Megabanks on Steroids

The Journal examines how the too big just keep getting bigger

The Wall Street Journal has an excellent page-one story this morning on how giant banks are getting bigger and throttling competition.

This is good stuff:

The financial-overhaul bill that will be signed into law by President Barack Obama on Wednesday won’t address one of the most far-reaching consequences of the recent crisis: Market power is concentrating in the hands of the nation’s largest banks.

Fortified by infusions of taxpayer capital and takeovers of other large institutions killed or wounded in the crisis, a handful of hulking banks is emerging from the mess to dominate everything from mortgages to checking accounts to small-business loans. The financial-regulation law will bring new shackles and oversight, likely to cost the big banks billions in revenue. But their growing supremacy will help them absorb the blow.

As if to prove we’ve learned absolutely nothing from the crisis, Bank of America, JPMorgan Chase, and Wells Fargo have gone from a combined 21 percent market share to 37 percent nationwide in just three years—the fastest such concentration ever, the Journal reports. And it’s good to emphasize that this growth happened through acquisitions, not through organic growth.

But I don’t understand why the WSJ focuses on these three banks while excluding (except for one brief mention) Citigroup, which is the third biggest bank—with going on twice the assets of Wells Fargo. The only thing I can figure is that Citi hasn’t grown like the other banks and so would water down the eye-popping numbers here. That’s not a good reason to leave it out, obviously.

That’s unfortunate, and the one flaw with this piece.

There are lots of good numbers here that ought to outrage or at least give pause about the bank oligopoly—including the one mention of Citi:

Measured in loans and other assets, Citigroup Inc. and the three other giants had $7.7 trillion as of March 31, up 56% since the end of 2007. Their combined assets are nearly twice as big as the assets of the next 46 biggest banks, according to SNL Financial, a research firm in Charlottesville, Va.

And reporters Dan Fitzpatrick and Robin Sidel report that BofA, JPM, and Wells now make 57 percent of all home loans in the U.S.—more than double their 2008 market share.

This is a good explanation for why everyone ought to be protesting such consolidation:

“Concentration on the national level is something that ought to be of concern to policy makers” because it means “fewer choices and less-competitive pricing” for small businesses and consumers, says William Isaac, the chairman of the Federal Deposit Insurance Corp. from 1981 to 1985.

Possibly even worse, the consolidation puts more risk “in fewer and fewer hands, so when mistakes are made, they are doozies.”

What does the public get out of this? Lower interest payments on savings accounts and CDs (Wells and BofA pay half the national average interest rate on CDs) and fewer loans. So why do people have their money in them? Well, lots of them had their accounts acquired from smaller banks. I, for one, became a BofA customer when it purchased Fleet a few years back. I’ve since emptied my account and moved to a credit union, and I can testify that it’s a time-consuming pain in the rear to switch banks.

Fewer banks means less competition ultimately. And outsized market power means anti-competitive behavior:

After opening the office in 2009, Mr. Wagner says, Florida Business Bank was about to snatch several corporate customers away from the big banks when the borrowers suddenly were told to keep their accounts right where they were, or else the companies shouldn’t bother trying to get credit from the big banks. “They are going to use their leverage to retain all the business they can,” says Mr. Wagner, who declined to provide specific details.

Big round of applause for the Journal here.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.