Bank Consolidation and Bank Competition


Somewhat lost in the to-and-fro over whether big banks are “too big” and need to be broken up is the question of competition. In my view, if we only had a dozen or so banks in America (instead of thousands as is currently the case) that would be fine as long as it meant any given customer had a half dozen or so reasonable options to choose from. Given that the current crisis has tended to lead toward consolidation of the banking industry, one key question is whether that trend toward consolidation is going to mean more localized monopolies or the emergence of robust competitors to incumbent firms.

It’s merely anecdotal, but Scott Reckard’s LA Times article on the subject suggests a happy outcome:

Rebates of 5% on debit-card purchases. Bonuses of $100 for new customers. The way things are going, banks in California may start giving away toasters again if you open a checking account.

Having battled through the near-meltdown of the economy, America’s biggest banks are squaring off in a more traditional war. They’re now fighting for retail and small-business customers in the Golden State.

Bank of America Corp. and Wells Fargo & Co. have long dominated that market in California. But a massive shakeout of financial institutions nationwide has large new competitors moving in, eliminating many medium-size banks and thrifts that once presented an alternative to Californians.

Bank of America and Wells Fargo long faced localized competition in California, but it came from smallish firms who didn’t really stand a chance. Having those firms get gobbled up by larger ones from other regions appears to in effect be increasing the level of competition. That said, there’s a great deal of regional variation in American banking and the story almost certainly looks different elsewhere.