By Rachel Louise Ensign
Americans are parking more money with the biggest banks than
ever before, cementing the firms' dominance of the financial
industry less than a decade after the crisis.
The three largest U.S. banks by assets have added more than $2.4
trillion in domestic deposits over the past 10 years, a 180%
increase, according to a Wall Street Journal analysis of regulatory
data. That amount exceeds what the top eight banks had in such
deposits combined in 2007.
The outsize gain began when the trio of lenders -- JPMorgan
Chase & Co., Bank of America Corp. and Wells Fargo & Co. --
did huge deals during the crisis. Their heft has continued to
increase in recent years as consumers opt to put their money at the
behemoths over smaller U.S. banks.
While the crisis led many to question whether banks had become
too large, the lead of the biggest lenders has only widened. At the
end of 2007, the three banks held 20% of the country's deposits. By
the end of 2017, they held 32%, or $3.8 trillion.
It marks a new phase of consolidation in the banking industry,
one driven first by the deals and then by customers' attraction to
the digital tools and ubiquitous locations of the biggest
banks.
Last year, about 45% of new checking accounts were opened at the
three national banks, even though those lenders had only 24% of
U.S. branches, according to research by consulting firm Novantas.
Regional and community banks, by contrast, had 76% of branches but
got only 48% of new accounts, the firm said.
These customers, who tend to be younger, are valuable to banks
because they often provide more business later on by, for instance,
taking out a mortgage or opening a brokerage account.
Before online and mobile banking became popular following the
financial crisis, these consumers generally opened a new account at
the bank with the nearest branch, no matter the size of the
institution, said Andrew Frisbie, executive vice president at
Novantas.
But now that many banking transactions are done online or
through smartphones, these customers are picking national banks
because of their well-known brands and the perception that their
technology is better, Mr. Frisbie said.
Large banks' deposit growth is a major advantage because it
provides the banks with an increasing base of cheap financing that
can be used to make loans. It also allows them to avoid paying
higher interest rates to depositors, which disappoints savers but
boosts the firms' profit margins.
"The biggest banks are winning," wrote Tom Brown, CEO of hedge
fund Second Curve Capital LLC, last month. "Small banks should be
very concerned."
Through the 1980s, American banks faced tough legal constraints
on getting bigger that ensured the country's deposits remained
spread out across thousands of small banks. While some rules
limiting size still exist, in 1994, lawmakers passed legislation
that paved the way for national banks that could hold customers'
deposits coast to coast. At the end of that year, the three largest
banks held about 5% of the nation's deposits. Those firms
eventually were a part of multi-billion dollar mergers that created
today's biggest lenders.
Some of the deposit growth comes from businesses parking their
money in bank accounts that earn no interest. That funding is often
considered less valuable because it is seen as likelier to leave as
rates continue to rise.
But the biggest chunk of deposits is held in the banks' retail
units, which hold money consumers leave in their checking and
savings accounts, according to bank filings. These deposits, which
are considered "sticky, " or less likely to leave, have become even
more important because of postcrisis rules.
The biggest banks have also improved customer satisfaction
ratings that had been damaged by the financial crisis and increase
in home foreclosures. And they are persuading current customers to
leave more money with them. For instance, the average checking
account balance at Bank of America has increased to about $7,000
from $2,000 in 2007.
Prohibited from doing deals, JPMorgan and Bank of America are
planning to keep expanding by opening branches in major U.S. cities
where they have none. Bank of America has opened or announced plans
to open around Denver, Indianapolis and other cities. JPMorgan
hasn't named the 15 to 20 new markets it is entering, but analysts
think they could include Boston, Washington, D.C., and
Philadelphia.
The strategy could steal business from Wells Fargo, which is
struggling to move past its various regulatory issues. It could
also accelerate deposit-gathering problems for smaller banks, said
Mr. Brown of Second Curve Capital.
And that can lead to other issues, from slowing loan growth to
dwindling fees from other relationships. The risk for small banks,
he said, is that "this is a slow death."
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
March 22, 2018 14:15 ET (18:15 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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