Sandy Weill Says, "Break Up the Big Banks"!

Sanford (Sandy) Weill, former empire builder and former Chairman and Chief Executive Officer of Citigroup, has gotten religion. 

“Break up the big banks,” Sandy cries from the rooftops!

“The big banks do not make economic sense and are subject to systemic collapse.”

“Re-instate Glass-Steagall.”

My question is “What job is Sandy Weill shooting for now?  My goodness, the man is 79 years old.  Does he want to take over for Tim Geithner when Geithner ceases to be Treasury Secretary?  Or, maybe he wants to be the Chairman of the Board of Governors of the Federal Reserve System when Bernanke goes.”

There must be something behind this latest outburst for this man taught the world how to build a “big”…no, a huge…financial institution.  This man did all he could to remove Glass-Steagall and wrote the textbook on how to construct banks that were too big to fail. 

Has he seen the light?  What form did his revelation come in?  He must be trying to trick us to get something he wants.  Be careful…the man is a tiger!

Or, is he just too old?

The banking system is not what it was when Sandy Weill was running things.  Even as he remained Chairman of Citigroup into the 2000s, Citi grew out of his understanding and control.

Finance is different now.  Finance is just about information and how information is used.  Electronics is taking over. 

In one sense, who needs a bank?  I do not “bank” at a commercial bank.  I don’t need to.  My children don’t use a bank.  They don’t need to. 

Today, “banking” can be integrated with a person’s financial portfolio in a non-bank and that person can transfer funds from anything they own into cash, or, transaction accounts, or, money market accounts, or, stocks, or commodities, or, foreign exchange, or, whatever…in real time.     

All these things are just information and modern information technology allows people the opportunity to operate in this sophisticated world of modern finance if they so desire.  And, these systems will become ubiquitous in the near future, all available on a handheld device.

Obviously, if individuals have the ability to act in this way, the institutions that provide these services also have the ability to act in this way.  And, guess what?  These institutions are going to act at the edges of where the technology allows them to act.  And, guess what?  The regulators are going to have very little ultimate control over this. 

In fact, it is my belief that the regulators don’t really know exactly what the banks…excuse me…the big banks do.  As usual, the banking system is out in front of the regulators and, as usual, the regulators are scrambling as hard as they can to catch up with where the banks are.

But, what does the banking system in the United States look like? 

The FDIC tells us that as of March 31, 2012 there were 6263 commercial banks in the banking system, of which, 525 held assets in excess of $1 billion.  Please note that these 525 banks held 91 percent of the assets in the whole banking system. 

The Federal Reserve gives us a little finer breakout.  The largest twenty-five domestically chartered banks in the United States hold 57 percent of the total bank assets of the country, but they hold 66 percent of the assets held by all domestically chartered banks.

Thus, in terms of domestically chartered banks, one can argue that the largest 25 domestically chartered banks in the country hold 66 percent of the assets in domestically chartered banks; 500 domestically chartered banks in the country hold 25 percent of these assets, and 5,738 domestically chartered banks in the country hold 9 percent of the assets.    

Foreign-related financial institutions hold 14 percent of all the bank assets in the United States.  This means that the assets of the largest 25 domestically chartered banks in the United States plus the assets of foreign-related financial institutions total up to 71 percent of all the banking assets in the country!

Where do you draw the line in defining what banks are too big to fail?  And, where do you draw the line in defining what banks are too small to survive?  How can you make judgments like these is a fair and just manner?

And, information technology operates on scale and this means that the future is going to belong, even more, to the larger banks…not the smaller ones.

Right now, however, it is the 6,200 or so, smaller domestically chartered banks that I have the greatest concern for.  The United States still has more than 800 banks that reside on the FDIC’s list of problem banks.  And, this list does not include those banks that are in enough trouble that the FDIC and the OCC are looking for other organizations to acquire them. 

Furthermore, we still have 311 banks that the U. S. Treasury has an ownership position in.  This is down 32 banks from the total in April 2012. This ownership position was achieved during the Troubled Asset Relief Program (TARP) that was launched in 2009. 

