1 Thing You're Missing About Bank of America

Banking is a unique business. To gain market share, all a good bank has to do is avoid failure. But as the CEO of Bank of America (NYSE: BAC  ) recently reminded us, there's one more critical element to this story.

As a profession, banking is akin to a war of attrition; to a large extent, survival alone connotes victory. Over the past 30 years, the number of banks in the United States has fallen by more than 60%, from 17,886 in 1984 down to only 6,940 today.

Although much of that retraction was the result of consolidation, failure also played a major role. Between the financially volatile 1980s and the more recent crisis, thousands of lenders have been seized by the FDIC or snatched from the jaws of failure by savvier and better capitalized suitors.

The net result is a highly concentrated industry, dominated at the top by a handful of giant institutions. Just look at the market share of retail deposits by Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , and JPMorgan Chase (NYSE: JPM  ) compared with the industry overall.

It's hard to deny that controlling so much money gives these banks a huge competitive advantage. Fundamentally, all a bank does is arbitrage interest rates; they borrow money at low rates from depositors and then lend those funds at much higher interest rates to people and businesses in need of capital.

At the same time, however, such an enormous presence in the market also comes with costs. And that cost, in a system where deposit insurance is predicated on premiums from the banks themselves, increases in lockstep with deposits.

As Bank of America's Moynihan recently told Gerard Baker of The Wall Street Journal, "each time a bank fails, 13% of that cost comes to Bank of America." That amount, of course, is commensurate with the Charlotte-based bank's market share of deposits.

The point here is that Bank of America -- and, for that matter, Wells Fargo and JPMorgan Chase -- is truly becoming America's bank, whether investors and/or consumers like it or not. Consequently, as Moynihan has reminded investors time and again, its future success is dependent in large part on the success of not only the country overall, but also on the costs it will bear as a result of failing competitors.

Discovery the "only big bank built to last"
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable standout. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 10, 2013, at 6:15 PM, Rusty56 wrote:

    Tes John, the number of banks is projected to by cut in half in the next 10 yrs. so the big banks will do just fine. And no, they are not hated by most of America as you would like to believe. The media is who hates them and most people are too ignorant to make their own decisions, their all like sheep herded by an ignorant media! Go figure.

Add your comment.

DocumentId: 2720458, ~/Articles/ArticleHandler.aspx, 4/24/2014 11:49:05 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...