Thursday, January 14, 2010

Bigger Banks From The Liability Tax

After the bank liability tax goes into effect and in contemplation of it happening, expect banks to grow in size.

Big banks will merge with smaller banks with FDIC insured deposits. Smaller banks are almost exclusively funded by capital and deposits. Merging with a bigger bank that is taxed will allow the bigger bank to use the deposits in place of its non-insured funding debt. Especially in this low lending environment where banks are heavily invested in US Treasury securities and cash like instruments, a merger with a deposit based institution will allow banks to reduce their potential tax burden and also have room for new loans when the economy recovers and lending demand increases.

See my previous post on this topic, "White House Bank Liability Tax Will Increase Financial System Risk."

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