Every week, the FDIC closes a few banks around the country. In Minnesota, six have been closed so far this year, equal to the number closed in all of 2009. Pinehurst Bank in St. Paul, which was closed May 21, was the most recent. Yet, compared with other nations and relative to Minnesota’s population, we still have many banks that range in size from gigantic to tiny.
The Federal Deposit Insurance Corp. listed 411 “depository institutions” for Minnesota as of March 31, of which 388 were commercial banks and 33 were “savings institutions.” That total has dropped by more than 200 since 1990.
But that number undercounts the number of banks operating in the state because it does not include the many banks — including two giants, Wells Fargo and U.S. Bank — that are chartered in other states but have branches here.
Given so many banks, people may well wonder if society as a whole is hurt when a few banks bite the dust and question what number of banks society really needs.
There is no precise answer to the second question, but in general terms, it is important to have enough banks that all households and businesses can choose between two or more competing institutions when shopping for checking and savings accounts, loans or other financial services.
Based on those criteria, there still are plenty of banks in Minnesota. In fact, banking is more competitive in many ways than it was for decades, even if the total number of individually chartered banks is eroding both from FDIC closures and from non-crisis-driven buyouts and mergers.
Our country has many more banks than any other nation in the world. This is a historical legacy of presidents like Thomas Jefferson and Andrew Jackson, who were leery of financial institutions that had national power. Individual states thus long were left free to charter banks as they saw fit. This resulted in a “dual banking system” after the Civil War, with a small number of nationally chartered banks, some of which eventually became very large, and a plethora of state-chartered banks, most of which were very small.
State sovereignty over banking was enhanced by the McFadden Act of 1927 that prohibited establishing bank branches across state lines and subjected nationally chartered banks to the restrictions of whichever state they were located in.
In general, states on the East and West coasts tolerated greater branching, and those in the Midwest were more restrictive. Some states, most notably Illinois, were “unit-banking” states, allowing only one physical banking house per charter.
Through the vehicle of a “bank holding company” that owned the stock of multiple separately chartered banks, there were, in effect, large banks with multiple branches even in restrictive states. But the number of branches was far less than where branching was easy.
Moreover, states often were reluctant to grant multiple bank charters for small communities. Thus, in many nonurban areas, the first bank to get a charter held a local monopoly. Local residents could open accounts in a community five or 10 miles away, but most local businesses, churches and school districts had little choice in where they banked.
The result of restrictions on branching and issuing new charters for banks that might compete with existing ones meant banks in both rural and urban areas had some degree of monopoly power. Very rich households and very large corporations could always go to Chicago, San Francisco or New York, but everyone else faced limited local choice. And people paid more for banking services, got lower interest on savings and paid higher interest on loans as a result.
When limitations on branching within states and across state lines were swept away in the 1980s, banking became more competitive, and the costs of banking services dropped in real terms. The decline in the total number of banks, accentuated by the farm financial and SL crises of the 1980s, did not reverse the trend toward more competition in most communities. The Internet made it easier for people to get banking services from elsewhere in the nation without ever entering that bank’s physical facilities. And mutual funds and standalone mortgage originators gave households more choice in savings and home financing, even if the latter turned into a debacle.
So while people may well worry about what episodic bank closings may indicate about the overall state of our local and national economy, they need not worry that they won’t have choices about where to have a checking account or apply for a car loan.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.