Big Banks Offer Size and Reassurance, Despite their Shortcomings

Why don't big banks that "were recently on the verge of collapse" have to struggle to retain customers? The question is posed in an article in this week's New Yorker, which cites research published last year by Jack Bao, who at the time was a graduate student at MIT, and Alex Edmans, a Wharton finance professor.

The paper, "How Should Acquirers Select Advisors? Persistence in Investment Bank Performance," found that market share does not necessarily translate to the best returns for an investment bank's clients. "The entire industry seems to equate market share with quality, without stopping to check whether market share is actually positively related to performance," Edmans told Knowledge at Wharton, which reported on the paper last year.

The New Yorker article looks also at consumer banking, where four banks — Citigroup, Bank of America, JPMorgan Chase, and Wells Fargo — control commanding shares of consumer deposits, credit cards and mortgages. "This isn’t because the big banks have been making a special effort to be customer-friendly," the article states, "On the contrary, in the credit-card market they’ve slashed credit lines and jacked up interest rates. In retail banking, they haven’t capitalized on the benefits of size (like lower borrowing costs) to cut prices for their customers, the way big retailers like Walmart do. Instead, they typically pay lower interest rates on deposits than smaller banks do, and charge higher interest rates on loans. Overdraft fees, too, have typically been higher at big banks than they are at smaller ones."

The customers remain, according to the magazine, because it is hard to switch banks in an era of online banking. But it also argues that "the big banks have the further advantage of their brands, however tattered the brands may be. It’s nearly impossible for consumers to evaluate how healthy a bank is. So, at a time when banks are failing with some regularity, the size and ubiquity of these big banks is reassuring."