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Small Banks Welcome Big Competition


In Santa Cruz, standing up to the big guys isn't impossible.

At the height of the financial crisis last fall, federal regulators sent billions of dollars to banks they deemed too big to fail. One year later, the biggest of those banks are even bigger.

With federal assistance and arranged mergers with weaker foes, the surviving banks hold greater control over consumer lending and face little competition.

In many regions, the playing field has been stacked in favor of those banks once on the precipice, and small banks -- many of which avoided the stumbles of the majors -- have been forced into difficult situations.

Santa Cruz, California, is the epicenter for this new banking oligopoly, in which the biggest banks have consolidated and a few small ones fill in the gaps. Wells Fargo (WFC), Bank of America (BAC), and JPMorgan Chase (JPM) -- after being given billions of dollars to acquire smaller competitors -- hold nearly three-quarters of the deposit market there.

According to a recent Washington Post article, JPMorgan Chase, which acquired Washington Mutual, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, following its acquisition of Merrill Lynch, and Wells Fargo, the biggest West Coast bank, after it picked up Wachovia.

Those three banks, plus government-owned Citigroup (C), currently issue one of every two mortgages, and about two of every three credit cards.

In several metropolitan regions, of which Santa Cruz is the prime example, "these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow," according to the Post. Nationwide, these three banks were allowed to hold more than 10% of the nation's deposits, despite longstanding regulations against such control.

In Santa Cruz County, with a population of about 250,000, Wells Fargo -- following its acquisition of Wachovia, which held 20% of deposits there -- now controls 35% of the market. The big bank also has a history in the area, acquiring numerous community banks over the years.

David Heald, the president and chief executive of Santa Cruz County Bank, one of a handful of community banks left in the area, said he welcomes the challenge of facing the big banks, in particular a familiar rival like Wells Fargo.

"We feel confident competing against Wells Fargo," he said last week.

Heald said the major banks in the area have raised their fees and service charges, whereas his bank hasn't. Nationally, this trend bears out: In the last quarter, the top four banks raised deposit fees by an average of 8%. To remain competitive, smaller banks lowered their fees by an average of 12%.

As a result, Heald expects some customers to switch to Santa Cruz County Bank. In fact, he said he's seen an uptick in new customers who once used Washington Mutual and Wachovia -- and these customers are now the largest contributors to the deposit base.
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