For all its highly touted reforms, the financial overhaul enacted in Washington won't stop big banks from getting bigger, and that spells trouble for smaller banks as well as consumers, experts say.
The growth of "megabanks" in Florida was highlighted recently when the Wall Street Journal surveyed a stretch of Orange Avenue in downtown Orlando. There, the "Big Three" -- Wells Fargo, Bank of America and J.P. Morgan Chase -- increasingly dominate the city's main banking corridor.
Nationally, BofA, Chase and Wells now have 33 percent of all U.S. deposits, up from 21 percent in mid-2007, the fastest shift of such a large chunk of deposits in U.S. history, the Journal reported.
Additionally, the Big Three made 57 percent of all home mortgages in the first quarter, up from 28 percent in 2008, according to Inside Mortgage Finance, an industry newsletter.
And, as proof that they are "too big to fail," the federal government fronted this trio $95 billion in capital in 2008 and 2009, all of which they repaid.
"It is true that megabanks are now bigger and more powerful than before. The new financial reform legislation will not do anything to reverse that, and might even make it worse because the legislation does little to limit the largest banks' activities while still giving them a special status as systemically important institutions," says Gerald Epstein, an economics professor at the Massachusetts Institute of Technology.
"(This) will most likely mean that the government will continue to be largely in the position of having to bail them out in a crisis ... this will continue to allow them to borrow at cheaper rates than smaller banks and will thereby give them a growth advantage, just reinforcing their size and the concentration in the system," said Epstein, who is also co-director of MIT's Political Economy Research Institute.
The new federal law attempts to tighten current regulations. Rules that limit U.S. banks holding 10 percent of all U.S. deposits from buying up rivals have been expanded to included liabilities, as well.
Critics say that's like locking the barn after the horses are gone. Through previously approved acquisitions, BofA (which bought out Countrywide Financial Corp.), Chase (Washington Mutual) and Wells (Wachovia) can squeeze the rest of the field.
The situation has consumer groups pushing for stricter bans on big-bank consolidations. Many favor House Resolution 5159 by U.S. Rep. Brad Miller, D-N.C., which aims to close the growth-by-acquisition "loophole" in the 10 percent standard.
"I'm concerned that big banks are gaining power and that the laws aren't good enough to limit size," said Ed Mierzwinski, of the U.S. Public Interest Research Group.
Mierzwinski says his studies show that bigger banks charge bigger fees -- and use their broad market reach to get away with it.
"Because of the stickiness of account relationships, they are able to retain customers, they can have worse service and lower deposit interest. We need to make sure consumers have the right to shop around," he said.
To help depositors "untether" themselves from badly behaving banks, Mierzwinski and other consumer-interest advocates want to let customers "fire their banks" without getting hit with cancellation fees. These groups also want to establish user-friendly databases to help the public compare services, rates, charges and benefits.
"There's very little price competition at the retail level. Big banks don't like to compete on products, and regulators have not encouraged it," Mierzwinski says.
But that doesn't mean small banks are automatically better.
"Remember, small banks are the guys who first adopted the overdraft fee bandwagon. It was like getting hooked on crack, and it became a massive source of their revenues," the PIRG official said.
In an effort to level the playing field and get credit flowing again, the Florida Bankers Association last month asked the Federal Reserve Bank and the Federal Deposit Insurance Corp. to grant forbearance to its 300-member institutions.
In a bid to assist small banks in the state, FBA President Alex Sanchez requested a 12-month waiver from higher capital requirements and suspension of the use of appraisals for loans.
That kind of relief won't help strengthen Florida's banking industry in the long run, and could weaken it, MIT's Epstein says.
"The answer to this is not to reduce the capital standards for the smaller banks, even those in a state facing a crisis. This could amount to making the same mistake as during the S&L crisis in the '80s -- allowing insufficiently capitalized institutions to make what might be very risky loans and then ultimately leading them to fail at great taxpayer expense.
"After all, if you own a small bank, and you know it is undercapitalized and might fail anyway, then you might take excessive risks, even engage in fraudulent activity to make money for yourself, knowing that in the end the bank will fail and the FDIC will have to take it over."
Mierzwinski was apoplectic at the prospect of suspending appraisal rules. "Hello! Corrupt appraisals caused the bubble. This would be like throwing gasoline on the fire."
Instead, Epstein recommends a "quid-pro-quo" deal.
"What might make more sense for Florida banks is an agreement that they might get some forbearance in exchange for very close monitoring by the regulators and a binding commitment to increase their lending for employment and home saving purposes.
"To just give forbearance without monitoring is asking for very serious trouble," the MIT professor said.
Kathleen Day of the Center for Responsible Lending sees both sides of the equation.
"If you don't give forbearance, you cause economic loss. But history tells us, every time you give it, they gamble to make it up and it pours good money after bad.
"Taxpayers are on the line and we need to make sure (banks) who get those benefits aren't acting like idiots. Remember, the S&L crisis started with little failures," Day said.
Florida, which ranks third in the nation for bank failures (behind Georgia and Illinois), suffered two more closures on Friday.
The FDIC announced that Port Saint Joe-based Bayside Savings Bank, and Panama City Beach-based Coastal Community Bank shut down. Their failures will cost the deposit-insurance fund $110.7 million.
Meanwhile, the Big Three keep turning the screws on the market, paying lower interest rates and tightening up on loans.
According to the FDIC, in the first quarter, total loans outstanding at U.S. banks with assets of more than $100 billion declined 1.5 percent. That was more than three times as steep as the decline among banks with less than $100 million in assets.
That negative trend has trickled down to Orlando, where lending has slowed as megabanks have expanded. According to Equifax Inc., the dollar value of new bank-card and home-equity loans dropped 73 percent in Orlando's metropolitan area between April 2008 and April 2010, compared to a national decline of about 4 percent in the same period.
No doubt, the sharp decline in Orlando reflects Florida's horrid housing market. But it's a chicken-and-egg issue, too. Some economists accuse megabanks of "hoarding" cash and clamping down on loans -- thereby strangling economic recovery in the crib.
According to the Journal, megabanks are preserving capital as they brace for lost revenue from parts of the financial-services overhaul that don't impact smaller banks, such as new restrictions on proprietary trading and derivatives. As a result, bigger banks have cut their lending more than small institutions, leading to a smaller supply of loans.
"The flow of credit is still significantly impaired" in Orlando, Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida, told the Journal. "Businesses that might be faring well and looking to expand aren't able to get that financing."
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Contact Kenric Ward at kward@sunshinestatenews.com or at (772) 559-4719.
