Industry Is Remade in a Wave of Mergers
By Robin Sidel and Damian Paletta
Sept. 30, 2008 11:59 pm ET
The notoriously fragmented American banking system is going through a decade's worth of consolidation in a matter of weeks, with the U.S. government often acting as matchmaker.
At the end of last year, the three lenders that are now the largest in U.S. banking -- Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc. -- collectively held 21.4% of all U.S. deposits. Now, with this month's government-backed sales of the banking assets of Washington Mutual Inc. to J.P. Morgan and of Wachovia Corp. to Citigroup , the Big Three instantly have a combined 31.3% of U.S. deposits.
For more than a decade, banking experts have predicted an industry that is shaped like a "barbell" -- a few big banks at one end, thousands of tiny ones at the other and little in the middle. But that trend played out slowly, because many middle-tier banks were able to stay independent thanks to a robust economy. Now, with the financial crisis spreading, that middle tier of banks is starting to disappear.
"The consolidation is a natural part of credit cycles," said Sheila Bair, chairman of the Federal Deposit Insurance Corp. "This is what happens when you get into credit turmoil."
The consequences of this warp-speed consolidation will likely reverberate for years. For customers, it means less choice and the potential for higher fees as the big banks get more pricing power, further pressuring smaller rivals. For the economy and government officials, the very size of these banks means they should be better insulated from big shocks because their business lines are so diverse. But it also means these banks now may be seen as too big to fail. That notion could lead banks to take big risks if they think they'll be bailed out if they fall on hard times.