Banking System Continues To Shrink

by: John M. Mason

Through the third quarter, the decline in the number of commercial banks still in existence continues to meet my forecast for the year. By the end of September 2013 the banking system numbered 159 banks fewer than were in existence on December 31, 2012.

In the pace through the first three quarters of the year continues in the fourth quarter, the banking system should have more than 200 fewer banks at the end of 2013 than were in existence at the end of 2012. My forecast for 2013 has been for a decline of about 200 banks.

In 20012, the year ended with 195 fewer banks.

Year-over-year, that is, September 30, 2012, to September 30, 2013, the number of commercial banks in the banking system declined by 231 banks.

Note that for the first three quarters of 2013 there were only 21 failed commercial banks.

Thus, the banking system continues to smoothly adjust as the regulators oversee the long-term shrinkage of the commercial banking industry. I will stand behind my earlier statements that the banking system still contains a large number of institutions that are very, very weak. The large liquidity injections of the Federal Reserve have helped to keep these weak banks afloat so that the FDIC can oversee the smooth contraction of the whole system.

As can be seen from the small number of failed banks, the primary vehicle for the shrinkage of the banking system is through acquisitions. It is my opinion that the number of commercial banks in the banking system will continue to shrink at the current pace into 2014.

The total number of commercial banks in the banking system was 5,937 on September 30, 2013. To achieve a fully healthy banking system, I believe that the number of banks in the industry needs to drop below 4,000. This will not happen overnight.

For example, as I reported in my post of November 12, the "smaller" banks in the banking system, the banks that hold the most commercial real estate loans, has seen a large amount of refinancings in recent months. Many of these refinancings have included additional funds in order to help borrowers work out their projects in a reasonable manner and this has resulted in lending to this class of borrower to show sizable gains. The problem is that many of these refinanced loans were to be paid off at maturity and so did not show up on any problem loan list. Now, the climate is such that these "smaller" banks have refinanced many of the loans with monetary "add-ons" to help them carry their projects for another day. This, in many cases, is just "kicking the can down the road." That is, the problem loan situation in these banks has not been solved.

The liquidity the Federal Reserve has supplied helps to keep the banks with these loans remain afloat. It is my opinion that many of these organizations, along with other banks for other reasons, will be absorbed into other banks over the next two to three years.

Over the past 12-month period, 159 commercial banks with assets of less than $100 million were removed from the banking system. There are now less than 1,900 banks of this size remaining in the banking system.

During the same time, the system lost 85 commercial banks that had more than $100 million in assets but less than $1 billion in assets. The number of banks in this size category are rapidly approaching 3,500 organizations.

Over the past twelve-month period, 13 commercial banks joined the $1 billion in assets or more club, bringing the total of this class up to 539 banks.

The banking system continues to shrink and the proportion of banks in the largest category continues to rise. In terms of total assets, commercial banks that had more than $1 billion in assets made up 91.5 percent of the banking industry on September 30, 2013. On September 30, 2012 these banks controlled 91.0 percent of the banking industry. And, five years ago, on December 31, 2008, the banks with $1 billion or more in assets controlled just 89.8 percent of the assets of the banking industry.

Thus, as of September 30, 2013, you have nine percent of the banking industry controlling 91.5 percent of the assets of the banking industry.

The direction of the banking industry…fewer banks…more bigger banks. And, more non-bank banks.

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.