Just 3 ‘superbanks’ now dominate industry

His answer: “We need to educate the boards of these banks that ultimately are supposed to be a stopgap for these things. They need to have a bird’s-eye view of the organization and understand if the left arm is taking on debt while the right arm is taking on debt. They have to oversee that.”

But some analysts are arguing that the current wave of consolidation could be followed by a move to break up the biggest banks.

In a recent congressional hearing, Nobel Prize-winning economist Joseph Stiglitz said the consolidation of the banking industry is "a very serious problem."

"I think it’s part of a general failure to enforce antitrust laws in the last few years. So one of the things I think is part of your exit strategy is that we have to think about breaking up some of the big banks.”

Even American Banker, which covers the industry, predicts in a story titled “Pressure Builds to Corral the Giant Firms” that “the financial services companies considered ‘too big to fail’ may face a political backlash next year.”

Another major issue will be how successfully these merged banks will be able to integrate their operations, from staffing to technology.

Even in the best of circumstances where companies have months to plan for a merger things can go awry, says Carol M. Beaumier, executive vice president of global industry programs at Protiviti, a business consulting and internal audit firm.

“The level of due diligence and planning doesn’t exist,” says Beaumier of the rapid consolidations that have resulted from the financial meltdown. “We are creating a daunting task for companies that have to carry out these mergers. It creates uncertainty among employees (and) customers, and the government will be looking over its shoulder.”

Good employees at some of these institutions may be lost in the shuffle because, she says, “You don’t have time to prepare and identify those key performers.”

As they grow, the megabanks could end up shooting themselves in the foot when it comes to service, says Standard & Poor’s analyst Stuart Plesser.

“When they get really big they may lose some relationships in the end because there’s certainly some impersonal banking going on when they get that big,” he says.

The National Consumer League’s Greenberg believes government should move quickly to keep banking fees down for consumers, just as Congress capped executive compensation as part of the bailout bill.

“The system isn’t working now, and all this consolidation means less competition,” she says. “It is incumbent on regulators and Congress to step in and say, ‘Wait a second. You don’t get to impose exorbitant fees.'”

“These banks have to get away from a business plan that’s based on fines and penalties, she adds, “and get back to providing consumers, farmers and small businesses credit at a reasonable rate that serves both the lender and the borrower.”

Until a new administration takes action, consumers and small businesses can always vote with their feet and use a smaller, community bank.

“Many consumers (are) turning to local banks, saying, 'I’m much more comfortable having my money with you,’” says Nancy Atkinson, senior analyst with Aite Group, a research firm that covers the financial services industry. “And small businesses say, 'I know my local banker, and I trust that person.’”

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