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Can small banks be competitive?

By David McMillin · Bankrate.com
Friday, September 23, 2011
Posted: 12 pm ET

While the status of Capital One's acquisition of ING Direct remains on hold, the smaller players in the banking industry are voicing a concern over adding another member to the too-big-to-fail, or TBTF, club.

At the Federal Reserve's hearing about the proposed acquisition earlier this week, a representative from the Independent Community Bankers of America, or ICBA, asked regulators to impose a moratorium on all mergers and acquisitions that involve banks with more than $100 billion in assets. The association raises the concern that making big banks even bigger will place more risk on the entire financial industry.

In addition to the risk posed to the financial industry, the association discussed the risk that it poses to you, the consumer. The addition of more systemically important financial institutions, or SIFIs, creates somewhat of an oligopoly, one that will continue to shrink the number of banks who are competing for your business.

What the ICBA is arguing is that as the playing field shrinks, so do your choices. When you look at the TBTF club, the options at the consumer level look fairly similar: disappearing rewards programs and hurdles to clear checking account fees. The ICBA argues that propositions such as the Capital One-ING Direct deal will lead to more of this for you and ultimately, less business for its members.

Despite offering high-yield checking accounts and other rewarding products, it's no secret that many small banks are struggling. As big banks continue to slash reward programs and add fees to their accounts, I’m curious to see whether or not consumers will demonstrate their unwillingness to be nickeled and dimed for holding their deposits. If some consumers can determine that the bank down the street can fulfill their service needs as well as the bank that has a branch on every street in America, perhaps the playing field will even out, and members of the ICBA will continue to prosper.

What do you think? Is the latest round of financial reform making the banking industry even less competitive? Or can community banks continue to distinguish themselves from financial behemoths in your eyes?

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