April 13, 1998
There are two new mergers in the banking industry; NationsBank will team up with BankAmerica and Banc One Corp. will buy First Chicago. But is bigger better for consumers?
PHIL PONCE: Is bigger better in the banking world? Some of the nation's largest banks seem to think so and are taking steps to make themselves into even larger giants. Today it was Nations Bank and Bank America, at $60 billion the largest merger between two American banks and Bank One Corporation and First Chicago, no small change either, at close to $30 billion. And those are just the latest. In the last two years First Union bought CoreStates; NationsBank bought Barnett Bank, and Wells Fargo bought First Interstate. And just last week came the biggest of all financial services deals, the proposed merger between Citicorp and Travelers Group. With us to discuss the big bank deals are Bert Ely, a banking consultant who has his own firm in the Washington, D.C. area, consumer advocate Ralph Nader, who analyzes the impact of mergers and founded Public Citizen, and Ron Chernow, an economic historian who's written several books about the banking industry. His most recent is titled The Death of the Banker. Gentlemen, welcome.
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Mr. Chernow, the head of NationsBank is calling this proposed merger "the watershed event in the nation's banking history." Just how big of a deal is it?
RON CHERNOW: This really is an historic event. This is the largest bank merger in American history if you measure it by deposits and branches. If you measure it by assets, the Citigroup merger last week is larger. But this is a historic event because it creates the first truly national consumer bank with branches ranging from Miami all the way to Seattle. To put this in perspective, 20 years ago we scarcely had any banks that had even branched into the adjoining state. Now we have banks that have branched from coast to coast. But this really fulfills a vision that A. P. Gianini, the founder of Bank America, articulated in 1904. It's taken the entire century to reach a truly national banking system.
PHIL PONCE: Mr. Ely, do you agree, it's a pretty big deal?
BERT ELY: I think it's a very big deal, again, because it creates the first coast to coast bank in the country, and it is a natural consequence of the federal government filing, knocking down all the remaining restrictions on banks' ability to branch within the United States.
Is bigger better for consumers?
PHIL PONCE: Mr. Nader, is bigger better as far as consumers are concerned?
RALPH NADER: I don't think so. The big banks have a record of charging higher for bank fees and their customer accounts. They have a record of less responsiveness to small business loans. But this just isn't just a merger of banks. This is part of a larger pattern where insurance companies, security firms, banks, and industrial corporations can own one another, with the repeal of laws that were trying to reduce the risk level during the Depression and after years of 1930 and later. So what we're seeing here is a taxpayer-guaranteed moving in through deposit insurance, bailing out the deposit insurance fund, which is now at a ridiculous $30 billion--hardly enough for one bank collapse--and bigger and bigger banking and financial conglomerates that say to Uncle Sam if we get in trouble, you're going to have to bail us out because we're too big to fail.
PHIL PONCE: How about that, a bad deal for consumers, Mr. Ely?
BERT ELY: No, I don't think so because consumers are still going to have ample choice within the banking industry. We have 9,000 banking companies in this country. Most of them are small community institutions that can meet the needs of those people who aren't happy with the big banks that are serving their market. Now that we're getting increasing competition among these banks not only as they branch across the country, but as they also sell their products, in other regards--also, I think the too big to fail argument is overplayed. I mean, it is a reality, but the way the Federal Deposit Insurance system is set up, the federal government has the right to tax without limit successful banks in this country to pay for whatever deposit insurance losses there are going to be. This is quite a change from the S&L situation in the 1980's.
RALPH NADER: Of course, in a period of record profits the FDIC has stopped assessing for a rainy day ahead of time. Listen, when Paul Volcker, the former chairman of the Federal Reserve Board, warns against breaking down the barriers between banking and commerce and securities and industry, we'd better listen. Here's a man right out of Wall Street, major figure in American financial activity, testifying a few months ago before the Congress, saying, look, you're going to have cross subsidization, you're going to have the taxpayer having to fund failures in say the securities area and insurance area, instead of just supporting the deposits in a bank. It raises the risk factor and brings in crony capitalism where banks will favor their own subsidiaries and affiliates in terms of loans, et cetera, just the way we're decrying now in Asia. We're saying crony capitalism is bad in Asia but it's okay to bring it back here, and concentrate power even more.
"We're saying crony capitalism is bad in Asia but it's okay to bring it back here, and concentrate power even more."
PHIL PONCE: Mr. Chernow, is that a fair comparison?
RON CHERNOW: Well, you know, I think that the worst example of crony capitalism in American banking has been the community bank. The community bank has been wonderful in terms of having personal relationships with individual depositors and local businesses. But we have had more bank failures in American history because of collusion and back scratching, because of local bankers in cahoots with local real estate developers and small businesses than from any other area. I mean, just look at the S&L crisis so that the small bank has been a hallowed institution in America in banking's history, but it hasn't been an unmixed blessing.
