The financial crisis is nearly a decade in the past, but UTSA associate professor of economics Edgar Ghossoub says we’re still feeling the effects and are essentially living in a brave new financial world. In a study published in the European Economic Review, Ghossoub argues that because large banks have become bigger than ever, their market power is unprecedented and competition is rapidly becoming a thing of the past.
“As banks get larger, they have more market power,” he said. “Over the past 20 or 30 years, we’ve seen this trend with the number of banks declining. If you can’t compete, you’ll be acquired by another bank.”
While some banks have gotten larger over time as a result of the acquisition of smaller banks, they have also become much larger as a result of the rush of mergers and capital injections during the global financial crisis in 2008. For instance, less than 2% of total banks in the U.S. controlled over 70% of total assets in the banking system in 2013. This makes it easy for them to exert market power through higher ATM and overdraft fees, changing interest rates, charging for checking accounts and denying loans.
“Competition changes things,” Ghossoub said. “If I try to get a loan at one bank and I’m denied, I can go to another bank and maybe succeed there. But without competition, I don’t have many options.”
He compared the lack of competition to the current state of airlines. After years of lackluster profit, most airlines have started charging for every comfort and convenience.
“This could easily happen in the banking industry if things don’t change,” Ghossoub said. “They can charge for everything because no one has any realistic alternative.”
The lack of competition in the banking industry has resulted in power concentrated between a small number of financial institutions, which allows them to control the market without much input from the federal government. For example, if the government decided to lower interest rates to encourage borrowing, the banks have the power to resist. Increasing lending could decrease interest rates further, which negatively affects their profitability. The banks are now so large and have so little competition that they could simply decide not to do it. As a result, the post-recession recovery has been slow.
Banks bearing that infamous moniker “too big to fail” are, to no one’s surprise, burdensome on the economy because of their systemic risk. If they topple, they require political intervention and become too powerful to regulate.
“It’s the result of a free market,” Ghossoub said. “It’s not necessarily a bad thing, but in any market you can’t leave it unleashed completely. You always need regulatory measures, but to what extent is a different story.”