The US banking system appears to be in crisis, although how much of that is media hype, how much is incompetence at certain levels of management and regulation, or how much is a structural issue, is unclear.

     I am not a banker, but it seems to me that the current problems of the system involve all three of those issues; media, incompetence and structure.

     I have often ranted about the media’s incessant need for sensationalism, and the public’s inexhaustible craving for it, and that is certainly a factor. Social media has also contributed to the hysteria that produced “runs” on Silicon Valley Bank and, just this week, First Republic Bank. I have to admit that the media reports of these types of incidents appear almost gleeful, and that is not only irritating, it’s irresponsible and exacerbates the problems.

     Incompetence has certainly played a significant part in the current crisis. If the reports are to be believed, that incompetence stretches from local management to federal regulators. Local mismanagement allowed the ratio of cash reserves against possible depositors’ withdrawals to get out of hand so that the banks were unable to cope with frenzied withdrawals. They ran out of cash.

     Regulators have apparently known for some time that the potential of this crisis was growing, but they did little or nothing about it. They have allowed small banking institutions to expand their customer bases beyond sensible limits in terms of cash reserves. Bankers are supposed to be amongst the most conservative business people out there. That reputation has been severely tarnished in the last few weeks. As far as regulators are concerned, they simply have not been doing their jobs in protecting the public and the depositors. Thank god for the FDIC program of deposit guarantees, or the panic would have been far worse.

     Then there is the issue of structure in the US banking system. On a very basic level, why do we need over 5,000 banks. Yes, there is historical precedent for having many, many small banks, and that goes back to the beginnings of the Republic. As I’ve said in other blogs, when communication across the country was fragile, or non-existent, each little community needed a bank, and no one entity could effectively expand to cover large areas. However, that is not the case today – we are not on the frontier, or in the wild-west, any more…..except in the minds of right-wing politicians of course.

     Add to that large number of banks the fact that between the 2008 banking crisis and 2015, over 2,000 small banks went under, and it is reasonable to conclude that there is a major structural problem in the US banking system.

     From a personal point of view, it has always annoyed me that when I want to transfer money internationally, I have to go through a large clearing bank, usually in New York, because the local bank doesn’t have the knowledge or personnel to handle international transfers. I end up paying double the fees, apart from the inconvenience and time delays.

     We need far fewer banks, more branch banking, better-trained bank personnel, and more effective regulation. In other words, the whole US banking system needs to be shaken up and brought into the modern world.

     However, there is another problem that can result from fewer, and larger, banks. If they become too big, they are in a position to regulate, at least politically, the regulators. They can become too big to fail. The recent case of JP Morgan Chase taking over First Republic is a good example. JP Morgan Chase is a behemoth that, in my humble and perhaps ignorant opinion, is far too big, and far too diversified to be effectively regulated by anyone, even itself. That is equally dangerous to a multitude of small banks.

     How many banks do we actually need to create good competition, good coverage through branch banking and a system that is simpler to regulate.

     An idea that could address this issue is, first major consolidation, and then, the breakup of large banks into legally-disconnected regional banks – perhaps just five geographic regions in the country. They can grow, and compete, in their regions but cannot expand into others. Perhaps these banks should also be required to legally separate their investment and other services from their banking operations to make the whole system more manageable.

     The large and small banks will certainly cry “to much regulation”, or “restriction of their individual rights”, or “un-American practices”, and many other such screams of protest. My response would be that they’ve had their chance for self-regulation, and have proven totally incompetent in that task.

     The federal government is there to protect the general public’s interest, so they have to step in and re-think, and re-regulate, the future of the US banking system despite the crescendo of opposition it will face. American citizens deserve nothing less.

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