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In 1933 alone, about 4,000 commercial banks and 1,700 savings and loans institutions failed.

Kenneth H. Thomas

not all customers will benefit from greater consolidation

U.S. federal government rolled out various laws in 1784 to encourage multiple banks in individual states.

wave of consolidation occurred in 1994

"Many small banks feel that they are being pushed out of existence by new regulations,

swing of the pendulum last year, consolidation returned to 1994 levels. But in contrast to previous times, much of the consolidation has been due to failures

Loretta J. Mester

"In the short term, I think consolidation will pick up as weaker banks go through mergers and acquisitions, and stronger banks take time to get their capital shored up" in their pursuit of greater efficiency and economies of scale,

institutions that will likely be hardest hit by all this activity will be the community banks

have less than $1 billion of assets, but account for 92% of all banks and savings institutions,

Dodd-Frank Wall Street Reform and Consumer Protection Act was a death knell

experts expect consolidation to continue, and predict that the trend will leave the banking system better off in the long run. "We don't really need as many banks as we used to,"

Their plight hasn't been lost on the FDIC, which has launched various initiatives to give community banks some relief.

guidelines that lighten requirements for how these banks manage customers whose accounts are consistently overdrawn.

community banks play an important role in local economies. They typically have close relationships with individual customers

Todd A. Gormley,

"Smaller firms and local individuals trying to get loans from larger banks could be a subset of the population that is worse off because of consolidation,

concentration in geographic markets

are an important factor in the reciprocal relationship between lender and borrower

consolidation also leaves a handful of banks controlling the majority of certain types of products.

Four "mega banks" -- Wells Fargo, Bank of America, JPMorgan Chase and Citigroup -- now hold three-fifths of the home mortgage market, which limits consumers' choice of products and their ability to shop around for competitive pricing. "It's a textbook issue of a concentration of power," Guttentag says. "A limited number of firms control the market, and they will engage in implicit collusion."

borrowers with low incomes or bad credit are significantly less likely to default on loans if they borrow from a local bank than if they receive a loan from a distant bank or mortgage company.

some cities, states and regions have just one dominant bank.

Pittsburgh metropolitan area, PNC Bank has 47% of the deposit share, according to the FDIC. The second-largest bank in the area is Citizens Bank of Pennsylvania, which has 8.5% of the deposit share.

no limits on deposit shares in certain markets, 1994's Riegle-Neal Act imposes a 10% cap on nationwide deposits for a single bank.

Treasury Department is now looking into modifying the cap to include all consolidated liabilities.

consumers need not worry

Mester

While the total number of banks may be declining, the number of branches isn't.

In the last 10 years, the number of bank branches nationwide has increased 15%, although that expansion has primarily involved banks with $500 million or more in assets. The number of branches dropped slightly for the first time in a decade in 2010.

Guttentag

the number of banks will continue to shrink, but he doubts the U.S. will ever look like, say, Canada -- which has just 22 banks. Indeed, if consolidation continues as it has over the past 20 years at the average annual rate of 3.3%, it would take 60 years for the total number to fall below 1,000 banks and nearly 130 years to get below 100.

if the number of banks shrinks from 6,000 to 100, if those 100 are operating in all market segments and if consumers have many options, there is no reason for concern," Guttentag

didn't the Dodd-Frank Act of 2010 end "too big to fail," and won't its "living wills" provision nudge our largest banks to become smaller and simpler?

"I can be hopeful. I am an optimist at heart, but I don't see any evidence of that."

his plans to protect commercial banking from riskier forms of finance

realizes regulatory tactics and strategies must evolve as banks balloon in size and scope, George insists boots-on-the-ground supervision is crucial. She worries complex approaches are overshadowing common-sense judgments.

Stress testing is a "useful tool to gauge potential losses from different economic scenarios. It is no substitute for supervisory judgment and examination," she said.

helps calibrate capital,

"but to really know a bank's condition, you have to go in and examine those credits."

While the central bank has taken many steps in recent years to open its monetary policy decisions to more scrutiny by outsiders, its regulatory policy making has grown more opaque. Gone are the days when Fed governors debated policy decisions in open meetings. George would reverse that trend.

we have to apply the transparency pledge to everything we do

Part of what we have succumbed to is a sense of urgency. Things are moving fast."

time to "ponder the unintended consequences."

These rules have big import

her philosophy on regulation.

concern I have

You can make any rule as complicated or as simple as you want. The more complicated you make it, and I learned this watching Basel II get crafted, I don't think you ensure any chance of success."

I would like to see us go back to a time when examiners were required to use judgment. You gave them simple, clear rules and they had to make judgments."

I have watched over the years. It is an accumulation of compliance, and community banks do not have the scale to spread those costs, so they bear them disproportionately."

I worry about the burden on small banks,

Consumer compliance issues seem to cause the most friction among bankers and their examiners, she said.

due to prescriptive rules that tell the examiner that you don't get to apply judgment here. If it meets this, this and this test, then it's a problem. That's the frustration of bankers."

Forbearance drags things out,

I think about it pretty simplistically. Anytime you have an asset, a loan, that gets into trouble, somebody has to take the loss. The sooner you take the losses," the better.

