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April 16, 1998
Economic Scene; Few see bank consolidation as a harbinger of doomsday.
By PETER PASSELL
WHILE the timing was dramatic, the news this week of two gigantic bank mergers shocked few economists who specialize in financial markets.
''This is the beginning of the catch-up game,'' explained Bert Ely, a banking consultant in Alexandria, Va. Legislation has prevented the creation of a dozen megabanks, he says, which would exist alongside hundreds or thousands of smaller independent ones.
Nor were economists wringing their hands last week over the competitive effect of what promises to be a rapid consolidation of the banking industry as Nationsbank seeks to merge with BankAmerica and Banc One seeks a union with First Chicago NBD. ''There's just no way a bank can carve out a dominant position in the national market,'' argued George Benston, an economist at the Goizueta Business School at Emory University in Atlanta.
What qualms they had concerned the ability of the monster banks with one-size-fits-all lending policies to serve small businesses efficiently. But even the skeptics are hard pressed to come up with scary situations. ''So long as entry into banking is relatively easy,'' said Lawrence White at New York University's Stern School of Business, ''the niche players should sustain the small-loan market''.
There is a sense of historical inevitability about bank consolidation. Every other developed economy has nationwide banking, with brand names and branches as ubiquitous as, say, Exxon gas stations in America. And while it is possible to find economists with serious worries about the integration of financial services as diverse as deposit-taking and the underwriting of casualty insurance a la Citcorp-Travelers, prohibitions against interstate branch banking have long been viewed by economists as a crude form of protectionism. ''If the Supreme Court had simply ruled in the 19th century that the interstate commerce clause applied to banking, we would have gone the way of the rest of the world,'' Mr. Ely argues.
That said, there is still disagreement over the potential efficiencies in moving from a world of $30 billion regional banks to one of $300 billion national banks. The merged entities may get some mileage from closing branches, integrating computer systems and combining specialized services -- for example, financing trade with Latin America. But there is ''extreme skepticism'' among researchers that the cost saving will offset the inherent inefficiencies of running larger corporations, said Alan Blinder, a former vice chairman of the Federal Reserve who teaches at Princeton University.
By the same token, it is only natural to worry that consolidation will lead to less competition and higher prices for banking services. Mr. Bentson flatly dismisses the notion, arguing that the effective level of competition will rise in most areas as banks buy into new markets through mergers.
Mr. White is a bit more circumspect. Large commercial customers, he agrees, have nothing to fear.
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But it is not the job of regulators to second-guess the motives in this latest round of merger mania, Mr. Blinder suggests. As long as industry consolidation threatens neither the competitiveness nor the stability of banking -- which they apparently don't -- this is a matter for the stockholders.
http://query.nytimes.com/gst/fullpage.html?res=9904E2DA173CF935A25757C0A96E958260&sec=&spon=&pagewanted=print-------
Monopoly-Creating Bank Consolidation? The Merger of Fleet and BankBoston
Abstract:
The merger of Fleet and BankBoston in September 1999 resulted in a regional New England lending market in which only one large, universal bank remained. We explore the extent to which that merger resulted in monopoly rents for the combined entity in some niches within the regional loan market. For small- and medium-sized middle-market borrowers, prior to the merger, Fleet and BankBoston charged unusually low loan interest rates, reflecting their ability to realize economies of scope and scale. After the merger, those cost savings were no longer passed on to medium-sized middle-market borrowers, which resulted in an increase in the average interest rate credit spreads to those borrowers of roughly one percent. Small-sized middle-market borrowers (which continued to enjoy the advantage of loan market competition from remaining small banks) maintained their low spreads. Our results suggest that it may be desirable for regulators to consider the concentration in lending markets in addition to deposit markets when evaluating mergers and structuring appropriate divestiture requirements.
http://www.corporatefinancingweek.com/file/70474/global-top-ten-ma-record.htmlAntiTrust Laws/Bank Consolidation debate (1998):
....The cost of failing to maintain competition can be very great. Only partisan rancor and the idiosyncratic opposition of a single conservative Senator prevented the 105th Congress from passing this month a financial consolidation bill that would have allowed banks, insurance companies and stockbrokers to merge into conglomerates for the first time since the Great Depression. Americans who, during the S&L crisis of the 1980s, deplored the large number of American banks and praised the highly anticompetitive concentration of the Japanese banking industry are now aware of their mistake, though I haven't noticed many of them actually confessing error. As the Japanese financial system collapses, threatening to take the world economy with it, the political influence of Japanese bankers continues to delay implementation of the necessary measures. If a global depression occurs, it will be largely the result of inadequate competition in the Japanese financial sector. Yet the 106th Congress will no doubt commence in January with the reintroduction by legislators gorged on "campaign contributions" from the banks and brokerages of legislation to permit similar levels of concentration in our system.
What antitrust does for us cannot be discussed intelligently if "the economy" is perceived as a domain separate from "politics." The American Century has been about explosive technical innovation transforming human life. It has also been about maintaining a balance between economic liberty and democratic control over our destiny as a society. The underlying message of the antitrust philosophy is that democratic government defends itself by encouraging economic competition and destroying private power before it grows too large for the electorate to control. The alternative is government of the oligarchs, by the oligarchs and for the oligarchs. If that occurs, democratic self-government will indeed perish from the earth.
http://moglen.law.columbia.edu/publications/antitrust-democracy.html