PHIL PONCE: How about the--how about the status of small banks, though, should small banks be worried in light of these mergers that seem to be taking place? Is a small bank an endangered species at this point?
RON CHERNOW: I think so. I think that these two mergers today really sound the death knell for the community bankers, and I have mixed feelings about that, but I don't think that they have the resources, the capital, and the technology to compete. I think that we'll see more community banks selling out to super regional banks, more super regional banks now indulging fantasies of becoming coast to coast banks of the sort that BankAmerica and NationsBank announced today.
PHIL PONCE: Death knell for community banks, Mr. Ely?
Is this a death knell for small, community banks?
BERT ELY: Not at all. Community banks are doing very well. Last year 188 new community banks were chartered. Sure, the community banks are being bought, but the large banks are not going to put 'em out of business. Every time two large banks merge there's a net transfer of customers to other banks. And so I don't think they're going to be falling by the wayside. I'll come back to a point that Ralph talked about in terms of and his implication is of maintaining a separation of banking from insurance and securities. That's obsolete thinking. The fact is that electronic technology--meshing together all these different industries, that's why we saw the Citicorp/Travelers deal last-and that's why we're going to get away from these nice, neat compartments that we're used to visualizing the world towards an integrated financial services industry, and that is what the future holds.
PHIL PONCE: For clarification's sake, what happened last week, and correct me if I'm not stating it correctly, what happened last week had more to do with expanding services, whereas, what happened--what's happening today has more to do with just banks being bigger as banks.
BERT ELY: That's right. Today's mergers are just those taking place within the banking industry. The Citicorp/Travelers deal last week brings together a giant organization that's involved in banking on a worldwide basis in the insurance business and the securities business. This is the wave of the future because this is what technology is making increasingly feasible.
PHIL PONCE: Mr. Nader.
RALPH NADER: If this is the wave of the future and we're going to get preferential treatment of these affiliates, these banks and loans et cetera, which I call crony capitalism, a far greater scale, by the way is in the hometown bank--if so, let's get rid of deposit insurance for the bank that is part of a conglomerate that's going to cross-subsidize and favor its insurance and security and other affiliates. Why have this kind of guarantee when you have this kind of cross-subsidization? This is why we need congressional hearings the way Wright Patman and Senator Proxmire used to have so Bert can go up there and testify, others go up there and testify, this is an enormous jolt to the traditions and the risk controls, and the competitive scenario of our economy, and to have it go through with no more discussion on television than what this program allows in a sound bite media world is ridiculous. We need thorough, deliberate congressional hearings here.
PHIL PONCE: How about that, Mr. Ely, should Congress--should the government give this--give this--these mergers the thumbs up?
BERT ELY: I think without question, and there have been lots of congressional hearings on this over the last couple of years, in conjunction with financial services modernization legislation that Congress has been chewing on. Also, with regard to this cross-subsidization--what that is, banks with deposit insurance are able to subsidize other activities--that's an assertion that Alan Greenspan and others in the Federal Reserve have made. But they have not put a single number on the table to support that it's a totally false assertion in my opinion.
PHIL PONCE: Mr. Chernow, does the country really have any experience in dealing with the potential failure of an institution of the size that's contemplated here?
RON CHERNOW: No, we really don't because our entire sense of scale changes with these mergers. I mean, just a week or two ago a bank with $200, 300 billion in assets considered an extremely large bank. Now, suddenly we have mergers creating institutions with $500, 600, 700 billion in assets. So I think that Ralph Nader is correct, that is going to create a huge debate about deposit insurance because I think that if banks were too big to fail in the 1980's, they're now much, much bigger in the 1990's. And we have a situation when we have a national consumer bank that's operating coast to coast, if that bank were to fail, the ripples would spread right across the country. So I agree with Ralph; this will trigger off a big debate about deposit insurance.
PHIL PONCE: Is fear of failure something that people should take seriously, Mr. Ely?
BERT ELY: Well, I think that the political establishment should take it seriously, and I agree with both Ron and Ralph on this, that there is going to be a congressional debate on it, and I think it's going to be very healthy. But what I think is important is to look at the facts in the issue and get away from the emotions. Too big to fail is a political reality of the industrialized world. I think it's important to accept that. But what's key is how do you prevent failure and who pays for failure? That's what we debated, and I believe that these large mergers are going to put this issue on the table more directly before Congress as they should. So I don't think we have any disagreement on that. Disagreements can be over how you do it.
