The Multinational Monitor

JUNE 1996 · VOLUME 17 · NUMBER 6


M E R G E R    M A N I A    R E T U R N S


The Making of the
Banking Behemoths

by Jake Lewis


TO FURTHER THE CAMPAIGN for efficiency and speed, federal bank regulators and the Justice Department might consider assembling the nation's big banks for a mass marriage ceremony in the first available football stadium.

It might deprive a few hundred lawyers and consultants of hefty fees, but the result would not be much different than the pro-forma, few-questions-asked procedures that have waved nearly 1,500 bank mergers through the gates since 1993.

Many of the smaller- and medium-sized marriages did not get much media attention, but last year's royal weddings of Chase and Chemical Bank in New York and Wells Fargo and First Interstate in California hit the front pages. The Chase-Chemical merger created the nation's largest bank with $300 billion in assets. The Wells Fargo-Interstate merger formed a new West Coast giant, combining more than $100 billion in assets.

The rash of other multibillion dollar mergers in 1995 included First Chicago-NBD Bancorp, First Fidelity-First Union, Integra Financial-National City and Fleet Financial-Shawmut. Dozens of other bank marriages also created and strengthened regional banking powers.

While some of the frenzy has cooled, massive consolidation of the nation's banking resources is an ongoing trend. Already, 71.5 percent of the U.S. banking assets are controlled by the 100 largest banking organizations, less than 1 percent of the total.

If the concentration of economic power is creating concern among bank regulators, members of Congress or Clinton Administration policymakers, it is a well-kept secret. The regulators, the Justice Department and Congress, for the most part, have adopted an Alfred E. Neuman "what, me worry?" stance.

But the creation of a financial system dominated by a handful of megabanks and mammoth holding companies poses real problems -- Washington's apathy notwithstanding. The trend to bigger banks will shift insurance risks to taxpayers, cost jobs, lead to increased rates for bank customer service, make it harder for small borrowers to get loans and lessen community access to bank branches.


Too big to fail

With U.S. taxpayers still paying off hundreds of billions for the bailout of the savings and loan industry, the legislative and executive branches of the federal government might be expected to consider what bigger and bigger banking institutions mean for government's deposit insurance liability.

At a minimum, the trend toward bigger banks is creating a new class of "too-big-to-fail" financial institutions -- banks that must be bailed out, regulators and politicians are certain to argue, to prevent a "domino" effect on the entire economy. These institutions will enjoy what amounts to a taxpayer guarantee of all their assets (not just customers' deposits). So, hidden in the merger documents creating these giant banks are huge new liabilities for taxpayers and tons of free insurance for large depositors and shareholders of these too-big-to-fail institutions.

With the merger frenzy in full swing last year, President Clinton's newly appointed Federal Deposit Insurance Corporation (FDIC) Chairperson, Ricki Tigert Helfer, moved to cap the reserves that financial institutions pay into the government's bank insurance fund at $25 billion, just 1.25 percent of the insured deposits. In the process, FDIC eliminated deposit insurance premiums for 92 percent of the nation's banks.

Helfer will not have to call in outside consultants to discover that a reserve of $25 billion doesn't stretch very far should one of the megamergers -- with assets of several hundred billion dollars -- turn sour in the future. At that point, Congress would be forced to once again reach into taxpayers' pockets, as it did in the cleanup of the savings and loan debacle in the 1980s.

In the past, the government has used a variety of devices to paper over problems and prevent the outright failure of big banks. In some situations, the government has provided assistance for quickie mergers with stronger partners for ailing bank giants. In other cases, deposit insurance funds and loans from the Federal Reserve banks have been used to save too-big-to-fail institutions.

For example, Continental Illinois National Bank, on the brink of total collapse in 1984, was saved with $4.5 billion from the Federal Deposit Insurance Corporation plus Federal Reserve loans after the regulators and Congressional banking committees decided the Chicago bank was just too big to close.

But these bailout devices will be difficult and far too expensive to put together for the new generation of megabanks without turning to taxpayers for the funds.