Most of these banks are smaller banks…the larger ones have paid back the fund in full.  The bank shares owned by the Treasury are now being auctioned off to investors who would like to own part of a bank.  In April, 20 banks were auctioned off and the Treasury received back 90 percent of what it was owed.  In the latest auction of 12 banks, the Treasury took a 14 percent haircut on 10 of the banks and could only partially sell shares in the two other banks.

The attractiveness of the remaining 311 banks is expected to be substantially less than those that were involved in the latest auction.  The Treasury has several ideas about how the shares of these banks might be made more attractive.

To me, the issue is not about breaking up the larger banks.  These banks are going to all be technologically advanced and very difficult to breakup, let alone regulate.  The issue is about the 6,200 banks that cannot compete electronically and the subsection of these banks that are still facing issues of solvency. 

I remain confident that the number of banks in the banking system will drop below 4,000 in the next couple of years and the trend will continue downwards.  I also remain confident that, in the near future, the largest 25 domestically chartered banks in the country plus foreign-related financial institutions will see their share of assets in the U. S. banking system rise from 71 percent to 80 percent and more.  So let’s see, that leaves the remaining 3,950 or so “smaller” banks less than 20 percent of bank assets in the U. S.  And, it is my belief that of this number, the ones with any chance of survival will not be less than $1 billion in asset size.  What do you think, Sandy?

The Condition of the Banking System: March 31, 2012

 The FDIC banking statistics for March 31, 2012 were released last week.  There is room for hope in the statistics, but we are still not out-of-the-woods, yet.

The FDIC press release trumpeted the fact that the number of commercial banks on the FDIC list of problem banks fell for the fourth quarter in a row and reached a total of 772 banks, which was the lowest level this list has seen since year-end 2009. 

However, there are still 772 commercial banks on the problem list, which is more than 12 percent of the total number of commercial banks in existence. 

Only 16 commercial banks were closed in the first quarter of 2012, but there were 27 fewer banks in existence at the end of the quarter than there were at the end of 2011.

Over the last 12 months the number of commercial banks in the banking system declined by 190 and only 82 of these were closed. 

So, the banking system continues to decline with the majority of banks leaving the system due to merger or acquisition.  The vast majority of the decline (175 banks) is in the smaller banks (banks with assets of less than $100 million) where most of the problems seem to center. 

Over the past five years, the number of commercial banks in the banking system has declined by almost 1,000 banks.  The number of the smaller banks leaving the industry over this five-year period totaled 1,110!

At the end of the first quarter of 2012, there were only 6,263 FDIC-insured commercial banks in the industry. 

Even though the number of FDIC bank closures has dropped substantially in recent quarters, mergers and acquisitions continue to take place at a fairly rapid pace. 

I believe that we will continue to see results like this over the next several years.  The number of commercial banks in the banking system will continue to decline as troubled small- and medium-sized banks continue to be acquired.  If the decline in the number of banks continues in the 150 to 200 range for the next three years, the banking system will drop to between 5,700 and 5,800 banks by the end of 2015.  These numbers are above the 4,000 number that I had been predicting over the last couple of years but are still stunning given that there were 14,000 commercial banks in the banking system early in my banking career.

Regardless of the exact number, there are few reasons for new commercial banks to be formed and there are plenty of reasons why existing commercial banks will continue to consolidate.  This will mean that there will be fewer and fewer of the smaller banks in the banking system and more and more larger banks. 

Right now, according to the FDIC statistics, the largest 525 commercial banks in the United States (about 8 percent of the banks in the system) hold almost 91 percent of the assets in the banking system.  According to Federal Reserve statistics, the largest 25 domestically chartered commercial banks in the United States hold approximately two-thirds of all the assets in domestically chartered commercial banks.

In a real sense, the small- to medium-sized banks are almost irrelevant to the banking system except that their failure or clumsy exit could cause trouble to the rest of the system.   

