Before the financial crisis, the banking industry was too concentrated and clubby. And now? It’s even more so. In the midst of the crisis, the country’s four biggest banks—Citigroup, Bank of America, JPMorgan Chase, and Wells Fargo—actually got bigger. Thanks primarily to a series of government-sanctioned mergers, they now control almost forty per cent of the country’s total banking deposits and two-thirds of its credit cards, and issue half of all mortgages. Investment banking, too, remains more or less dominated by the usual suspects, which have seen their market share grow as the number of their competitors has shrunk. Firms that were recently on the brink of collapse haven’t had to struggle to hold on to their old customers, as you might have imagined. They’ve had to struggle to keep up with their new ones.

Illustration by Christoph Niemann

This isn’t because the big banks have been making a special effort to be customer-friendly. On the contrary, in the credit-card market they’ve slashed credit lines and jacked up interest rates. In retail banking, they haven’t capitalized on the benefits of size (like lower borrowing costs) to cut prices for their customers, the way big retailers like Wal-Mart do. Instead, they typically pay lower interest rates on deposits than smaller banks do, and charge higher interest rates on loans. Overdraft fees, too, have typically been higher at big banks than they are at smaller ones. In investment banking, there has traditionally been little or no competition on price, and that hasn’t changed. There are no discounts in the M. & A. department.

So why aren’t customers and clients moving on? In the case of ordinary consumers, “switching costs” have a major effect. It’s a serious hassle to shut down a bank account and transfer money to a new one, especially with direct deposit, automatic bill payments, and the like. The same is true of refinancing at a different bank from the one that currently holds your mortgage, or trying to persuade a new bank to give you a business loan. These costs aren’t trivial: a 2001 study showed that the cost of switching a loan came to about a third of the loan’s annual interest rate. Even if people are dissatisfied with their bank, it’s usually cheaper not to fight than to switch. If you’re a restaurant or a retailer, you have to work hard to insure that your customers keep coming back. But once banks get a customer he’s pretty much theirs for good.

The big banks have the further advantage of their brands, however tattered the brands may be. It’s nearly impossible for consumers to evaluate how healthy a bank is. So, at a time when banks are failing with some regularity, the size and ubiquity of these big banks is reassuring. It seems improbable that they will simply vanish (the way a bank like IndyMac did), because the government won’t allow it. It’s possible, in fact, that the crisis, instead of eroding the reputational advantages of the big banks, ended up bolstering them. In times of uncertainty, people are inclined to shun experiment for the safe choice.

Reputation arguably plays an even bigger role in the competition for corporate business. A major part of what Wall Street firms do for their clients is, in effect, to vouch for their financial prospects: when a bank underwrites a company’s bond offering or an I.P.O., it is essentially certifying that company in the eyes of investors. Companies hire high-profile firms to advise on mergers not just for the advice but for the public signature of approval. The more powerful the bank that’s giving the advice, the better the cover it offers. Success, then, feeds on itself: having a big market share today makes it easier to win business tomorrow. Researchers have found that during the stock-market bubble of the late nineteen-nineties higher-reputation banks actually did a worse job of managing I.P.O.s: they regularly set new stock offerings at a point well below what the market was willing to pay. But companies still avidly wanted those banks to run their public offerings. Similarly, a series of studies of M. & A. advice has found no evidence that deals managed by market-dominant, high-reputation firms work out better. No matter—a 2007 paper by economists from M.I.T. found that banks were generally hired not on the basis of their performance but on the basis of their market share. That makes it tough for newer or smaller competitors to break in: it’s a variant of the “to get a job you need experience, but you can’t get experience without a job” problem.

Should we worry about all this concentration? Maybe megabanks are what we need. Certainly most developed nations have banking systems even more concentrated than ours. The trouble is that the “market” for banking is so distorted—by switching costs, by government subsidies and guarantees, and by the banks’ market power—that it’s hard to know whether big banks are adding value or are simply exploiting their oligopolistic positions. We do know that too much concentration in finance increases risk, since a handful of dominant players are more likely to make the same kinds of mistakes, and jeopardize the entire system. Unless consumers rise up en masse to move their money to credit unions, the market isn’t going to deal with the problem. And that means Washington has to. ♦