As this post points out, the trend of the regulatory regime has been to nudge or auction weak institutions to bigger, purportedly stronger institutions. Wachovia to Wells Fargo, Merrill and Countrywide to Bank of America, Bear Stearns and Washington Mutual to JP Morgan. As FDIC points out, more banks are becoming troubled. As Naked Capitalism points out, surviving banks with share prices possibly bolstered by weak accounting rules will roll into consolidations with larger banks, continuing the concentrations of deposits, clients, and risk into fewer hands. No wonder Bernanke says it will be hard to shrink the Megabanks. We are going backwards.
From Naked Capitalism:
The “lax” [regulation] is clearly a tad inflammatory, but tweaks in Basel III rules to allow dubious quality items like mortgage servicing rights as Tier I capital speak volumes. In addition, the various noises from policy makers makes clear that they aren’t willing to make banks raise capital level by much due to fears of the impact of lower loan availability on economic growth (more equity behind lending means higher lending costs, since equity is more expensive than debt). And with that not-very-strong starting point, the banks have pushed for even weaker rules.
Should this come to pass, Credit Suisse, via a Wall Street Journal story, is already predicting the outcome: more bank mergers.
So to echo my recent refrain, we need new banks that are capable of adding market forces to shrink TBTF institutions that will not be forced smaller by regulation.