Whether you like it or not, the number of banking units in the United States is shrinking relatively rapidly and more and more of the assets of the banking system are being found in the larger banking institutions.  And, this does not include the impact of the growing number of foreign commercial banks that are becoming players in the United States. 

Given the weakness in the commercial banking sector it is not surprising that bank loans are not showing much bounce.  Loan balances at FDIC-insured commercial banks declined in the first quarter of 2012 by slightly more than $56 billion. This decline occurred after loans had increased modestly over the previous three quarters.  Loan increases generally took place at the larger commercial banks. 

Revenues and bank profits continue to rise, but most of the increase, as expected, came in commercial banks that had more than $1.0 billion in assets.

It is still my belief that the general thrust of the monetary policy of the Federal Reserve is to keep commercial banks open and operating so that the FDIC can continue to close the weaker institutions in an orderly fashion and to allow the stronger, larger banking institutions to acquire the weaker ones, who are generally the smaller banks.  This strategy will continue to be followed until the condition of the banking industry improves sufficiently to grow stronger on its own.

Continued weakness in bank lending, particularly at the smaller institutions, will signal to us that the banking system, as a whole, has not fully recovered from the financial crisis that took place several years ago. 

This continued weakness in bank lending will also contribute to tepid growth in the economy as consumers and small- and medium-sized businesses cannot obtain the funds they need to spend and expand.  All these pieces seem to go together.       

Loan Growth Continues to Pick Up at Commercial Banks

My report on bank lending last month had the headline, “Finally, some real loan growth at the banks.” (http://seekingalpha.com/article/426601-finally-some-real-loan-growth-at-the-banks)

Well, loan growth has continued through March.  Loans and leases at commercial banks increased by over $10 billion in March, bringing the total rise in loans and leases up to $95 bullion for the first quarter. 

The interesting thing is that this increase occurred predominately in the “small” banks in the country, the roughly 6,265 banks that comprise the Federal Reserve’s definition of small.  The “large” banks are the largest 25 domestically chartered commercial banks in the country.  A total of $79 billion, or, 83 percent of the increase in loans and leases at commercial banks in the United States over the first quarter, came from these “smaller” banks. 

This is certainly good news.  Economic growth in the United States had been rising since June 2009, but the growth rate has been pretty tepid.  Two reasons for the slow growth were that many individuals and businesses in America were deleveraging and the commercial banking system was trying to get itself in order given all the bad assets that were on the balance sheets of the banks. 

The concern has been that as long as the banks were re-structuring and individuals and businesses were attempting to lessen the debt on their balance sheets, economic growth would remain shaky.  For things to feel more secure, banks would have to start lending again. 

Loans and leases at commercial banks were up 4.7 percent, year-over-year, in March.  Almost two-thirds of this growth came in the past six months, and over one-third of the growth came in the last three months.  This is encouraging.

In the smaller commercial banks, the largest increase in loans came in the residential real estate area.  Residential loan growth rose by more than $31 billion in the past quarter and about $53 billion in the past year. 

The interesting “turn-around”, however, was in commercial real estate loans.  For the year as a whole, commercial real estate loans at the “smaller” banks were down by almost $13 billion, but, for the last quarter they were up by more than $14 billion, a $27 billion reversal. 

Commercial real estate loans were still down in the largest 25 banks by over $5 billion in the quarter, but on the whole, the strength shown in this area is ‘hopeful” and worthy of continued watching.

Business loans at commercial banks (commercial and industrial loans) have been up year-over-year for several months now, but the real strength has been at the largest banks.  For example, year-over-year, commercial and industrial loans at the largest 25 banks in the country were up by almost $105 billion compared with an increase of $42 billion at the smaller banks. 

However, in the first quarter of 2012, business loans at the largest banks rose by $25 billion as compared to a $24 billion increase in the “smaller” banks. 

This, to me, is a good sign for economic growth.  Although it may not translate immediately into much faster growth, I take this strength in lending as protecting against a downside fall-off.