Too big to control

While the potential bailout of these banking monsters is a contingent liability for the taxpayers, the economic and political power of the new corporations is immediate and real.

The banking industry has long been a powerful force in state and federal legislatures, and the large footprints of its trade associations are found often in deliberations and decisions of regulatory bodies at all levels.

The political power of the new institutions controlling hundreds of billions of dollars of assets in interstate branches stretching across the nation will be awesome. In many areas, these megabanks will dominate pricing of banking products, deciding who does and who does not get credit and what development goes forward and which is labeled a loser.

The current 104th Congress reflects the already pervasive power of banking lobbyists. The agendas of both the House and Senate Banking Committees have been dominated by industry wish lists -- proposals that would let banks, securities firms and insurance companies combine resources under common ownership. Banks are also seeking a rollback of safeguards designed to protect consumers and communities.

Only the inability of Congressional leaders to divide the legislative goodies among competing banking and insurance interests has kept the legislation from reaching the President's desk.

Banking industry clout in state and federal legislatures -- among members of both parties -- is nothing new, but in local communities the power and decision-making of a single multistate megabank is likely to be decisive. Few politicians from the local courthouse to the White House will want to engender the displeasure of these dominant financial institutions.

While campaign contributions reveal only the tip of the broad political power of the banking industry, it is worth noting that bank PACs contributed more than $3 million to members of Congress in 1995 -- an off-election year. Another $602,000 was donated in the form of "soft money" to political parties last year.

And these PACs, like the parent banking corporations, will just get bigger and bigger as mergers combine financial resources.

Likewise, regulation of these institutions will be an increasingly difficult -- and perhaps impossible -- job for state and federal agencies.

Megabanks will be too big and too scattered for anything resembling on-site, hands-on examinations. Such examinations would require a small army of examiners, and neither the banking industry nor the federal government is likely to volunteer to pay the enormous cost of top-to-bottom inspections.

Instead, more and more examinations will be based on self-certified, bank-generated data. Examiners will be left to pore over reams of computer runs, hoping that the soft spots will show up before the problems reach a critical mass. Bankers and regulators insist that this system will work, but for taxpayers who will foot the bill for these "too-big-to-fail" institutions, the process may resemble the reading of tea leaves more than it does hard-nosed bank examinations.

The problems of bank supervision are exacerbated by a crazy-quilt structure of overlapping federal and state regulatory agencies. Three different federal banking agencies and the Securities and Exchange Commission get in on the act -- as do 50 state banking commissions that pursue a variety of regulatory approaches.

Treasury Undersecretary John Hawke describes the present regulatory system as "needlessly complex." But Congressional efforts to consolidate the agencies and create an independent regulatory body have repeatedly failed.

The banking industry has always preferred the present balkanized regulatory structure which frequently provides opportunities to shop for supervisory laxness among the different agencies. It is unlikely that the new monsters of the banking midway will be out lobbying for changes that would create a more rational and effective system. The present antiquated structure fits the industry's concept of a new world of self-regulation just fine.


High fees and credit crunches

While there may be arguments about the eventual winners in this new bank monopoly game, there are already some very clear losers.

For local communities -- and individual customers -- the concentration of economic resources in the banking industry spells more misery, particularly in areas already struggling to survive.

Higher loan rates and lower yields on savings go hand in hand with concentration of banking resources in local markets.

As Federal Reserve Governor Janet Yellen conceded last year before the House Banking Committee, studies have found that banks in concentrated markets "tend to charge higher rates for certain types of loans, particularly small business loans, and tend to offer lower interest rates on certain types of deposits than do banks in less concentrated markets."

Industry concentration will translate into new and higher fees for banking services, especially for smaller deposit customers. Dr. Janice Shields of the Washington, D.C.-based Consumer Finance Project points out that the number of banks in the United States decreased by 28 percent and the dollar amount of deposits increased by 36 percent over the past decade, while aggregate service charges on deposit accounts rose by 108 percent over the same period.

