Bank Tax Could Benefit Small Lenders

The Obama administration's proposed tax on the nation's largest banks could lead to long-term gains for customers and small banks, an economist says.
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CHICAGO (TheStreet) -- The Obama administration's proposed tax on the nation's largest banks could cause short-term pain for consumers, but potentially long-term gains for customers and small banks, says Chicago economist Mike Moebs.

Last week, President Barack Obama presented a plan to help the government recoup the estimated $117 billion cost of the Troubled Asset Relief Program. The 10-year tax would impact intuitions with more than $50 billion in assets. Top banks, including

Bank of America

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Goldman Sachs

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(C) - Get Report

, could be hit with annual levies of $1 billion to 2 billion.

Moebs, chief executive of economic research firm

Moebs Services

, says consumers and small businesses would shoulder most of the tax in the form of higher fees on loans and services. But the initial burden could give way to a new competitive landscape that would create more options for customers and drive more business to community banks and credit unions.

Banks with more than $50 billion in assets control 44% of U.S. consumer checking accounts, Moebs says. That massive market share could be chipped away as customers turn to smaller institutions, which could offer more competitive prices because they wouldn't have to pass the tax to clients.

"Taxing big banks effectively says to the marketplace, 'Don't do business with them,'" Moebs says. "Their prices are going to be too high and, if they are not, they are going to have lower income and shareholders will start dumping the stock. Why should I be in Goldman, Chase or


(MET) - Get Report

, when I can turn to smaller banks, insurance companies and security firms that will give me a greater return"

Community banks have been especially hard hit by the credit crisis. Government regulators shut down 140 banks last year as rising loan defaults depleted their capital. The tax on big banks could give them a badly needed competitive edge, he says.

Major banks have spent the last two decades buying rivals and expanding across the U.S. However, the benefits of "economies of scale" -- when a company can spread fixed costs over a larger operation -- haven't necessarily trickled down to consumers, Moebs says.

"Bank managements have said, 'Listen my license is to get bigger, I don't have to worry about my costs and I don't have to worry about being efficient. All I have to do is worry about growth,'" Moebs says. Banks are at the point "where one additional dollar of marginal revenue equals added marginal cost."

Faced with a similar trend, U.K. regulators recently ordered some of its "too big to fail" banks to close branches.

Royal Bank of Scotland

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has to shed 900 branches by the end of March, and


(BCS) - Get Report

must shutter 1,000.

The proposed tax could accomplish the same feat for U.S. banks by forcing them to slash expenses. Companies that scale back service and raise fees might see clients defect to small banks, boosting their deposits and strengthening their businesses.

"For all the wrong reasons, Obama might be doing the right things with the tax on the big banks," he says, describing the benefits as a "lucky consequence."

-- Reported by Joe Mont in Boston.