Are Too Many Financial Institutions in the U.S. the Problem?

The FDIC shutdown 4 more banks yesterday bringing the total bank failures this year 81. The failed four banks are:

Guaranty Bank of Texas
CapitalSouth Bank of Alabama
First Coweta Bank of Georgia
ebank of Georgia

Guaranty Bank is the 3rd largest bank failure this year with assets of $13 B and deposits of $12 B. Bilbao Vizcaya Argentaria (BBV) of Spain assumed control of Guaranty Bank thru its US subsidiary BBVA Compass. Commenting on the acquisition, the chairman of BBVA Compass Jose Maria Garcia Meyer,  said: “excellent strategic sense” and represents an opportunity for BBVA to expand its presence in the “high growth Sunbelt Region.”

In a Bloomberg Television interview, the analyst Meredith Whitney predicted that more than 300 banks would fail this year. This brings us to the title of my post. Yes. There are too many financial institutions in this country. All these institutions are chasing the fewer number of customers and their deposits. Some of the smaller banks may have to consolidate their operations with other branches. Other banks such as the “problem banks” may have to be closed if they continue to suffer with losses and recovery is not possible in any way.

From the FDIC’s Quarterly Banking Profile, 1Q, 2009:

“The number of FDIC-insured commercial banks and savings institutions reporting financial results declined from 8,305 to 8,246 in the first quarter.During the quarter, the number of insured banks and thrifts on the FDIC’s “Problem List” increased from 252 to 305, and total assets of “problem” institutions rose from $159 billion to $220 billion.”

There are a total number of 8,147  U.S. Credit Unions in the US (Source: CUNA).

This phenomenon of having too many banks is not a problem just in the US. In Spain, Savings banks expanded too fast in the past decade and now must merge with other banks in order to survive. While most Spanish banks are run very conservatively they are still exposed to economic problems such as the growing high unemployment and the collapse of the real estate sector. The following chart shows the growth of savings banks in Spain since 2003:


Source: Euromoney

From a total of 20,871 branches at the start of the decade, savings banks in Spain expanded by more than 4,100 in the next 5 years. The two large Spanish banking giants Santander (STD) and BBVA (BBV) are not interested in acquiring some of these savings banks as they do not want domestic expansion. This is one reason why Bilbao Vizcaya Argentaria (BBV) acquired Guaranty Bank and eyes strong growth in the US markets.

One of the senior banking executive of the two large Spanish banks said:

“There are simply too many of these financial institutions. Ultimately we must reduce installed capacity.”

His statement probably holds true for US as well. Due to high profit margins a large number of banks opened in the US in the past few decades. As the economy contracts and Americans reduce consumption, some of the banks may not be needed.

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