WASHINGTON – The acquisition of Wachovia Corp. by Citigroup and Washington Mutual by JP Morgan Chase & Co. has created a new risk-related concern among some analysts: institutions so large the failure of any one of them could cripple the financial services market and drain the bank insurance fund.
The Wachovia/Citigroup merger creates an institution with $2.9-trillion in assets, approximately four times the size of the entire U.S. credit union community. The Washington Mutual/JPMorgan chase combination creates a $2.1 trillion institution. And Bank of America, when it completes digesting its deal for Merrill Lynch, will have $1.9-trillion in assets. Combined, the three institutions are more than eight times the size of the assets of U.S. credit unions, and dwarf the assets of a number of large banks, as well, including the $609-billion Wells Fargo.
The deals are fanning concern about concentrating more risk in fewer institutions. They also are leading to questions about how difficult it is to manage such huge companies – and to regulate them, according to analysis by American Banker, an affiliate of Credit Union Journal.
"You're concentrating more and more of the banking system in the hands of fewer and fewer people," said Bill Longbrake, a former WaMu vice chairman who currently is a director at First Financial Northwest Inc. "That, by definition, creates systemic risk in the long run."
Camden Fine, the president of the Independent Community Bankers of America, agreed with Longbrake’s assessment. "One of the tragic consequences of this whole financial crisis is that our commercial banking system is becoming more risky, not less risky, as a result of these enormous concentrations of assets in the hands of just three CEOs," he said.
Former FDIC Chairman L. William Seidman said bigger the bank, the more costly its failure, but bigger also means more diversified. "They will be more expensive if they collapse," he said. "But what you're doing is creating diversified banks with units that have had good management and have been able to stay in a reasonable strong position."
Observers said that gets to the heart of the current policymaking process: regulators are surrounded by problems – from failing banks to suddenly risky money market mutual funds – and are more focused on solving today's problem than establishing a framework for the future. "It's hard to think about the long range when the crisis is upon you, and at the moment the whole pressure is to just act to the current situation," Longbrake said. "Not much thinking has happened on the long term."
