Monday, July 13, 2009

All Interstate Bank Barriers Coming Down

"Look for a bounty of new competitors in your region if the Obama Administration succeeds in its proposal to eliminate all barriers to interstate branching,"FinCriAdvisor tells bankers.

I have nothing against artificial barriers coming down, but what is going on here is the removal of barriers to allow very specific players to expand across state barriers.

The Riegle-Neal Act of 1994 authorized mergers across state lines, but not interstate expansions. Now, the interstate expansion barrier is likely to come down, and you can be sure money center banks and private equity are ready.

The elimination of barriers to expansion over state borders will force small banks to fall into the hands of private equity and the like. FCA again:

For banks not willing or able to cross state lines, mergers that let you strategically expand your services into new markets may be the way to combat new entrants. You want a partner that can generate new customers or that can add services to "make current customers stickier," [Tad Gage, executive VP of Chicago-based Capital Insight Partners, which specializes in raising capital for community banks] says. A bank that can "generate more core loans and deposits ... will have a leg up on everybody else."... If private equity is involved, the metric studied most is loan loss reserves, particularly in relation to non-accruing and non-performing loans and the local economy, Gage adds. "Demonstrating the ability to bring those in arrears up to current, the ability to work with customers and not rely on a write-off" are what investment bankers seek.
It's clear. Private Equity has already run their screens. They know who they want. The clearance for banks to operate across state borders will be the signal to small banks that they either sell out to the elite players, or be drowned in a sea of new competitors.

You are about to witness a major league, sophisticated takeover of pretty much the entire banking system by the insiders. For most small banks, it will be difficult if not impossible to compete.

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