The break-up of the big banks combined with strengthening the community banks and credit union would create something much closer to a free market of 7,000 institutions than 4 institutions controlling the world’s currency.
Since the 1960’s the banking industry has been dominated by two main tiers of banking — the founding members of “associations” who sit on the board of electronic networks and then the peons who are all the rest of the banks. The number of founders is probably less than a dozen. The rest number around 7,000.
To give credit where credit is due, the leaders of this pack (when their numbers were higher before consolidation) came up with a pretty smart plan: create an electronic network that would enable their depositors to have access to their bank accounts all over the world — and force the vast majority of smaller banks to use that network and thus pay for the cost of the infrastructure.
The result was that community banks and credit unions were subjected to “rules” that did not allow them to conveniently access the network whereas the big fellows were able to advertise that you could get free access to your account with your ATM card anywhere.
Attempts by community banks and credit unions to use smaller ATM machines and push back on the big bank competitors resulted in draconian rules that put hundreds of firms out of business and severely restricted access to bank accounts unless you were a customer of a big bank. This in turn allowed the big banks to raise fees to absurd levels.
The cost of a an electronic transaction is less than 1 cent including settlement. Visa, MasterCard and others have instituted charges on the front end (surcharges) and back end (on your end of month statement where you might not notice) of somewhere around $6.00 per transaction if you use an ATM that is not branded with the big bank name.
This combined with two other developments — the allowance of interstate banking and the repeal of the Glass Steagel act giving investment bankers (risk takers) access to depository accounts at commercial banks (risk averse), resulted in complete domination of the marketplace by just a few banks.
The story goes that we need extra large banks because there are international companies that need extra large financing. Small banks can’t do that, they say and so big banks are a necessary evil.
It’s a lie. ATM Charges should be less than $2.00 at most including front and back end. Bank charges have skyrocketed despite the claim of scale economies in the large banks. And electronic transactions are only more convenient for large banks because they won’t let the networks give the same privileges to the small banks. It’s a classic case of antitrust waiting to happen.
But that was just the beginning. By changing the face of lending from the banker actually knowing its customer to never knowing its customer, the decision-making process on loans became increasingly remote. So they came up with an addictive form of gambling called FICO which is a convoluted score-system that requires you to be in debt in order to get a high enough score to borrow money when you need it.
Enter securitization. The risk-taking investment bankers quickly figured out a scheme wherein if they created underwriting standards that would produce non-performing loans, they could make a fortune and bleed the world dry of virtually all real money. They got the money from investors, other banks, governments and even individual investors by lying to them. But because the process of lending had become so decentralized they had the cover of plausible deniability and started creating “innovative products” under the ideological belief that the “free market” (which is anything but free) would regulate itself.
Here is the real story: Most small business and personal loans would be of far higher quality and produce far more impact on local, state and national economies if they were originated by local banks who met, knew, visited and verified the facts and the people. There is no rational business case for a lender in Chicago to be selling its services to a borrower in San Diego.
Virtually any loan, regardless of how large could be handled by expanding the functionality, which already exists, of the technology networks that transfer and settle electronic transactions.
Which means that a big huge borrower or a banker with a scheme like the mortgage meltdown scheme would be subjected to 7,000 banks reviewing the risk and probably getting outside knowledgeable consultants to evaluate the scheme. Syndication of loans is as old as lending. Take the big banks out of the equation and ask yourself, would the mortgage meltdown scheme have ever left the station if it was subjected to that kind of scrutiny?
The ONLY reason it worked is the LIVING LIE that bigger was better. The Department of Justice Antitrust division can fix this quickly simply by enforcing existing law. The break-up of the big banks combined with strengthening the community banks and credit union would create something much closer to a free market of 7,000 institutions than 4 institutions controlling the world’s currency.
For consumers this would mean lower bank fees. Most people pay over $200 per year in various bank fees without realizing it. It’s large undisclosed or simply added into your statement. Some people pay as high as thousands of dollars for “overdrafts” created by first imposing a fee that drains the account to zero and THEN presenting the checks for payment and paying them for a “modest” fee of $39.00.
Nothing is going to change though, unless people get riled up, throw the bums out and start over again. As long as Dimon and others effectively write the laws and make the rules the consumer is screwed, the taxpayer is left in a hole for generations, and investors will never trust the U.S. markets again.
Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: antitrust, community banks, credit unions, EFT, loan syndication, MasterCard, networks, Visa | 4 Comments »