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Big banks tighten grip

By Holden Lewis · Bankrate.com
Tuesday, July 20, 2010
Posted: 2 pm ET

Today's Wall Street Journal has a long, front-page article about consolidation in the banking industry. "Market power is concentrating in the hands of the nation's largest banks," write Dan Fitzpatrick and Robin Sidel.

They note that the three biggest mortgage lenders -- Wells Fargo, Bank of America and Chase -- made 57 percent of home loans in the first three months of this year (my preferred stats say their share is 56 percent). This increasing market concentration is a hobbyhorse of mine. I think it's bad for consumers, although I have heard arguments otherwise: that the big banks are more efficient, and therefore charge less to consumers.

Although gobbling up the competition might make banks more efficient, there's no guarantee that they'll always pass along their savings to the consumer. Oligopolists can reach unspoken agreements regarding fees and interest rates. Only the naïve would expect an oligopoly to adopt consumer-friendly pricing.

Enormous, efficient companies are vulnerable to errors and external shocks. Taxpayers foot the bills for their failures.

Fitzpatrick and Sidel describe these objections, and they mention something else that should concern consumers. Early in the article, they write about a challenge facing a small, local bank in Orlando, Fla. The bank's corporate customers "are being told by the biggest lenders not to move their deposits to other banks or else they might not get a new loan."

Why should that bother you, the consumer? The big banks play similar games with small lenders. Smaller, independent mortgage banks depend on lines of credit from the gigantic banks. Increasingly, the gigantic banks are threatening to reduce or withdraw these lines of credit. How does an independent lender keep its line of credit? By dealing exclusively with one gigantic lender and forsaking all others.

To me, that sounds like the biggest money-center banks are carving up the mortgage market the same way Roosevelt, Churchill and Stalin divided Europe at the Yalta conference. That didn't turn out well for a lot of people.

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