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A grim tale of banking lessons big and small

By ROBERT TRIGAUX
Published January 29, 2007

This is a fairy tale called Goldilocks and the Three Banks.

Goldilocks was walking down a city street in Florida when she spied a Bank of America branch. She entered, only to learn the bank was a behemoth based in Charlotte, N.C. It was too busy trying to change federal rules that prevent any one bank from holding too much of the nation's deposits.

"This bank is too big!" she cried, and ran down the street.

In the next block, she saw a sign for Coast Bank of Bradenton and walked into the branch. But she saw a customer's newspaper story that said Coast had loaned too much money to one troubled housing developer.

"This bank is too small!" Goldilocks shouted, and fled.

We interrupt this fairy tale for a public service announcement. There are still plenty of good banks for Goldilocks. But her brief adventures at Bank of America and Coast Bank offer some lessons for us all.

Lesson One: At some point, banks that get too big get too powerful.

In recent weeks, Bank of America was reported to be lobbying to end a federal cap that limits one bank from holding more than 10 percent of the nation's banking deposits. Bank of America, with more than $695-billion in deposits, is about to bump into that cap, a restriction that hampers its growth and pretty much bans the Charlotte giant from buying another bank of significant size.

Here's the rub: The United States, for at least 200 years, has had a dread of banks becoming so big - so concentrated - that they can manipulate economies and squeeze credit unfairly. This fear is one reason banks are regulated, poked and prodded by so many regulators, ranging from the Federal Reserve, the Treasury Department, the FDIC which insures bank deposits, the Securities and Exchange Commission, and a host of state banking departments. (If only the insurance industry had such oversight.)

Last week, Bank of America CEO Ken Lewis backed off the lobbying effort to do away with the deposit cap. I think he realized he was about to touch the third rail of banking.

"I thought we had gotten out there a little too far in terms of our level of aggressiveness, and it sent the wrong signals," Lewis told the New York Times.

Interesting footnote: Another CEO of a banking giant, Ken Thompson of Wachovia, was quoted last week in Tampa indicating he'd like to see the 10 percent deposit cap go away, too.

"Artificial caps are not a good thing in a free economy," he said.

Bank of America and Wachovia dominate Florida's banking market. Between the two North Carolina banks, they control more than a third of banking deposits in the Sunshine State.

Lesson Two: Smaller banks that lend too much to one borrower can get in trouble quickly.

By lending so heavily to one struggling developer, Coast Bank is overexposed. The bank has hired a financial adviser to consider "strategic options." In the banking industry, that phrase is often a euphemism for: "We're in a pickle so we better see if anybody out there can lend us some money, or possibly even buy us."

Around here, it's been a long time since banks, big or small, landed on our radar. Like Goldilocks, it's apparently time to start paying more attention.

Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.

[Last modified January 29, 2007, 00:31:07]