A 1995 study by the U.S. Public Interest Research Group and the Center for Study of Responsive Law showed that fees on checking and savings accounts increased at twice the rate of inflation from 1993 to 1995 as bank mergers roared forward.

Fees cut across a wide spectrum of small- and medium-sized account holders, but the biggest losers are likely to be those citizens and communities seeking access to credit. In the new bigger corporations, the decisions about consumer and neighborhood credit will be filtered through longer and more distant lines of managerial control.

A recent study by Allen Berger and Joseph M. Scalise of the Federal Reserve Board in collaboration with Anil K. Kashyap of the University of Chicago, "Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," finds that large banking companies make "very few" commercial and industrial loans to small business borrowers.

As of 1994, the study estimated that banking corporations with more than $100 billion in assets had only $2.3 billion -- or 2.5 percent of their commercial loans -- devoted to small borrowers. The study said big banks provided only 0.7 percent of their commercial loans to "very small" business borrowers -- defined as those with less than $1 million in bank credit.

The story was the opposite for small banks. The study found that banks with less than $100 million in assets made nearly 82 percent of their commercial loans to borrowers with bank credit below $1 million, with most of the loans going to "very small" businesses.

There probably won't even be a nearby branch where a consumer or small business borrower can register a complaint, since an inevitable by-product of the merger game is the closing of bank branches. Thousands of bank workers are being declared surplus as neighborhood branches are padlocked in an effort to reward shareholders.

The Chase and Chemical merger is expected to eliminate 12,000 jobs over the next three years, about 4,000 in New York City alone, according to the banks' own estimates. But, if history is any guide, these estimates may prove to be on the rosy side. When Chemical acquired Manufacturers Hanover in 1992, the bank promised that only 80 branches would be closed. In the end, 177 branches were shut.

Nationwide, as many as a half million bank employees are expected to lose their jobs as the industry consolidates over the next decade, according to a study by DeLoitte and Touche, a major accounting firm.


The efficiency hoax

The bleak prospects for communities, consumers and bank employees notwithstanding, top executives in the banking industry continue to cheerlead for the mergers.

"We're creating an absolute powerhouse," Thomas Labrecque, chairperson of Chase, exulted when the Chase-Chemical merger was announced last year.

James Culberson, Jr., president of the American Bankers Association, says the "hope and expectation of the bankers doing the mergers is that the newly formed banks will gain operating efficiencies, improved earnings for their shareholders and a better deal for their customers."

Some of the banks' excitement about the mergers might be understandable if megabanks were destined to provide huge efficiencies and cost savings. But virtually all the economic studies question how much marital bliss there will actually be in the big mergers.

Stephen Rhodes, a long-time economist with the Federal Reserve Board, has looked at dozens of studies from a variety of sources and finds "little support" for the view that bank mergers result in improvements in performance.

Rhodes' view is supported by John Boyd, a former senior research officer at the Federal Reserve Bank of Minneapolis, and his colleague, Stanley Graham, an economist. Finding most economies of scale are exhausted when banks reach $100 million in assets, Boyd and Graham concluded that "consolidation of banking is not all it seems and those who have enthusiastically applauded it are likely to be badly disappointed by its results."


Closing out communities

Bank regulators appear to be giving short shrift to all the evidence on the perils of bank concentration as the merger applications land on their desks in increasing numbers.

Many community groups, concerned about the loss of branches and local market control, believe the Federal Reserve Board, which must approve merger applications, is doing an extremely poor job in applying the "public convenience and needs" test to the new mergers, as required by the Bank Merger and Bank Holding Company Acts.

Dr. Kenneth Thomas, a professor at the Wharton School of Finance and frequent writer on the Community Reinvestment Act (CRA) and anti-trust issues, argues that the Federal Reserve needs to broaden its test if it is to accurately measure what constitutes public "convenience and needs."

Thomas says the Federal Reserve should look beyond CRA scores (indicating how well banks satisfy credit needs of their entire communities, including low- and moderate-income neighborhoods), data under the Home Mortgage Disclosure Act (indicating in which neighborhoods they make mortgage loans) and narrow interpretations of the anti-trust statutes. Thomas says other considerations should include prices, service charges and fees, product mix, customer service, community support and branch consolidations.