Why the urge to merge?
PHIL PONCE: Let's get to an initial impulse, Mr. Ely, and that is, why are these mergers taking place? What is the motivation, the essential motivation?
BERT ELY: The motivation is that the restrictions against them have finally been taken off after a century. What the federal and state law did for a century is prevent the evolution of the America banking system as we now see it emerging. And we're going to end up with what we should have always had, which is a relatively small number of large regional or national banks coupled with thousands of prospering community banks. And so we're moving in the direction we should that evolution is delayed for almost a century by I think a misguided federal state law.
PHIL PONCE: So you're saying the--that left to its own devices, the market would have only--the market now would have resulted in what, a dozen or fifteen large banks?
BERT ELY: Yes.
PHIL PONCE: Is that what you're saying?
BERT ELY: And we would have been there and--but coupled with five, six, seven thousand smaller banks, plus we had well over 10 thousand credit unions.
PHIL PONCE: Mr. Nader.
RALPH NADER: Little boys looking for bigger toys. Let's not discount the bigness for bigness sake. The top executives are going to make out like bandits on these mergers in all kinds of ways, executive compensation, stock options. They have their own personal interest for these mergers. But what is the purpose for the consumer, for the beleaguered taxpayer, who's expected to bail them out? Who else can bail out these big banks when they start collapsing? How about the experience of American Express and Sears Roebuck with conglomerate financial empires? That didn't work out very well either. You have huge corporate bureaucracies here riddled with internal envy and in-fighting, et cetera, very unwieldy, very difficult to manage. Anyone who gets hooked into those conglomerates as consumers are going to lose the opportunity for comparison shopping, the key criteria for consumer welfare, comparison shopping. And they're going to lose a lot of personal privacy about their financial lives.
PHIL PONCE: Mr. Chernow, how about that? Historically, how often are these deals motivated, driven by the individuals at the head of their respective institutions?
RON CHERNOW: There's always corporate ego and frankly, a lot of bank mergers have not worked out. But I think that we have to acknowledge the reality that banking has been in a kind of slow motion crisis for the last 20 years. Depositors have deserted the commercial banks for the brokerage houses, for mutual funds, for the stock markets. Large companies have deserted the banks for the stock market and the bond market. And one of the reasons that legislators and regulators allowed a loosening of these restrictions was to enable commercial banks to increase both their product and geographic diversification. This is why the restrictions that were placed on interstate branching in the 1920's and then again in the 1950's have now been slowly dismantled.
RALPH NADER: But they're reporting record profits for six years in a row of these banks, record massive profits, massive stock appreciation, are hardly down and out, and they need this kind of help.
RON CHERNOW: Yes, but I think there are two reasons for that. Number one, they've had extremely low interest rates, and in banking, when you have low interest rates to spread between what the banks have to pay and what they're taking in tends to increase, and profits increase. Also, some of that profitability comes from the bank mergers where they cut costs where there have been overlapping branches. I think what we're seeing today is that the commercial banks feel that they have to offer new products and to expand revenues and not simply cut costs by closing branches.
RALPH NADER: Mr. Ely.
BERT ELY: The large increase in bank profits in large part is due to the fact that the banks have bigger and bigger capital bases all the time. That return on capital has not been rising the way it might be suggested. The other thing that we see going on is that banks have lost a tremendous amount of market share in recent decades to their less regulated and less taxed competitors. And I think part of the modernization process has to go forward, is to level the playing field from a regulatory standpoint so that we get the most efficient mix of banking and financial services and get away from the regulatory discrimination that has existed towards the nation's banks.
Is this the start of more big mergers?
PHIL PONCE: And, Mr. Ely, how much pressure is there in the nation's banks--among the nation's banks to merge some more? Are we going to be seeing more of this in the next--next couple of three years?
BERT ELY: We are going to see more because we have not yet fully worked through the consolidation process that was held up with water behind the dam for almost a century. It probably takes another five or 10 years to run out, but overlaying it is going to be this melding of the banking, insurance, and securities industries as we saw in the Travelers/Citicorp deal that was announced last week.
PHIL PONCE: A quick reaction to that prospect.
RALPH NADER: Yes. Hugh McCall, the head of NationsBank, says in a few years five to six giant financial conglomerates will dominate the nation. That's not healthy for Main Street; it's risky for Wall Street; and it's bad for the Federal Reserve and all the other forces in Washington who want to bail out these banks and financial conglomerates, when they're mismanaged, speculative, or overreach in terms of their risk taking. The key thing here is to have broad congressional hearings and more discussions on programs like this.
PHIL PONCE: And, gentlemen, I'm afraid that's where we'll have to leave it. Thank you all very much.