten years of monetary ease have left a lot of money in people’s pockets, money that is just looking for a way to be used.
Then there are the private equity firms that have accumulated more than $1 trillion in uninvested capital that is looking for deals to participate in.
One must not forget the banking industry, which as of March 14, 2018 has almost $2.3 trillion in cash assets, assets that they are not going to sit on forever.
The game is different here. The banks have to deal with the regulatory system and up to this point of time, the regulators have not looked favorably upon bank mergers, especially the acquisitions of the largest banks.
But things are changing in the banking arena, most of it silently, and this is, almost clandestinely, leading us into a whole new world of banking.
For one thing, the number of banks in the banking system continues to shrink dramatically.
As of December 31, 2017, the FDIC tells us that there are less that 5,000 insured commercial banks in the banking system… 4,918 to be exact. This is down 194 banks from December 31, 2016.
From around the start of the Great Recession, December 31, 2007, there are 2,361 fewer commercial banks in the banking system.
The 4,918 banks in existence on December 31, 2017 is only 60 percent of the number of banks in existence on December 31, 2000, but you get the idea.
Just a reminder of where the banking system is coming from… there were 12,343 banks in existence on December 31, 1990 and this does not count all the thrift institutions that were around at the time.
According to Federal Reserve data, on March 14, 2018, the banking system in the United States had $16.675 trillion in total assets. The largest 25 domestically chartered banks in the US controlled $9.395 trillion, more than 56 percent of these assets.
Just to put these numbers in perspective, foreign-related financial institutions, mostly very large institutions, included in the total assets numbers, accounted for $2,344 trillion in assets, or more than 14 percent of the total banking assets in the United States.
So, the 25 largest domestically chartered banks in the US plus foreign-related institutions in the banking space controlled over 70 percent of total banking assets in the United States. So the remaining roughly 4,850 banks in the US possessed only 30 percent of the country’s banking assets.
“The three largest U.S. banks by assets have added more than $2.4 trillion in domestic deposits over the past 10 years, a 180 percent increase, according to a Wall Street journal analysis of regulatory data."
“That amount exceeds what the top eight banks had in such deposits combined in 2007.”
“At the end of 2007, the three banks held 20 percent of the country’s deposits. By the end of 2017, they held 32 percent, or 3.8 trillion.”
“Last year, about 45 percent of new checking accounts were opened at the three national banks, even though those lenders had 24 percent of US branches… Regional and community banks… had 76 percent of branches but got only 48 percent of new accounts…”
The new accounts tend to be going to younger customers. And, these younger customers are also demanding greater access to newer technology.
The bigger banks have massive plans for more ubiquitous branching systems aiming for new markets throughout the country. The bigger banks, also, although not known for their technological innovation, are leading smaller banks in terms of making the new technology available to customers. And, as Ms. Ensign mentions, the younger customers have greater trust in the information technology coming from then larger banks than they do that coming from smaller institutions.
Ms. Ensign quotes Tom Brown, CEO of hedge fund Second Curve Capital LLC, as saying, “The biggest banks are winning. Small banks should be very concerned.”
But now let’s get to the cash holdings of the banks: on March 14, 2018, the banking system had nearly $2.3 trillion in cash on their balance sheets. The largest 25 domestically chartered banks had a little more than $1 trillion of this cash and the foreign-related institutions had very close to $0.900 trillion in cash. Combined, these two classes of banks, that only controlled 70 percent of the total assets in the banking system, held over 86 percent of the cash assets of the banking system.
These banks will not sit on these cash assets forever. And when they put them to use, my guess is that they will put them to use to continue to dominate the banking system. Certainly the domestically chartered large banks will… and… I believe that the foreign-related institutions will be playing a bigger role in US banking in the future and will use their resources to expand.
The future? I don’t believe that the smaller banks will be able to compete with the larger banks on the basis of technology. Here I am talking about worldwide access to money in a real time basis. Here I am talking about money transfer connected with other banking services… like borrowing.
As far as branching is concerned, don’t think of your small, “convenient” branches. The branches the three largest banks are talking about are in “major U.S. cities.” Ms. Ensign writes “JPMorgan hasn’t named the 15 to 20 new markets it is entering, but analysts think they could include Boston, Washington, D.C., and Philadelphia.”
Note that these are cities that have lots of young, active individuals that are technology savvy. Note, also, that these individuals don’t really use branches, the bank just has to have a presence in the region. I’m an older guy and I don’t use branches!
The largest banks have the “cash on hand” and they want to use it going forward as soon as the regulatory environment changes. They will use it anyway to capture the market for younger persons until they can start acquiring again. But the important thing is… they have the cash on hand to take advantage of the opportunities that open up. It’s the sign of the times.