It's a Bank-Eat-Bank World
Los Angeles may be the nation's second largest city, but it no longer hosts a major bank. Nor do Houston, Philadelphia, San Diego, Phoenix, San Antonio, or Dallas -- the U.S. cities ranked fourth through ninth in population.In the aftermath of the latest round of banking merger-mania, none of these seven cities is home to any of the country's seventy-five largest banks. The largest bank still based in any of these cities is Frost National Bank of San Antonio, whose parent company, Cullen/Frost Bankers, ranked 79th in mid-1998 with $6.4 billion in assets.This is just the tip of the iceberg. All across the country, hundreds of cities and towns of all sizes are finding that control over local loans to businesses and residents -- the economic lifeblood of any community -- has shifted from locally based banks to the distant corporate headquarters of a new breed of mega-banks.The Megamergers of '98Six megamergers in 1998 have escalated the ongoing consolidation of the banking industry to a whole new level. Three years ago, Citicorp, the parent corporation of Citibank, was bumped from its longstanding position as the country's biggest bank when Chase Manhattan and Chemical banks of New York merged to form the first $300 billion U.S. bank. This year it reclaimed its number one standing by combining with the Travelers Group of insurance and investment companies to form the new Citigroup, with almost $700 billion in assets.Within banking itself, NationsBank's takeover of Bank of America's operations -- and its name -- joined the third and fifth largest banking companies in the country to create a giant based in NationsBank's home state of North Carolina. With $580 billion in assets, the megabank's reach now stretches through 22 states from Alaska to Florida. Its 4,800 branches hold more than 8 percent of the nation's total bank deposits. In eight states, including California, Texas, Florida, and Washington, the new BankAmerica has more deposits than any other bank.Meanwhile, in the "thrift" industry (S&Ls and savings banks are called "thrifts," and are kept separate from banks in most statistics) the largest single institution, Seattle-based Washington Mutual, took over the second largest, Home Savings, of California. Just a year earlier, Washington Mutual had outbid Home Savings to acquire Great Western Savings, another California insitution, and the country's third largest thrift. When the dust finally clears, Washington Mutual will have $150 billion in assets, more than all but eight banking companies, and more than three times as much as the second largest thrift.The 1998 mega-mergers are the latest and largest instances of a merger wave that has cut the number of U.S. banks by more than a third since 1984, leaving 8,984 in mid-1998. The number of thrifts has fallen even more -- down 53 percent since 1986 to just 1,728 in mid-1998. In 1990, only one banking company had assets over $150 billion -- Citicorp. Now there are nine.Ellen Seidman, head of the Treasury Department's Office of Thrift Supervision, told the House Banking Committee last April that the then pending megamergers would, if all completed, result in the nation's top ten banking companies controlling an unprecedented 44 percent of total industry assets, and the top ten thrifts controlling 36 percent of all thrift assets. All those mergers are now completed.The Reasons WhyMany of the megamergers seem driven more by the empire-building dreams of bank CEOs with outsized egos, or by the maniacal momentum of the merger movement itself, than by economic rationality. Indeed, in the frenzied bank-eat-bank world that now exists, the failure of a merged bank merely serves as the excuse for an even bigger takeover, rather than leading to a slowing of the trend.For example, the San Francisco-based Wells Fargo botched its 1996 acquisition of First Interstate, another California-based bank, failing to achieve predicted profit levels largely because of computer snafus that wreaked havoc on accounts, alienating tens of thousands of customers on the West Coast. As a result, it was transformed from predator to prey, and taken over this year by the slightly smaller Norwest, a Minneapolis-based bank. And the lackluster performance of the Cleveland-based KeyCorp after merging with Society Corp. in 1994 has, according to The Wall Street Journal, caused that bank to be "widely viewed as takeover bait."In spite of its excesses, however, the merger wave is driven by real political and economic forces that make its continuation seem all but certain. The Riegle-Neal Interstate Banking and Branching Act of 1994 marked the final move in an almost complete dismantling of long-standing legal barriers to the geographic spread of banks. Federal and state laws dating to the 19th and early decades of the 20th century restricted almost all banking companies to a single state in part to curb their power. Banks began their serious campaign to repeal these laws in the 1970s.The banks' merger wave has been aided by fast-paced changes in communications and computer technology, making it possible to manage massive, far-flung organizations with millions of customers. In such areas as processing credit card accounts or servicing mortgage loans, highly sophisticated computer facilities reduce costs. But the investment needed is so massive that only a handful of banks can afford it, and most others are forced to leave the business.More ominously, the new technology increases the ability of the biggest banks to compile vast amounts of personal financial data on individual customers -- including their buying habits as revealed by credit card and checking account records, and private details exposed on loan applications. Consumer groups are concerned about the possible misuse of this information. Bankers, however, want to use the accumulated information on each customer to fine-tune their marketing of a new range of financial services -- since they are now moving beyond checking accounts and loans to selling mutual funds, investment advice, and insurance. The U.S. Public Interest Research Group is sounding the alarm about the Travelers/Citicorp merger because no law prevents the bank side of the business from consulting the health insurance records of Travelers in evaluating loan requests. Presumably a bank would not look kindly on a mortgage application from someone struggling with a potentially fatal illness.Given current trends, within the next few years between five and ten truly national banking companies could emerge whose branches and ATMs will be as familiar from coast to coast as McDonalds restaurants, Staples office supply outlets, or