We’re constantly told that the future is more consolidation, global rule making and cosmopolitianism. In fact, the faith in thinking and regulating globally has remained one of the few unshaken superstitions throughout this crisis. But that faith looks more and more unwarranted as earlier attempts at national financial regulation like Sarbanes-Oxley and the SEC, global regulation such as Basel II and global banking have been such dramatic failures.
At least one part of the faith may be starting to crack under the pressure. Meredith Whitney has been arguing for some time that banks that think and lend globally lose money because they are too out of touch with the kind of local knowledge that regional banks can deploy.
Today at the Wall Street Journal’s Future of Finance Initiative conference she predicted that the big bank model is dead.
Whitney, famous for foreseeing the troubles facing Citigroup, suggested that key parts of the big banking model made them susceptible to the types of problems that caused the financial crisis. One issue is the physical distance between loan originators and borrowers. Good lending results from a relationship with borrowers, and regional banks are in a better position to take advantage of those relationships. She added that five banks controlling two-thirds of mortgage origination and credit cards is fundamentally unbalanced.
Instead, she suggested “supercharging” regional lenders. One possibility is that if stress tests help healthy banks and lead them to return TARP money, some of those funds could be transferred to local banks to encourage consolidation (on a smaller scale) in that sector. She also sees the potential for regional banks to take on business from nonblank lenders who were decimated by the subprime crisis.
Regional lenders have grown angry at their larger counterparts, as evidenced by a conference in Phoenix last week. They are angry that the big players have given bankers a bad name. They cheered comments from Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. chief Sheila Bair about the need to clamp down on megabanks.
However, not all smaller banks are created equal. While the majority of local banks are faring well and didn’t receive any TARP money, most of the 42 banks that have failed since the start of last year were community institutions.