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.