Citi, BofA, Wells Fargo: Collateral Damage

NEW YORK (TheStreet) -- Those who believe U.S. banking giants like Citigroup (C), Bank of America (bac) and Wells Fargo (WFC) have essentially no competition on the domestic front may want to broaden their horizons.

Spain's largest bank, Banco Santander (STD), said Monday it will raise more than $7 billion via an initial public offering of its Brazilian unit. Not only will this offering bolster Santander: it will also create one of the top 30 banks in the world with a market cap of more than $45 billion, according to a Dow Jones report.

Meanwhile, BofA is busy wrangling with Congress and regulators over the seriousness of gaps in disclosure related to its controversial deal to acquire Merrill Lynch, and how severely its top executives should be punished. Wells Fargo is still working through all the toxic assets it acquired from Wachovia. And both banks, along with Citigroup, are still trying to figure out how to pay back the U.S. government and convince shareholders they are on a sustainable path to growth. These distractions do not exactly make it easy to worry about competing in an increasingly global marketplace.

The notion that Spanish or Brazilian banks (or other entities headquartered outside the United States) could become serious competitors on the big banks' home turf is far from hypothetical. Spain's second largest bank, Banco Bilbao Vizcaya Argentaria (BBV), recently became the 15th largest banking presence in the United States after buying assets from Guaranty Bank in Austin, Texas, after it was seized by the FDIC.

Other foreign banks with significant profiles in the United States, including BNP Paribas and Bank of Toyko-Mitsubishi UFJ (MTU) are eyeing similar asset deals, according to a report in The Wall Street Journal.

It's possible that some segment of investors in the U.S. banking giants is even more emboldened after last year's financial meltdown than they were before. That's because no matter how clumsy Citi, BofA and Wells Fargo may look today, U.S. regulators have sent the message that they will prop them up at all costs. That 'too big-too-fail' status, always implicit but now explicit, should help them raise money more cheaply and defend their turf against all comers, the theory goes.