George belongs to a growing cohort of folks who question some of the conventional wisdom growing up around community banks, namely that a massive wave of consolidation is coming and the average size must increase.

I don't think there has to be a wave of consolidation."

I don't think they all have to be $1 billion" in assets

worried about credit risk at community bank

both margin pressure and competition from larger banks that can use lower funding costs to undercut smaller rivals.

is they [banks] need more yield so they will go out for more risk," she said. "And when they do that in a low interest rate environment it can look OK. But those borrowers start looking worse when rates start ticking up.

it's all going to affect a lot of people.

I hear bankers saying

I am going to have to start making some credits that I wouldn't normally make because I have to generate earnings.'

community banks also are telling her about losing business to large banks.

but that big bank is coming in and pricing a loan in a way that I cannot and would not."

They say I am trying to compete with the big bank in my market

Community banks that survive will be the ones that hold the line on risk but continue to adapt, she said

community banks are core to the payments system and core to lending in these markets. I don't see that model being outdated. It's always got to be tweaked, but I worry the thing that is going to drag them down is regulation. That seems like something we could address and should address."

stimulus spending, as prescribed by mainstream economic theory, to create jobs and promote growth."

Obama intends to ignore the path for getting the economy back to full employment that most economists advocate.

interest rates did fall, it is difficult to believe that it would have much impact on either investment or consumption

theory as to how budget cuts could boost growth

lower deficits in the present and/or near future will reduce fears that government spending will be crowding out private economic activity. This would lead to lower interest rates. Lower interest rates will provide a boost to investment and consumption. Also, lower interest rates in the United States will make dollar assets less attractive to investors. This will cause the dollar to decline against other currencies, improving our trade balance.

no part of this story makes sense in the current economic environment. US interest rates are already at ridiculously low levels,

vast amounts of excess capacity.

doesn't matter at the White House any more.

Consumers remain heavily indebted due to the collapse of house prices.

The dollar continues to be a safe haven in uncertain times.

keep the dollar from falling too much against their currencies no matter how low interest rates fall.

unlikely that cutbacks in government spending will do much to lower the dollar and reduce the trade deficit.

Obama is apparently not listening to economists anymore, so he wouldn't care, in any case.

politicians who think that biology has no place in teaching the origins of species, we now have politicians who think that economics has no place in designing economic policy.

tens of millions of lives stand to be ruined.

Keynes's basic insights have been supported by a vast amount of economic research over the last seven decades. And we have solid evidence showing (pdf) that the limited stimulus pushed through by Obama in 2009 worked pretty much as predicted in generating growth and jobs.

policy will be determined by people with no knowledge of economics whatsoever.

evidence,

three-pronged reform agenda

capital plan

capital holes

it would be somewhere between €100bn ($137bn) and €200bn.

the plan needs to change

forced to meet the planned 9 per cent core tier one capital ratio in such a short time

determined not to raise fresh money – either from shareholders, because equity prices are so disastrously low, or from the state, because of an understandable fear of being stigmatised as a bailed-out bank that is weaker than its rivals

they would shrink their balance sheets, reducing the risk-weighted assets (or lending commitments) that form the denominator of their capital ratios, rather than boosting the capital that forms the numerator.

shrinkage of available bank credit across Europe

protesting about the lack of funding.

politicians and small business

the banks are bluffing

There is a strong reason to call their bluff

second prong

that will not be enough

normalise banks’ access to liquid funds in the bond markets.

Dexia,

often not insufficient capital that kills a bank (Dexia’s ratios were top-notch) but a lack of liquidity

short-term funding and long-term lending commitments proved fatal.

International regulators

come up with a new measure

the net stable funding ratio

will limit profitability and the banks have protested. But it should happen.

there needs to be a quick fix, too

there has been no issuance of bank bonds

Only with a temporary guarantee from a European Union vehicle can bond markets be reopened.

policymakers need to tackle the root cause of the problems in the periphery – namely, their budgetary mismanagement.

Silvio Berlusconi

must be ousted by the Italian people

entirely within the gift of those preparing for the weekend summit.

first two reforms

brave political calls, laying policymakers open to accusations of handing money to bankers again

the lesser of two evils

accompanied by an enforceable regime of business lending commitments

normal rules of capitalism have already been suspended. We should stop pretending otherwise and make the necessary intervention quickly and decisively

has been seen as a key source of the 2008 crisis because it fostered a rapid rise in debt and tremendous asset price inflation

a major threat to long term stability

worldwide effort to monitor shadow banking so that regulators will be able to rein it in future.

including money market funds, securitisation, securities lending and short-term secured lending known as “repo” as well as other shadow banking entities. They are looking at how regular banks interact with their shadow counterparts.

The US has the largest shadow banking sector at $24,000bn

direct lending to companies and other means, are the single largest part of the shadow banking sector, with 29 per cent of the assets, and structured finance vehicles come second with 9 per cent.

regulators will focus their efforts on entities that use lots of borrowing, those that take in short-term money but lend it for longer periods – a process known as maturity transformation – and those that might destabilise markets by selling lots of hard to value assets quickly.

important to address systemic risks – such as maturity transformation and leverage – arising from the shadow banking sector and its interaction with the regular banking system,