Bank mergers are hardly a new phenomenon: there have been hundreds over the past decade. The new crop is different only because the institutions involved are huge. But size, by itself, has nothing to do with how consumers fare. The critical issue is how much competition the postmerger giant will face. For example, the planned combination of Chemical Bank and Manufacturers Hanover Trust Co. will create the country’s third largest banking organization, but customers may not notice much effect on fees or interest rates: with a host of financial institutions fighting for business, New York is among the most competitive banking markets anywhere. Claims that customers will suffer in the BankAmerica-Security Pacific union “are malarkey,” says San Francisco banking expert R. Dan Brumbaugh. “The proliferation of
Still, many consumers won’t benefit from the banks’ drive for bigness. Well-heeled depositors can always find a higher-yielding money-market fund if their local bank trims interest rates. But for the small fry, it’s not so convenient to shift a $500 checking account. Many customers have no alternative to their local banks notes Federal Reserve economist Jim Burke. Only three major banks serve the 40 square miles of south-central Los Angeles. BofA’s buyout of Security Pacific will eliminate one of them and could leave some customers with only a single bank in their neighborhood. In Cleveland, National City Bank’s proposal to link up with Ameritrust in a $33 billion institution would put 85 percent of bank deposits in the hands of three banks; depositors might have little choice but to grin and bear whatever charges they impose.
That power in the marketplace will be the major issue when the Fed considers a proposed marriage in the Southeast, involving $66 billion NCNB Corp. and $49 billion C&S/Sovran Corp. NCNB and C&S/Sovran rank second and third in size in South Carolina; their merger and another pending linkup would give NCNB and rival Wachovia Corp. control of almost two thirds of South Carolina’s bank deposits. Robert K. Heady, editor of Bank Rate Monitor, says that free checking accounts have all but disappeared in the Palmetto State as out-of-state institutions have moved in. Having fewer competitors might enable NCNB and Wachovia to boost other fees, too.
Small business probably stands to lose the most from mergers between competing banks. Savings and loan associations and finance companies may lend to consumers, but they rarely offer alternatives for the entrepreneur. “He’s really dependent on the local bank,” says Lawrence J. White of New York University, a former chief economist of the Justice Department’s Antitrust Division. A new study by Fed economist Timothy Hannan confirms that unsecured commercial loans under $100,000 are far cheaper in cities with intense bank competition than in cities with fewer banks. A Fed survey in 1990 found that small businesses almost always borrow from a bank close to home rather than an S&L or a bank in another city. Both studies suggest that small companies have a lot to lose if local banks merge.
The lack of competition is most severe in small towns, where there may only be one bank, and in medium-size communities like Boise, where four banks have the market locked up. But even bigger cities, like Honolulu, may suffer. The Fed let First Hawaiian Bank and First Interstate Bank of Hawaii merge last month over the vigorous objections of the Justice Department; now, three banks hold 86 percent of all bank deposits. “The banks here are not small-business oriented,” complains Sam Sloan, president of Small Business Hawaii. Things would be better, Sloan says, if mainland banks could expand into Hawaii. There’s not much chance of that: Hawaii’s seven remaining banks don’t want BankAmerica there.
The past month’s megamergers are by no means the end: over the next decade, profit pressures will drive thousands of the nation’s 12,000-plus banks to combine forces. But several thousand will survive-and many start-ups are likely to join them. Deregulation has made it easy to open a new bank. “Community and small banks are proliferating,” says Norman Katz, a banking consultant with Grant Thornton. Nearly 1,100 new banking charters have been granted nationally in the past five years, Katz notes.
Moreover, even in areas where banks are few, other financial institutions keep the competitive heat high. Banking expert Brumbaugh says that banks now have only about one fourth of all financial assets; the rest is controlled by insurers, stockbrokers, credit unions and a host of other players. That means that in many lines of business BofA will have a tough time taking customers for a ride. Savings and loan associations, credit-card issuers like Sears, Roebuck and Co. and lenders such as General Motors Acceptance Corp. all chase BofA customers.
As restrictions on interstate banking fall, there may well be a handful of banks operating coast to coast in a few years’ time. BankAmerica chairman Richard Rosenberg, whose institution has expanded from its bases in California and Washington to seven other Western states by snapping up defunct S&Ls, clearly wants BofA to be among them. NCNB, which intends to rename itself Nationsbank, has a similar idea.
The wisdom of that strategy from a business point of view is hotly debated. In general, large banks are less profitable than medium-size ones; many experts think the drive to expand defies economic sense. Whatever the case, the odds of those megabanks dominating the banking business are small. Even giant Citicorp, the nearest thing America has to a nationwide bank, controls a scant 6 percent of bank assets, far too little to let it dictate credit-card fees or interest rates. If problems do arise, the Federal Reserve Board can-and often does-force merging banks to sell branches to maintain competition. BankAmerica may have to divest branches in places like Yakima, Wash., and Fresno, Calif., to gain clearance to buy Security Pacific. If it does, consumers may well emerge from America’s largest bank merger unscathed.
Suddenly, A Hot Race As BankAmerica (headquarters at far right) and Security Pacific join forces, Citicorp’s No. 1 ranking is no longer undisputed. Holding Assets company in billions (6/30/91) Citicorp $217.3 BankAmerica- Security Pacific* $193.6 Chemical- Manufacturers Hanover* $135.5 NCNB-C&S/Sovran* $115.0 Chase Manhattan $98.5 J.P. Morgan $96.9 Bankers Trust $58.9 Wells Fargo $54.4 First Interstate $50.3 First Chicago $48.1 *ANNOUNCED MERGERS. SOURCE: KEEFE, BRUYETTE & WOODS, INC.
