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Banks Pushing the Limit?
In less than a week, the three largest banks in the country have fallen significantly: Bank of America (-20%), Morgan Stanley (-25%) and Wells Fargo (-18%). They’re drop shows you how negative market forces are right now.
All of these companies are recent recipients of federal bailout funds – which amounts to an implied arrangement that the government will not let these banks fail. The federal cash infusion has given these companies the funds to make new loans, shore up their finances and potentially acquire smaller banks.
But here’s where things get interesting. A little-known 1994 Federal law prohibits banks from growing past 10% of total deposits from acquisitions. Combined, these three currently control over 30% of U.S. bank deposits. Each bank is close to, or over its limit.
The banking and credit crisis has federal officials encouraging stronger banks to take over smaller, weaker ones. It’s not surprising that Citigroup just announced it’s in talks to acquire another bank. And it won’t be the only buyout coming down the pipe.
The unstable credit environment may encourage regulators to disregard these overages in favor of banking stability, in the short-term. Or it they could raise the1994 caps to 15% – which could set off an unintended consequence of acquisitions of banks not in trouble, but financially attractive.
Time will tell if these mega-banks are in the consumer good – if they’ll be given authority to grow further, or if they will they be forced to spin off assets after the crisis has passed.
Companies mentioned: BAC, WFC, MS
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