BANKING HAS A SWEET SPOT, SAYS BARCLAYS

Bigger isn’t always beautiful just as smaller isn’t always sweet. Sometimes striking a happy medium can be the way to go, at least for banks.

That’s what new research analysts at Barclays BARC.LN -0.64% Capital suggests. They say the sweet spot for U.S. banks could be between $20 billion and $50 billion in assets, which is much smaller than the J.P. Morgan Chase & Co.’s of the world, but far larger than most small community banks.

Barclays says banks in the middle had the lowest ratio of expenses to average assets, at 2.4%

Part of the reason banks of this size can keep costs down is that they aren’t subject to the added regulations that systemically important banks are. Banking regulators say bank holding companies above $50 billion in assets have to comply with the extra layer of rules and regulations, which includes yearly approval of the banks’ capital plans.

For the larger banks, those above $50 billion, that expense ratio jumped to 3%. Barclays notes that the banks that fared the worst were the 10 with between $100bn and $500bn in assets, as their expenses to average assets ratio was 3.3%.

Basically, the thinking goes that if a bank is just big enough to be included in a regulation, it can’t offset many of those costs with scale.

Expressing a somewhat different view on the topic of size, CIT Group Inc. Chief Executive John Thain told The Wall Street Journal in a July interview that growing to just $52 billion would have put the bank in the “worst spot,” adding: “We’d have had all the expense of going over $50 billion but only $2 billion more of assets to cover the expense base.”

Another key regulatory threshold was the $10 billion mark. Banks with more than $10 billion in assets are hit by revenue pressures tied to the Durbin amendment, which regulates debit card interchange rates. Barclays says the amendment has cost the banking industry around $6 billion in interchange fees.

Banks with more than $20 billion, however, have “the needed scale to offset the Durbin amendment’s foregone fee income without adding some of the Dodd-Frank Act’s more onerous expense requirements,” says Barclays.

Source: The Wall Street Journal