The Commercial Banking Industry: Keep Your Eyes On The Big Four

The times they are changing. The largest banks are moving out and will continue to do so over the next 5- to 10-year period. Why? The ability to scale the size of banks.

The financial system is going “digital” and digital depends upon networks and networks are the essence of the ability of the banks to reach greater scale. Just the ability of banks to “connect” with one another, allows scale to grow internally, but also externally. As a consequence, the biggest banks are taking over the industry.

Right now there are only about 4,400 commercial banks in the industry. In five years, I believe this number will be below 2,000. The biggest banks can scale the technology. The smaller banks… no way will they be able to compete… both in terms of scale or in terms of profits. Look at the current numbers.

The four largest banks, JPMorgan Chase & Co. (JPM), Bank of America (BAC), Citigroup Inc. (C), and Wells Fargo (WFC), in the United States made 45 percent of the industry’s overall profits in the third quarter of 2023. Last year the share was 35 percent, which is a very hefty number. But, given the current environment, I believe that this 10 percent rise tells a lot about what is going on in the industry. The biggest banks are killing the rest of the industry.

And, the reason for this, to me… is technology. The world is becoming digital and the movement in that direction is only going to accelerate. The world is becoming more and more and more digital. If you cannot play in that game, building scale at every turn, then you are going to fall behind. And, you are going to fall behind faster and faster and faster.

We are seeing that Artificial Intelligence is playing a bigger and bigger and bigger role in the future of banking. It seems, for example, that JPMorgan Chase & Co. is announcing a new innovative use of AI almost every week. Finding the right account is a good start for a new customer. And, then there are digital accounts that tie together accounts that make the movement of money so much easier. If not every week, it seems like the movement comes every other week.

How can you really say that 100 of the existing 4,400 commercial banks in the industry can really compete with all the digital and AI “stuff” that is going on and generate the scale of business that is really needed to have any hope for future existence? If digital doesn’t kill them… AI will…

So, the four largest banks in the industry saw a substantial increase in profits, year-over-year, but, “Overall, banking industry profits fell 5 percent in the third quarter.”

The reasoning? There were losses on lending and bond market investments. And, there was a 260% increase in interest costs. But, the four largest banks did not see their deposit expense rise like it did for the “other” banks. Here is where, I believe, you are really starting to see the digital factor come into play. The four largest banks paid less than 2% a year on accounts that paid interest in the third quarter. Regional banks… they paid nearly 3% on average. This data comes from Stephen Gandel.

Furthermore, more than 40% of the deposit accounts at the nation’s four largest banks pay no interest at all. In the industry overall, the average is less than 30%. Given this discrepancy, there is no indication that people will move more of their money from the big banks to get a higher return. The “digital” advantages customers receive at the bigger banks more than compensate for a higher return.

Sizewise, if one looks at some of the aggregate data from the Federal Reserve’s H.8 statistical release presenting data from the banking industry, one picks up another perspective on the issue. At the start of November 2023, the total assets in the U.S. banking system amounted to $23.0 trillion. Note that each of the four largest banks in the United States maintains more than $1.0 trillion in total assets. The 25 largest domestically chartered banks in the United States maintain $13.4 trillion in assets or about 58% of the banking system. So, you now have a rough idea of how the banking system is constructed.

The 25 largest banks have about 60% of the banking system, or about $14.4 trillion in assets. The biggest 4 commercial banks have over 25% of the assets in the banking system. And, my projection… the bigger banks are going to take up a greater percentage of the assets of the total banking system. The bigger banks are going to lead the rest of the system in digital finance.

As the world becomes more and more digital, the number of commercial banks in existence will decline.

Will it get below 2,000 banks in the next five years? I could be wrong. Well, maybe not… but the direction will be there. Maybe we will only drop around 3,000 banks. The exact number is really irrelevant.

The point is that the banking system is going to shrink and the shrinkage in the next five years will probably be greater than we have ever seen in the U.S. before. The largest 25 domestically chartered banks in the U.S. maintain almost two-thirds of the banking assets in the United States right now, how can they not hold 75% or 80% in the next five years?

One other thing that needs to be noticed… particularly in today’s environment. The commercial banks in the U.S. hold about $3.4 trillion in cash!

I have argued over and over again during the past two to three years that there is a massive amount of liquidity being held in the financial system. Can these monies go into the stock market? Yes, they can. Can these monies go into supporting economic growth? They sure can.

But, there is one more thing to recognize… the largest 25 domestically chartered banks in the United States hold about 50% of this total. The large domestically chartered banks in the United States have lots and lots and lots of “cash” at their disposal. These banks have the wherewithal to do just about anything they want in terms of creating the “new” financial system. These banks don’t have to go out and get the money to build the “new” world. They have the money on their balance sheets.

So, what is going to stop them?

The U.S. banking system is on the edge of the future. And, this future is coming, and coming fast. The “Big Four” will be leading it. And, the “Big Four” will dominate.

To me, it is not a question of whether this will happen or not. The question is going to be about how soon the commercial banking industry will be so dominated.