The Commercial Banking System Continues To Lose Banks: Do We Need To Lose Even More?

by: John M. Mason

The FDIC has just reported the banking statistics for December 31, 2012. There were 72 fewer commercial banks at the end of the year than there were at the end of the third quarter.

We lost 72 commercial banks in the fourth quarter but there were only 8 official FDIC bank closings. So, the commercial banking sector continues to shrink in an orderly fashion now with mergers playing a bigger role in the decline than actual failures. Note that there were 80 fewer commercial banks with assets less than $100 million in asset size on December 31, 2012 than there were on September 30, 2012.

Thus, the commercial banking industry continues to decline, led by the reduction in the number of the smallest banks leading the race for the door. Since June 30, 2007 just two months before the financial collapse began to take place, 1,244 of the smallest banks in the FDIC's statistics have left the banking system.

The number of banks with assets in excess of $1.0 billion continues to rise. On December 31, 2012, there were 535 of these large banks in existence. Note that on September 30, 2012, there were 526 of these banks around. On June 30, 2007, there were only 504 of this size bank around.

Even more dramatic is the fact that on June 30,2007, there was $10, 411 billion total assets in the commercial banking system, of which $9,195 billion were housed in the 504 banks whose assets exceeded $1.0 billion. Thus, a little more than 88 percent of the banking assets in the United States were in the largest commercial banks. On December 31, 2013, the banks with $1.0 billion in assets controlled 91 percent of the total assets in the banking system.

The smaller banks are going out of existence. The largest banks control more and more assets of the banking system. This question arises: if 535 banks control over 91 percent of the assets in the banking system, why do we really need the other 5,561?

Also, according to Federal Reserve statistics, the largest 25 domestically chartered commercial banks in the United States controls 68.5 percent of all the assets in domestically chartered commercial banks in the country at the end of February. Why do we really need 535 commercial banks in the United States?

To me, however, the relative strength of the largest banks is shown in what the banks did over the past 12 months. In the last 12 months, the largest commercial banks in the banking system saw their assets rise by $743 billion, rising to almost $13.4 trillion.

The shocking thing is that the total assets of the whole banking system rose by only $742 billion. Commercial banks with less than $1.0 billion in total actually saw their total assets shrink in 2012!

In terms of loans and leases you get the same picture. Loans and leases at the banks with more than $1.0 billion in assets rose by $367 billion.

Loans and leases in the rest of the commercial banking system actually decreased by $11 billion! Small- and medium-sized banks are not lending! Small- and medium-sized banks are not growing.

From these data I draw the conclusion that the small- and medium-sized banks, in general, are not in very good shape. If they were in better shape they would be lending and not sitting on such a substantial amount of cash balances. These small- and medium-sized banks are not growing in asset size and they are shrinking rather dramatically in terms of actual number.

This is only circumstantial evidence but it is consistent with my belief, stated repeatedly over the past three years or so, that the small- and medium-sized banks still face a solvency problem. The assets on these small- to medium-sized banks have not been fully written down yet implying that there are still many, many troubled community banks dotting the map of the United States.

I continue to believe that this is one reason the Federal Reserve System continues to throw money at the financial system with such abandon. The small- and medium-sized commercial banks are still be bailed out by the Federal Reserve System supplying so much liquidity to them. In this way these banks with real solvency problems can be allowed to fail or to merge with a more healthy bank in an orderly way. In this the Federal Reserve and the FDIC are partners in keeping the banking system afloat while the number of banks in the banking system can continue to shrink.

Last year, the banking system dropped by more than 250 banks. At the current pace, we will see almost 300 banks leaving the banking system in 2013.

So, what does that mean for the economy? Bank loans will continue to increase but they will come from the largest 535 banks in the banking system. We can even argue that most of the loans will come from the largest 25 commercial banks. These loans will tend to go to the larger businesses but especially not to the smallest businesses. Community banks will continue to fall by the wayside meaning that fewer and fewer loans will be made on "main street."

In my mind, this will mean that the bank loans will tend to stay within the financial system and not spread out into the real economy. In other words, money will flow more readily into the financial circuit and not into the production of goods and services. Thus, shadow banking will continue to grow and economic growth will continue to fester. Not a very encouraging picture.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.