Big banks to get bigger?

The Federal Reserve is considering a rule that is likely to encourage further consolidation in the financial industry. It would allow banks to take on more debt to finance acquisitions.

At the current rate, the number of banks is likely to fall soon to half as many as operated 20 years ago. There were 7,630 commercial banks in the United States at the end of last year, according to the Federal Deposit Insurance Corp., the government’s banking regulator. In 1984, there were 14,496 banks.

However, fewer banks is not anything consumers need to worry about, according to some banking industry officials. “It’s a good thing, because banks are getting strong,” FDIC spokesman David Barr said.

Under the Federal Reserve’s proposal, banks with assets up to $500 million could use debt to finance as much as 75 percent of the purchase price of another financial institution. Currently, only banks with assets up to $150 million can carry so much debt for an acquisition.

The Fed is trying to make more funding available to small banks to allow them to grow through acquisitions, Fed officials said in congressional testimony.

The proposal is in the public comment stage and could become final within months if regulators do not modify it.

In a recent example of the industry’s consolidations, Wachovia Corp. last month said it would buy auto-loan financier Westcorp for $3.91 billion.

“Together, we’ll have more to offer clients and a broader financial base on which to grow,” said Westcorp Chairman Ernest S. Rady.

Wachovia, with $459.5 billion, is ranked fourth in total assets among commercial banks.

Wachovia, Bank of America, JP Morgan Chase and Citibank control more than one-third of the nation’s $8.7 trillion in banking industry assets.

“They have a lot of liquidity,” Mr. Barr said. “The banking industry is extremely healthy in the U.S.”

With interest rates low — though climbing— and banks earning record first-quarter revenue of $34.2 billion this year, big banks are using their excess cash to capture a larger share of the market.

Large banks say consumers will benefit by receiving more services at cheaper rates.

Community banks say consolidations mean bigger banks will not serve small and medium-sized businesses as well.

“The answer is, it depends,” said Stephen Brobeck, executive director of the Consumer Federation of America.

Story Continues →