Consumer lending was particularly weak in the first quarter of 2012 as consumer lending fell by more than $2 billion.  This would seem to indicate that consumers were still consolidating and/or reducing their debts and were not out spending.  This, of course, can help to account for the continued weakness in economic growth. 

Overall, the information coming from the banking system is encouraging.  Commercial bank lending is increasing and it is increasing in both the business and real estate sectors of the economy.  Furthermore, bank lending is showing more strength amongst the “smaller” banks in the country.  This is good news to me not only because it might indicate that “main street” is beginning to show some life, but this could also be an indication that the health of the “smaller” banks is improving. 

One final point has to do with the cash balances carried by the commercial banks.  In March 2011, commercial bank cash holdings averaged $1,443 billion.  In March 2012, cash holdings averaged $1,594 billion, up $151 billion for the year.  Commercial banks are still carrying a lot of cash on their balance sheets.  (According to Fed statistics, excess reserves in the commercial banking system averaged $1,362 billion in March 2011, and averaged $1,510 in March 2012.)

However, this cash figure for March 2012 is down from the $1,838 figure of September 2011.  So, commercial banks are holding less cash now than they were at certain times last year. 

One reason for this is that foreign-related institutions are holding a lot less cash than they were last year.  In September 2011, these institutions held almost $1.0 trillion in cash assets.  In early April 2012, this figure was down to about $650 billion.  A large portion of these assets were lent out to “related foreign offices” of the foreign-related institutions.  From March 2011 to a peak in February 2012, roughly $285 billion flowed from these foreign related institutions to their “related foreign offices.”  These flows were closely connected with the financial problems being faced in Europe.  With the efforts to resolve the debt crisis in Greece and with the lending down by the European Central Banks, the needs for cash from the United States lessened.  Lending to “related foreign offices” fell by almost $90 billion between early February and early April as the pressure from the crisis in Europe receded. 

We are not yet out-of-the-woods in terms of the problems in Europe and in terms of our need for stronger economic growth in the United States.  However, particularly concerning the latter, I feel better now that commercial banks seem to be producing more loan growth.   We can only hope that this loan growth will continue to modestly expand.  

Larger Banks Are Changing the Banking Landscape

In a recent New York Times op-ed piece, the finance blogger at Reuters, Felix Salmon, wrote about the higher fees being charged customers at larger commercial banks in the United States. 

Salmon states, “As bank fees have moved from being invisible to being visible, the inefficiency and greed of the big banks has become ever more obvious.  The result is heartening: In 2011, more than 1.3 million Americans opened a new account at a credit union.

In part that’s because smaller banks and credit unions are a better fit for the average consumer.  They don’t have the huge branch networks to support, they pay their executives mush less and they don’t generally feel the need to be enormously profitable in the first place…

So, rather than kvetch about monthly checking-account fees, let’s celebrate them.  With any luck they’ll be just the thing we need to finally get around to closing our accounts at Citibank or Wells Fargo or Bank of America or Chase, and opening a new account at a better, friendlier—and cheaper—bank.” (http://www.nytimes.com/2012/03/11/opinion/sunday/higher-bank-fees-are-a-good-sign.html?_r=1&scp=3&sq=felix%20salmon&st=cse)

This reminds me of the time I was sitting in the executive quarters of a large savings bank in Philadelphia in the late 1970s.  I was talking with several of the senior people on the retail side of the bank.  They were ecstatic about the fact that their bank had just picked up more than 5,000 new accounts over the past month or so from a commercial bank that had recently started charging depositors explicit fees on their checking accounts as well as on some other transactions related products. 

This scene was ironic to me because about a week before, I was talking with some senior executives from the commercial bank that had raised its fees and they were very, very excited about all the accounts they were losing because of the new charges.  They were excited because the accounts they were losing were generally low balance, high transactions accounts…in other words, very costly accounts…and this had been one of the objectives they had hoped to achieve with the imposition of the higher fees.

Note: the savings bank failed while the commercial bank remained healthy and was ultimately acquired by a larger, national organization that was diversifying geographically.

