The Housing Chronicles Blog: Partial nationalization of banking system likely to mean fewer competitors

Wednesday, October 15, 2008

Partial nationalization of banking system likely to mean fewer competitors

Armed with a $250 billion blank check to invest in U.S. banks, the federal government is poised to play financial God in a way that's not been done before. So will its impact help pick winners from losers or prop up weaker banks that would otherwise fail? From an LA Times story:

By flooding the U.S. banking system with hundreds of billions of dollars in cheap capital, the government could find itself funding the most dramatic change in the nation's financial landscape since the deregulation drive of the 1980s.

That's because the Treasury secretary and bank regulators will decide which banks get an infusion of government money, and which will be denied. Many of the nation's 8,400 banks -- especially the smaller and weaker among them -- may be allowed to fail or be swallowed by bigger rivals, industry analysts say...

The program is also likely to hasten the evolution of the country's financial system from a conglomeration of community banks into a network of bigger, interconnected institutions, said Timothy J. Yeager, a former economist for the Federal Reserve Bank of St. Louis and a finance professor at the University of Arkansas.

But not everyone agrees. Gerard S. Cassidy, managing director of bank equity research at RBC Capital Markets, said he believed the program would help some weaker banks stay in business, because they will be eligible for the same favorable terms the big banks will get for government capital...

Click here for full story.

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