Will Bank Rescues Mean Fewer Banks?

Is the government using the credit crisis as a chance to reshape the entire banking sector? Evidence is mounting that it is.

Banks big and small are getting a helping hand from Uncle Sam as Washington seeks to strengthen the financial system. Just before Thanksgiving, Citigroup (C) boss Vikram Pandit managed to secure $20 billion in capital and a federal guarantee for some 90% of the bank's shakiest assets. That's on top of $25 billion Citi got in October. Through Nov. 25, 109 banks had either received or expected to receive $209 billion from the U.S. Treasury. Even tiny Saigon National Bank (SAGN) of Westminster, Calif., with $55 million in assets, expects $1.5 million. "It's a bit surprising to see the depth and breadth of which banks are receiving funds," says Frederick Cannon, chief equity strategist for banking analysts Keefe, Bruyette & Woods (KBW).

Yet an unknown number of other banks, deemed by the feds as too weak to survive and prosper, are seeing their requests for aid under Treasury's Capital Purchase Program quietly turned away. In at least a few cases, they are finding themselves nudged—or pushed—into the arms of stronger suitors. Regulators in late October told National City (NCC), a big Ohio bank stung by aggressive lending, not to expect federal aid—and to consider finding a partner, fast. National City was promptly acquired by Pittsburgh's PNC Financial Services (PNC). In November, four life insurers sought access to Treasury capital after banking regulators steered them to buy several ailing thrifts. "We're seeing a consolidation, and it's really driven by government policy," says Harvard economist Kenneth S. Rogoff.

The Treasury doesn't appear to have actually rejected any applications for funds yet. Instead, banking regulators "may go to the institution and say, 'We recommend you withdraw your application,' " said Treasury's Neel Kashkari at a Nov. 19 lunch meeting of a trade group. Kashkari is the official in charge of administering $700 billion in Treasury bailout funds.

The banks can take a hint, and the dealmaking is under way. As healthier banks acquire weaker ones with the de facto aid of the bailout fund, what could emerge is a barbell-shaped system with megabanks, small banks, and little in between. "There is tremendous pressure on the regionals to get bigger or sell themselves," says Jaret Seiberg, an analyst with Stanford Group. Some estimates are that 1,000 banks out of 8,000 will disappear.

Treasury officials, who declined to elaborate on public statements, have said consolidation isn't the formal plan, but neither do they discourage it. Other recent moves suggest the government wants mergers: In October tax authorities relaxed rules to let banks benefit from the accumulated tax losses of institutions they acquire. The change effectively subsidizes deals.

In November the Office of the Comptroller of the Currency made it easier for private equity investors to buy financial institutions. Now private equity players can more readily acquire smaller or ailing banks and combine them. As the Treasury quietly decides which banks will get funds and which won't, dealmakers will have plenty from which to pick and choose.

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