Number Of Banks Continues To Shrink: Banks With At Least $1.0 Billion In Assets Control 92 Percent Of Assets In Commercial Banking System

Includes: IYF
by: John M. Mason


The Commercial Banking Systems is losing about 200 banks every year and it lost 52 banks in the second quarter.

Most of the banks leaving the banking system are less than $1.0 billion is asset size and they are being merged out of existence.

Regulators are overseeing supporting the shrinkage in the banking numbers and are making sure the decline occurs in an orderly fashion.

The number of commercial banks in the US banking system continues to decline.

The new FDIC report indicated that in the second quarter of 2014, the banking system lost 52 banks. Only 7 banks failed in this quarter, so that the major part of the decline occurred through mergers.

There are now only 5,757 banks in the commercial banking system.

Over the past twelve months the number of commercial banks in the banking system fell by 223 banks. In the past two years or so, the commercial banks system has lost approximately 200 banks every twelve-month period.

At the start of the Great Recession in December 2007, there were 7,284 commercial banks in the banking system, so that we have lost 1, 527 banks between December 31, 2007 and June 30, 2014. That is, the number of banks in the banking system has fallen by one-fifth…or 21 percent!

And, how has the composition of the banking system changed?

Will we have more, 31, larger banks now, banks with $1.0 billion or more in assets, and a lot fewer smaller banks. The number of commercial banks with less than $100 million in assets has fallen by 1,322 banks since December 31, 2007, and those banks with assets in the range of $100 million to $1.0 billion have fallen by 236.

On December 31, 2007, banks with $1.0 billion or more in assets held 89 percent of the assets in the commercial banking system. At the end of June 2014, these banks held 92 percent of the assets.

According to Federal Reserve data, on June 25, 2014, the largest 25 domestically chartered commercial banks in the United States held 55 percent of the assets of the banking system.

Over the past year, the commercial banking system lost 154 institutions with assets of $100 million or less. In the second quarter of 2014, only 26 of these banks were lost.

The numbers for the $100 million to $1.0 billion range of asset size, were a loss of 87 over the past year and a loss of 27 in the last quarter.

The bottom line is that the banking system as a whole is still not in very good shape. The reason for drawing this conclusion is that the banking system is still losing about 200 banks every year. This is not normal.

The number of "failed banks" is down substantially, but the fact that so many banks are being merged into other banks are such a regular basis points to the fact that the regulators feel that the banks that are still troubled should be combined with a more healthy bank rather than try and keep the bank open and risk more failures.

This, to me is consistent with what the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency want to happen.

As I have written regularly for the past four years, one of the major reasons for the Federal Reserve to conduct its various rounds of quantitative easing was so that the commercial banks that are troubled can stay open longer so that the FDIC and the OCC can arrange for as many troubled banks as possible to be merged into a healthier bank in an orderly fashion.

Not only would a larger number of failed institutions be harder for the regulators to manage, it would have cost the FDIC much more money from its insurance fund.

But, this continues to change the banking system dramatically. The country that seemed to be built on "Main Street" is no more. Journalists need to open their eyes and see what the reality of the situation is.

"Main Street" as far as the banking system is concerned just does not exist anymore.

If we define "Main Street" as the commercial banks in the United States that are less than $1.0 billion in asset size, you have 5,213 banks that only control 8 percent of the assets in commercial banks. That places the average size of these 5,213 banks at $220 million in asset size. For the 1,744 banks less than $100 million in assets, the average size is $59 million.

Now consider that the banking system is going more and more mobile and that "big data" is coming into the picture, more and more, not only at existing banks but in the shadow banking system to screen borrowers to lower credit problems. Peer-to-peer lending is now a factor on the Internet and with Lending Club now going into an IPO, it just signals that the competition against "Main Street" banks will grow and grow.

The smaller banks, even up to $1.0 billion in asset size are going to face competition and cost pressures that were unimaginable just a relatively short time ago.

The commercial banking system, as we know it, is going to continue shrink.

Note: there might be good investing opportunities in banking for those that would like to take a little different approach. See my "Not What You Think: An Opportunity to Invest in the Banking Community."

It is my belief that the regulators accept this fact and are trying to accommodate the trend in the best way they can. I would not be surprised to see the numbers in the commercial banking sector continue to shrink by about 200 banks per year of the next few years.

This may be a reason, however, why commercial bank lending has not been as robust during this recovery cycle as it has been in the past. And, it may be a reason why other sources of loans, loans from "shadow banks," are becoming more prevalent.

The world of banking is really changing!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.