The Shrinking Banking Sector

    Ryan Babbage

    Over the last hundred years, banking has undergone a dramatic metamorphosis. As some banks failed to keep pace with industry trends and could not retain solvency, others have been swallowed up by more prominent financial institutions now controlling an added wealth of capital. What remains is an ever-shrinking pool of more powerful players whose deposits and influence eclipse those precursors from just decades ago.

    This article draws attention to the ramifications of having fewer banks and the risks associated with such large entities gaining even more power and influence over the financial system upon which we all rely.

    Too Big to Fail

    ‘Too big to fail’ is an expression used when referring to a business or market sector so integral and influential in the financial system that its sudden failure could lead to economic catastrophe. In such cases, governments worldwide have an obligation – not just financially but morally –to prevent this by propping up these giants with taxpayer funds, if necessary, for example, Wall Street banks or Detroit automakers.

    The banks considered “too big to fail” are the global banking system’s largest and most influential institutions. The economic risks of these banks’ failing include a decrease in liquidity, a rise in interest rates, volatility in stock markets, a drop in consumer confidence, and disruption of global trade. Additionally, if one of these banks should fail, it could lead to a domino effect where other major financial institutions follow suit. Overall, this could lead to an economic recession or depression as spending by businesses and consumers decreases due to fear and lack of trust in the banking system.

    The Bank Domino Effect

    The risk of bank failure in the near future is high as the insurance coverage on the deposits in all banks is only a fraction of what it should be. Nevertheless, with the Financial Claims Scheme (FCS): deposits with licenced banking institutions in Australia are safeguarded up to a quarter of a million dollars per account. The insurance covers up to the threshold of 250k per account, which means anything over is at risk. In short, those depositors that have more than 250’000 deposited are at risk of losing the rest of their funds.

    The US have very similar protection measures in place; however, the five largest banks in the US control over half of all banking assets, which means that if any of these banks fail, it would have a significantly greater economic impact than smaller and non-systemic banks. Furthermore, the majority of these large banks are highly leveraged and exposed to high levels of risk due to their complex financial instruments and derivatives. Suppose any of these large banks were to fail. In that case, it could trigger a chain reaction as other large financial institutions are forced to absorb their losses leading to decreased liquidity for businesses and consumers.

    In Europe, there has been a push towards consolidation within the banking sector to reduce systemic risk, resulting in fewer but larger banks with a greater concentration of resources and power. The result has been that a handful of banks now control most all banking assets in the region, leaving little room for smaller competitors.

    Overall, this trend towards consolidation within the banking sector has meant higher concentration levels amongst large financial institutions, resulting in greater risk should one or more of them fail. As such, it is essential for governments and regulators to closely monitor these large banks as they can have an outsized influence on global economies should their financial health deteriorate or fail altogether.

    The Hidden Risks of Consolidation

    As large banks consolidate, it forms monopolistic practices within the sector, concentrating risk and power among a few behemoth entities. The consequences of the consolidation trend in banking can be seen in several areas.

    • Firstly, there needs to be more competition in the banking sector as large banks are able to use their size and resources to create more favourable terms and services for customers while reducing competition from smaller banks.
    • Next, as large banks dominate the market, they have more influence over prices and policies which could further dampen competition and lead to higher consumer prices.
    • Additionally, with such high levels of concentration amongst a few large financial institutions, it increases systemic risk should any of them fail, which could lead to an economic downturn as the failure of one large bank could trigger a domino effect where other significant banks follow suit leading to decreased liquidity and an inability for businesses and consumers to access credit or capital.
    • Lastly, these larger institutions can also lead to increased political power with lobbying efforts and potentially put-up barriers that limit new entrants into the market. All of this combines to create a situation where the same few entities control most banking assets, leaving little room for smaller competitors or innovation within the industry.

    The concentration of financial wealth and the institutions that house and manage that wealth all play a role in further extending the gap between rich and poor, which also, in time, significantly reduces the middle class.

    As the middle class begins to dwindle out of existence, can anything be done to level the playing field and even the odds?

    There are a few things that can be done to level the playing field and ensure economic opportunities are available to more people:

    1. Governments should reduce barriers to entry into the banking sector by lowering licensing requirements and providing incentives for new banks and lenders, which would allow for more competition in the market which could help bring down interest rates and create a fairer financial landscape for everyone.
    2. Governments should also increase their oversight of large banks and financial institutions so they cannot monopolise or consolidate too much power within the industry.
    3. Governments should increase investment in education so that all citizens have access to quality educational resources that can open up previously unavailable career paths due to a lack of resources or opportunities.

    Through these efforts, it is possible to make headway towards levelling out some of the inequality in our economy today.

    Although the options presented make perfect sense, the likelihood of government policy changing in favour of the ordinary person is unlikely. As demonstrated by the US congress, NGOs and the financial elite, control mechanisms are more likely to increase than decrease as humans relish power and will do anything to retain it. The fight against cryptocurrencies is an example of enforcing laws over a new sector of finance, eradicating competing interests that have the potential to erode fiat currencies.


    Systemic risk is an insidious problem, capable of quickly wreaking havoc in the financial system. When deep-seated issues within a single institution spread to other seemingly healthy entities – through contagion or linkage – it could trigger disastrous results for entire economies. As consolidation brings about bigger banks, regulators are rightly concerned with keeping this kind of systemic peril under control.

    Nevertheless, although we have covered the rationale behind why banks are consolidating and have even discussed the hidden risks of consolidation within the ‘Too Big to Fail’ banks, it seems to suit the underlying strategic play of the Federal Reserve, the Bank of International Settlements (BIS), the US Security and Exchange Commission (SEC), and other governmental bodies to support the consolidation trend in banking.

    The only logical reason could be to introduce Central Bank Digital Currencies (CBDCs), which will be featured in the following article.

    Disclaimer: Please note that the information provided in this article is not to be considered as financial advice. Please seek advice for your personal or business matters from a qualified professional or make contact with myself or one of the team at Strategy Hubb to tailor custom solutions to accommodate your circumstances.

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