Too Big to Fail, Too Big to Succeed, Too Few to Compete

Barry Ritholtz of The Big Picture takes on a relative of the “too big to fail” mess: what he calls “too big to succeed.”

The banking sector has consolidated at the top over the last few decades—we all know that. But Ritholtz posts an interesting chart showing how the overall sector has become concentrated. Basically, we have fewer than half the total number of banks we did twenty-five years ago:

One obvious suspect has been the easy M&A environment of the past 20 years. Instead of a very competitive market where mergers for sheer size sake is discouraged, the opposite occurred. The number of bank acquisitions skyrocketed, and the number actual banks got slashed. Where there were once over 18,000 banks in early 1980s, today, the number is less than half, to under 8,500.

That raises obvious questions. Certainly I’m not saying that the number of banks in a random year like 1984 was optimal or that their sizes were optimal. But it stands to reason that if you have fewer entities in a market competing against each other, then the market will be less efficient.

Especially if that market is dominated by a handful of leviathans:

And once again, I am compelled to ask why it is in the country’s interest that 65% of the depository assets are held by only a handful of banks.

That’s just plain ol’ common sense. Wish there were more of it in the mainstream press.

It’s especially not in the American interest when you can’t let these banks fail because they’ll send the economy back to the Stone Age, so you’ve got to fork out trillions of dollars when they get in trouble, yet you can’t claw back all that ill-gotten pay its elite got creating the mess.

Ritholtz makes another interesting point, something I haven’t heard:

Recall that the big acquisitions and mergers in the 1980s were so banks could be competitive with Sumitomo and Mitsubishi and other big Japanese banks. (Why was that again?)


Click the link above to see a nice chart that puts banking consolidation in perspective.

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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.