Many community groups echo Thomas's concerns and contend that the Federal Reserve Board, while a polite listener, simply accepts community comments, noting them in footnotes and proceeds with the inevitable -- a rubber stamp of the merger application. "The Fed must resurrect and redefine the statutory public convenience and needs test so that it is the focal point of the megamerger application process," Thomas argues.

The anti-trust division of the U.S. Justice Department has been decidedly low profile on the wave of bank mergers.

On occasion, the division has required merging partners to put some of their branches up for sale to preserve competition for certain types of lending. In California, for example, the Justice Department ordered Wells Fargo to divest itself of 61 of the branches acquired in its merger with First Interstate.

But now it appears that the 61 branches will be purchased by Home Savings and Loan of Los Angeles, which has just announced that it is abandoning its affordable housing lending programs. The California Reinvestment Committee, a coalition of 160 community groups in Southern California, considers this a double whammy.

First, the merger was approved over massive community opposition, and now 61 branches spun off the merger are being peddled to a lender that no longer plans to make the kind of loans that the community groups were desperately seeking to ensure.

On top of the 61 branches that are going to Home Savings, 350 others are being closed permanently as part of the Wells Fargo-First Interstate merger. "The abandonment of affordable housing by Home Savings is particularly troubling as financial institutions continue to consolidate," the California Reinvestment Committee said in a statement.


A concentrated future

The mischief -- or apathy -- is not limited to the Justice Department and the regulators. Congress -- with members of both political parties sharing the blame -- has fueled the concentration of banking resources.

Following a huge lobbying push by Hugh McColl, president of NationsBank, a Democratic-controlled Congress pushed through legislation in late 1994 giving banks the power to establish branches nationwide -- with only limited community safeguards. Today, the branching powers are a big impetus behind many of the mergers.

Now, a Republican-controlled Congress is trying to weaken the Community Reinvestment Act and the Home Mortgage Disclosure Act in a manner that will make it substantially more difficult for regulators and local communities to track the performance of these merger-fattened interstate giants. If these consumer protections are wiped out under pending legislation, the merger game becomes much more deadly for the interests of low- and moderate-income and minority communities.

From the standpoint of economic concentration, this Congress may end up setting new records. Proposals introduced in both the U.S. Senate and the House of Representatives would allow the common ownership of banks, insurance companies and securities companies.

If a $300 billion bank seems large by today's financial standards, consider a bank that also owns a large firm that underwrites and peddles securities as well as a company that controls billions of dollars of assets in the insurance industry.

These conglomerates, dominated by taxpayer-insured banks, would control vast shares of the nation's financial wealth along with all the economic and political power that goes with such concentrations of money.

Members of both parties in Congress -- and to a large extent the Clinton Administration -- seem to view these developments as an in-house game among the financial powers. But concentrated economic power has extremely serious implications for every citizen. It is not a game to be played out solely by the financial interests.

Unfortunately, the issue of economic concentration is not on the radar screen of either party as the nation heads into the last presidential election of this century. Policy in this area seems destined to lurch along, guided only by how much muscle any segment of the financial industry can bring to bear on Congress and the executive branch.

As the industry knows well, if no one pushes a new public-interest policy on bank mergers and economic concentration, it will soon be too late. All the available merger partners will have been joined and no Congress and no administration will be able unscramble the mess -- and the U.S. economic landscape will be changed forever.


THE TOP TEN BANKS

Assets*
Chase Manhattan-Chemical, NY$301,984
Citicorp, New York$263,566
Bank America Corp, San Francisco$234,243
J. P. Morgan and Company, NY$204,747
NationsBank Corp Charlotte, NC$194,375
First Union Corp, Charlotte, NC$130,581
First Chicago-NBD Corp, Chicago$115,465
Bankers Trust, New York$108,144
Wells Fargo-First Interstate, CA$100,000
Banc One Corp, Columbus, Ohio$95,708

*Dollar amounts in millions

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