Strange story in the country with the most banks in the world: Sitting still is also ‘hit by bullets’ because … the same name as the bank has just gone bankrupt

On March 21, after Signature Bank – a New York City-based bank, was forced to close, there were 4 other banks that had to clarify that they had nothing to do with this collapse. despite having the same name. Similarly, when First Republic Bank in California was injected with $30 billion by major banks but collapsed a few weeks later, some investors sold off Republic First Bancorp shares again. The confusion over similar names sent shares of the Philadelphia bank down 28%.

The reason there are so many confusing cases is because America has too many banks. According to data from the Federal Deposit Insurance Corporation (FDIC), there are more than 4,100 commercial banks in the United States. While the UK has only 353 banks, Germany has 261 banks. Why does the US have so many banks?

The biggest reason why the US banking system has become fragmented has its roots in 19th century laws. These are regulations that limit the scope of activities of banks, which vary from state to state. Some states allow banks to open branches anywhere in the state, but in some places bank branches are only allowed to operate in the city or county in which they are located. Some states forbid banks from other states to operate.

The purpose of these regulations is to prevent banks from becoming too powerful. However, according to Randall Kroszner, a professor at the Booth School of Business at the University of Chicago, in the early 1800s, when regulations began to flourish, states made huge profits through dividends and money. pay taxes from banks. So they tend to protect their state banks.

By the 1970s, states began to lift these rules. And with the emergence of new financial technologies and products – including ATMs, money market mutual funds and vastly improved credit scoring systems, distant banks are also can provide financial services that were previously only available to local banks.

In 1978, Maine became the first state to accept other state banks. By 1994, all states except Hawaii had adopted similar laws. That same year, the government passed a federal law that completely lifted the remaining geographic restrictions.

This led to a significant contraction in the US banking industry. In 1983, the US had nearly 14,500 commercial banks. Two decades later the number had dropped to 7,700, and 20 years later the number continued to plummet.

JPMorgan Chase, Bank of America, Citigroup and Wells Fargo – currently dominate the US banking system. As the 4 largest banks, they hold 42% of the total assets of the industry, up sharply from 11% in 1990. However, geography still plays an important role in deciding which bank to choose. Borrow money from any bank of households and businesses.

Small local banks are still often chosen by small businesses simply because they want to choose banks that they know well. According to the FDIC, community banks with assets of 10 billion USD or less account for only 15% of total loans, but account for 30% of commercial real estate loans and 31% of outstanding loans. agricultural loans and 36% of small business loans.

The recent crisis may cause the US banking network to shrink even further. In 2018, the US Congress passed a law to relax the regulation of small banks. Accordingly, banks with assets of 250 billion USD or more (instead of 50 billion USD as before) must apply the strictest management regulations, which means that medium-sized banks will be exempt from a certain amount of money. capital requirements, liquidity as well as pressure tests.

However, after the recent crisis, where mainly mid-sized banks were in trouble, policymakers are considering returning to the $50 billion threshold, which means there will be about 30 more regulated financial institutions. more rigorously. If this happens officially, many banks will be forced to merge with other banks to adapt. As a result, America will have fewer banks, and with luck, fewer crises.

Refer to The Economist