Banking Industry – Consolidation by Fiat

Today, the Federal Deposit Insurance Corporation took over banks in Colorado, New Mexico, Oklahoma, and Wisconsin.  These included: First Community Bank, based in Taos, N.M, with $2.3 billion in assets; FirsTier Bank, based in Louisville, Colo., with $781.5 million in assets; First State Bank of Camargo, Okla., with $43.5 million in assets; and Evergreen State Bank, based in Stoughton, Wis., with $246.5 million in assets.  The FDIC has found buyers willing to take over the assets of all but FirsTier Bank, which the FDIC has approved the payout of insured assets.  However the cost to the insurance fund is over $485 million: First Community Bank is expected to cost $260 million, FirsTier Bank, $242.6 million, First State Bank, $20.1 million, and Evergreen State Bank, $22.8 million.

So far this year, there have been 11 bank failures, compared to 15 at this time last year.  While insured deposits (up to $250,000) have been covered (though the FDIC insurance fund, itself, has a shortfall of approximately $8 billion,) it is likely that many depositors at the failed banks will lose high interest rates on their CDs, because the acquiring bank is allowed to reduce rates on existing CDs – at least, this was the case in 2010.

One has to wonder if ever increasing banking regulation will really stem the tide of bank failures.  Regulation tends to shift the burden of the failures from the bank management and shareholders to the taxpayer.  Economist, Allan Meltzer said, “Recognize that regulation is an ineffective way to change behavior… Lawyers regulate, but markets circumvent burdensome regulation.” (Allan H. Meltzer, University Professor of Political Economy, Carnegie Mellon Tepper School of Business and Visiting Scholar at the American Enterprise Institute, Testimony before the Senate Committee on Banking, July, 23, 2009)  In other words, as more regulations that are put into effect, the more creative the banks get in getting around them. 

Bank failure, of course, is not good for the consumer as the choices become fewer and the fees (caused by regulation) get higher.  Regulation, it seems, is forcing a consolidation of the banking industry by fiat.