The Changing Banking Landscape In The US

The banking landscape in the U.S. has changed drastically over the past few months. At the beginning of the current year, three major banking acquisitions were completed. With the acquisition of Merrill Lynch, Bank of America (BAC) has now become the largest bank in the country by assets, ahead of JP Morgan Chase (JPM), which had recently purchased Washington Mutual’s banking operations, and Citigroup (C).

At the same time, Wells Fargo (WFC) and PNC Financial Services (PNC) completed the acquisitions of Wachovia and National City respectively, and became the 4th and 5th largest banks in the country.

Earlier, in September of last year, Lehman Brothers filed for bankruptcy and the other two major investment banks - Morgan Stanley (MS) and Goldman Sachs (GS) - converted to bank holding companies.

Twenty-five banks had collapsed last year under the burden of loan losses, and we expect the number to rise this year, as the economic conditions have continued to worsen and housing prices are still on a downward spiral, followed by commercial real estate prices. Rising unemployment is further adding to losses in other asset categories as well.

Thus, we anticipate further consolidation in the banking space, as the weaker players fail and the stronger players seek to build up their positions — and may be assisted by the regulators in doing so, as we observed in the past few deals. Further help has come from the Treasury in the form of TARP money, which some have already used for the acquisitions.

Having converting themselves into bank holding companies, Goldman Sachs and Morgan Stanley have subjected themselves to greater regulation, higher capital requirements and lower leverage norms. Further, as they transform their operations to bank holding companies, they are most likely to use the TARP funds to buy smaller/weaker banks to build up their deposit base.

Ultimately, we will see the U.S. banking scenario dominated by the few survivors of the crisis. For the consumers, it would mean lesser bargaining power — but at the same time, they would have the convenience of a wider array of offerings from one shop.

Certainly not good news for the employees, since layoffs will continue to rise as the merged entities consolidate their operations and deal with further losses in the credit portfolios.

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