This story came back to me in reading the New York Times article because I see some of the fee activity of the larger banks as an effort to encourage certain bank customers to leave these larger banks and take their accounts to the smaller commercial banks or credit unions. As with the commercial bank I described above, by raising certain fees and charges, these larger banks were allowing their customers to “self select” and take their business elsewhere. 

Of course, some of these larger banks presented their new fees in such a way that they got a lot of unfavorable publicity that they didn’t really want and so they immediately backed off.  And, this news played into the “Occupy” movement and helped its cause. 

But, I would say, the larger banks got what they wanted.  According to Saxon, 1.3 million Americans opened a new account at a credit union.  And, even more opened accounts at “smaller” commercial banks.

What’s going on here?

Well, this is a part of the new, evolving financial system. 

Are the larger banks really unhappy about this movement?  I don’t think so.  The larger commercial banks are getting larger.  The share of banking assets going to the smaller banks is declining.  In February 2012, the largest 25 domestically chartered commercial banks in the United States made up just about 66 percent of the total assets of all domestically chartered banks.  In February 2008, just before the financial crisis took place, the largest 25 banks in the United States held less than 65 percent of the total assets. 

Note: total assets at all domestically chartered commercial banks were just about 13 percent larger in February 2012 than they were in February 2008.

Furthermore, at the end of the year 2011 there were 6,290 commercial banks in the banking system, almost 1,000 fewer than existed at the end of the year 2007 when there were 7,284 commercial banks in existence.  The shrinkage came in the number of “smaller” banks.

But, Salmon writes: “From a consumer’s point of view, this trend (the movement of deposits to smaller commercial banks and credit unions) will create a virtuous cycle.  As deposits leave the big banks for smaller competitors, the too-big-to-fail crew will inevitably lose political clout—and eventually, start shrinking.”

What am I missing here that Salmon sees?

I agree that things are changing, but I see them changing in a different way.  Less wealthy individuals and businesses will move to smaller banks and credit unions.  These people will prosper at not-for-profit, low overhead organizations.  These financial institutions will offer more basic banking products and services and will thrive.  And, their customer base will be very happy. (http://seekingalpha.com/article/420741-commercial-banks-can-t-get-a-break)

Wealthier customers and larger businesses will work with the newly re-structured larger banks.  We see this taking place already as JPMorgan Chase and Citigroup, Bank of America and Wells Fargo are creating new relationships, new branches, and new lounges to attract a more affluent customer.  This new target is the “mass affluent”.   These are people with assets in the “hundreds of millions.” 

This, however, is not just about “banking” but about mutual funds, stocks and retirement advice and so on and so forth.  This approach is providing the customer with complete, timely, fluid, low cost management of the “customers’” wealth.  These banks are not going after the top 1%, but they are going after the top 10%.

Not only are these accounts more lucrative, they “also face less of a pinch under new government regulations than do those of ordinary savers.” (http://www.nytimes.com/2012/03/11/business/to-increase-revenue-banks-go-after-affluent.html?scp=6&sq=nelson%20schwartz&st=cse)

And, what kinds of managers are being brought into these banks by the Board of Directors?  Not just commercial bankers, oh, no!  Commercial bankers are just “debt” guys…people that only understand advancing money if there is adequate collateral and don’t get all agitated if the borrowers credit rating is not the best.  They understand loan classifications like business loans, mortgages, consumer loans, and commercial real estate loans.     

No, the recent trend…although it is not absolute…is to bring in investment bankers at or near the top.  Investment bankers are “equity” guys…they understand ownership…and, they understand risk management.  And, they understand asset classes and portfolios of assets. (http://www.ft.com/intl/cms/s/0/0e80a8c6-6c6c-11e1-b00f-00144feab49a.html#axzz1p1BAmhf3)

So, we should celebrate, with Felix Salmon, the movement of small deposit accounts to the smaller banks and credit unions.  However, I am not sure that I am celebrating this movement for the same reason that he is.