Big Banks: What Happens When Customers Cease to Believe?
By Staff News & Analysis - November 28, 2014

American banking has its own Tea Party … Like the anti-establishment wing of the Republican Party, the American banking business has its own version of a Tea Party: the Independent Community Bankers of America. In just the past week, the trade group has vociferously opposed the nomination of a Wall Street banker to the Treasury and hailed a bill that would increase congressional oversight of the New York Federal Reserve Bank. These are the plaintive cries of a dying breed of banker. – Reuters

Dominant Social Theme: Bigger banks are better.

Free-Market Analysis: This article presents us with a predictable meme regarding financial centralization as a competitive advantage. When it comes to banks, this is an especially ubiquitous theme.

That's because those behind the century-old banking consolidation are desperate to establish three points to be placed beyond debate.

First, the evolution of mega-banking is a free-market trend, an unstoppable evolution.

Second, the biggest entities and thus the biggest banks are always the most efficient. Efficiency in fact drives further consolidation, or so we are told.

Finally, the competences generally of big banks are greater than smaller facilities. They attract the "best and brightest."

Here's more:

ICBA, whose trademarked motto is "the nation's voice for community banks," claims 5,000 member firms representing some 24,000 branches and 300,000 employees. These banks hold $1.2 trillion in assets and $750 billion of loans. The association has been around for years, but since the global financial crisis ICBA has aggressively bared its fangs against the established order of Wall Street and money-center banks.

That's understandable. Unlike mega-rivals Bank of America and Citigroup, community banks didn't receive bailouts from the federal government, though they felt the sting of the downturn. Since 2008, more than 500 mostly small banks failed, according to the Federal Deposit Insurance Corp. So politicians on both sides of the aisle have become sympathetic to their cause.

The market, however, has not been particularly kind to community banks. Recent research from Celent, a consulting firm focused on financial services, lays bare the existential challenge they face. Since 1992, 6,522 banks with assets below $100 million have disappeared, to the benefit of the biggest banks, a trend the consultancy expects to continue. It predicts a 3.1 percent compound annual decline in the small-bank population through 2019.

There are many reasons for this. The economies of scale at institutions like Bank of America and Wells Fargo allow them to invest heavily in technology, offering digital banking services and massive ATM networks that may offer greater convenience to customers. After the financial crisis, the big banks have also enjoyed a funding advantage relative to their smaller brethren.

… ICBA said it "remains deeply disturbed and frustrated by recent reports that exposed the New York Federal Reserve's culture of deference to megabanks and the largest Wall Street firms." It was referring to whistleblower Carmen Segarra's accusations that the regulator was too timid in overseeing banks like Goldman Sachs.

So many memes are present in the above. Wall Street may be the putative target of the ICBA but it is not the main one in reality. The problem that small banks struggle with involves the expansion and contraction of the business cycle, and that is a central bank creation.

Also, the article mentions economies of scale as if these simply emerged from money center bank business models. But they didn't. Money center banks themselves are products of central bank money distribution. They are big and powerful because they reside within the formal chain of money creation.

ICBA may be "disturbed and frustrated" by the "deference" that the New York Fed shows to banks like Goldman Sachs, but this is quite understandable. Wall Street is the marketing arm of the central bank colossus, which is located in Switzerland not the US.

To try to understand the current controversy over bank supervision is quite impossible if one insists on treating it as a domestic issue. All central bank policies these days are apparently coordinated by the Bank for International Settlements (and London as well) and the system will protect its own.

Not only will it protect its own, it will create conditions for the continued expansion and consolidation of big money center banks. It will drive this expansion by ensuring these banks are "too big to fail" and thus receive the funds they need to stay in business no matter what.

All of these manipulations are generated to expand and consolidate the banking/financial sector. And what is more disheartening is that banks – despite the meme of their necessity – are in the larger sense simply glorified bookkeeping shops.

Yes, they are designed not necessarily to serve global financial needs. Even the biggest of them has a more humdrum task, which is to keep track of money. Everyone's money. Your money. This is why the large banks employ so many hundreds of thousands and millions of people. So much data collection and analysis utilizes considerable brainpower.

This may sound odd, but it is surely the truth. We know from US intel data shops that Western governments are obsessed with keeping track of citizens' behaviors and actions. The only thing that Western elites are more focused on than behavior is money.

The entire financial system has been designed to track and analyze fund movements. It is putatively independent and "private" but the bigger picture reveals that money center banks work closely with central banks – and central banks work closely with federal governments throughout the West.

There's more. The reason for commercial banking has to do primarily with tracking funds, in our view. But an equally important point to understand is that banking is not really necessary. The United States got along quite well without much in the way of money center banking before the Civil War. In fact, most banks were restricted to a single branch. The biggest banks were located in New York.

There were many non-banks as well. Upscale restaurants were apt to hold gold and issue receipts. And there were surely warehouses as well, where gold was stored, and from which the modern bank evolved.

This Reuters article treats small banks as a dying breed and wants us to understand that their demise is perfectly understandable. It is not. The death of small banking in the US is driven by business cycles and central banking.

The rise of large money-center banking is not inevitable, either. These vast amalgamations are not the inevitable creation of the market but a deliberate, internationalist manifestation designed to keep tabs on everyone else.

The expansion of big banks due to their competences and free-market forces is merely a meme. And as people understand more about big banking in this Internet Era, more are figuring out that the system is not what it is represented to be and its outcomes are neither inevitable nor even justifiable.

To us, this is an important trend in the 21st century. Over time, we have long-predicted, the credibility of central banking itself will come under increasing pressure in this Internet era, and these questions will extend to money-center banking as well.

The palpable anger with the New York Fed is just the beginning, or perhaps the second step. Like so much else in the 21st century, the matrix of neat 20th century assumptions regarding business and finance are subject to continual deterioration.

As the system continues to lose credibility, other paradigms may emerge that are not so easily controlled. Such an evolution might lead to "interesting times" indeed and constitute yet another reason for deliberate asset allocation.

Two mutually opposed forces are at work in the banking industry. On the one hand, it continues to consolidate, gaining power and clout as it goes. On the other hand, the very bigness inevitably abuses and ultimately alienates customers and smaller competitors alike.

These opposite trends will generate even more confusion, ill will and marketplace "incidents" as the 21st century evolves. Those with the most prudence will anticipate this destructive trend and reduce their exposure to the formal financial structure that is now beginning to topple of its own weight.

After Thoughts

There are many methods of reducing one's exposure, including real estate, precious metals, overseas investing and general hedging. All these and more are discussed at length here at The Daily Bell; we'll continue to do so.

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