Should You Worry About America's Shrinking Banks?


NEW YORK (MainStreet) – In America, the supposed global headquarters of free-market capitalism, the unthinkable has occurred: Not one new bank opened in the U.S. last year.

A report from the Financial Times points out that 2011 was the first year in decades in which the U.S. has not seen a new U.S. startup lender. The New York Times concluded that 2010 was the first year ever that more banks closed in the U.S. than opened.

The Federal Deposit Insurance Corporation notes that 90 banks closed in the U.S. this past year, with not a single new financial lending institution opening its doors.

So what happened to free markets, and to the banks that fuel them? And what does it mean for consumers? First, there are some caveats about what the Financial Times calls a "financial institution" to point out.

There were three new bank charters introduced in 2011, but none of the three meet the criteria needed to be considered as the genuine article, which the Times defines as “de novo” banks – newly chartered institutions that were not created through the takeover of an existing institution. Consequently, 2011 was the first year since 1984 when zero de novo banks opened in the U.S.

Analysts told the Times that the trend has been building for some time, and that a lousy market for financial services companies is largely to blame for the dearth of new banks. Without significant profit potential, the enthusiasm for opening new lending institutions is muted, and that seems to be the case today.

What does the lack of new banks mean for consumers? There's certainly no reason to panic – there is no lack of financial institutions who want to take your money and lend you some more (the FDIC counts 7,357 banks in the U.S.).

But down the road if the trend continues, consumers will have fewer choices as the industry narrows and consolidates. With most closings coming from the smaller-end of the bank scale, there may be fewer local lenders, which would force consumers to go to larger banks, who would exert even more control over savings rates and lending approvals (not to mention the fees and service charges that come part and parcel with larger banks).

On a larger scale, the notion that the U.S. couldn’t generate even one new de novo bank in 2011 is a real sign of just how weak the economy remains right now. It’s still early in 2012, but consumers and economists would both like to see that scenario turn around.

While it’s the smaller banks that seem to be struggling the most, recent defections from larger banks to community banks may signal a change in that trend. Check out what banking customers are switching for with MainStreet’s tips on How to Find a Good Credit Union!

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