Exxon gas stations. Although thousands of smaller banks are likely to survive as well, the ascendancy of the mega-banks promises to have profound impacts.One danger is that dramatically larger banks could lead to dramatically larger bank failures, with consequences as far-reaching as the operation of the megabanks themselves. The meltdown of a single giant bank could bankrupt the Federal Deposit Insurance Corporation. Already, Bank of America alone has deposits almost ten times greater than the FDIC's entire fund balance of less than $30 billion. Another major worry is that the financial power of the megabanks will give rise to concentrated political clout that will make it even harder for government officials at the state and national level to defend the public interest from the banks' profit-oriented agendas.Threatening Local CommunitiesBank megamergers also pose serious threats to the well being of local communities all across the nation. In the aftermath of major mergers, banks often trim their networks of branch offices, with a disproportionate number of the closings in lower-income neighborhoods. And banks enlarged through mergers use their increased economic clout to charge higher bank fees, increase the interest rates charged on loans, and cut the interest paid on deposits. Federal Reserve Board Member Laurence Meyer, testifying to Congress in April about what he termed the "sometimes breathtaking consolidation of our banking system," noted "substantial evidence that banks that are part of multistate organizations tend to charge higher fees in general than do banks that are not."Perhaps most significantly, shifting decision-making power to a distant headquarters reduces a bank's knowledge of and sensitivity to local circumstances and needs. This threatens to reduce credit for small businesses, lending to innovative programs promoting community economic development, and support for local civic and philanthropic projects.Commenting in April on NationsBank's proposed takeover of BankAmerica, the California Reinvestment Committee's Alan Fisher observed, "No one sitting in an office in Charlotte, North Carolina, can understand the credit needs of California's diverse communities. The new bank will be a monolith that is distant from everyday people and their needs." Fisher's concern turned out to be well-founded. Less than one month after the September 30th completion of the merger, the new Bank of America forced the resignation of top community reinvestment officials at the old Bank of America with whom the California Reinvestment Committee had formed good working relationships in recent years. This underscored to the Californians that all important decisions would be made by Charlotte-based executives.A Coordinated National ResponseIn response to the threats posed by the bank megamergers, organizations are mobilizing nationwide. The groups first demanded that regulators stop approving mergers until the consequences were fully studied and understood. That went nowhere, so the groups are now asking regulators to approve only those mergers of banks that guarantee they will meet the needs of lower-income and minority neighborhoods for loans and other banking services.The Community Reinvestment Act, a 1977 law designed to ensure banks serve the needs of the low-income communities they long ignored, requires Federal Reserve and other regulators to consider a bank's record in poor communities before approving a merger. This gives merging banks a powerful incentive to reach agreements with community groups. Otherwise, community groups can file formal protests with regulators detailing a bank's weak performance in meeting the needs of lower-income and minority borrowers and neighborhoods.Now that mergers are creating nation-spanning banks, community responses must be on the same scale. Recognizing this, the National Community Reinvestment Coalition (NCRC), an umbrella for more than 680 organizations, convened a meeting in May of groups from across the country to share information and debate strategies.The forty organizations represented agreed to pressure merging banks -- and federal bank regulators -- to develop detailed and specific community reinvestment plans for each area where the megabank would operate. In order to reflect the particular needs of each area, banks must develop these plans through good faith discussions with local community representatives and public officials, NCRC argues. And in order to be credible, the plans need to take the form of signed agreements filed with bank regulators rather than simply announcements in self-congratulatory press releases. The banks' usual habit of issuing vague pledges of nationwide goals is not enough."Banks must commit to regional and local community advisory committees that monitor progress toward meeting their pledges," says Gene Ortega of the Home Education Livelihood Program in Albuquerque, New Mexico, who serves as NCRC's chairperson.Activists point to the $120 billion ten-year community reinvestment commitment announced in May by Washington Mutual as a model for such agreements. The plan -- which includes provisions for low-cost bank accounts, more bank branches in lower-income and minority communities, and expanded lending for small businesses, community development, and affordable housing -- was developed through discussions with community-based organizations in each area where Washington Mutual operates. Contrasting Washington Mutual's plan with the unilateral announcements made by NationsBank/BankAmerica and Citigroup, the California Reinvestment Committee's Alan Fisher notes that "the commitment is real because the bank is filing it with the regulators -- not just with the wire services."The community reinvestment activists also are calling upon federal regulators to hold public hearings on the proposed mergers in all of the regions that will be affected and to make approval of the mergers conditional upon the banks' offering such community reinvestment plans.In some of the megamergers of 1998, banks such as Banc One and NationsBank/BankAmerica offered only vague and unilateral plans -- without sitting down with community groups for serious discussions. They received the Fed's OK nevertheless.In other cases, like that of Washington Mutual, community groups achieved considerable success. Strong community protests also led elected officials to bring intense pressure to bear on First Union as it sought approval to take over CoreStates -- a merger that left Philadelphia as another major city with no large local bank. In April, Pennsylvania Attorney General Mike Fisher concluded a legal agreement with First Union that guarantees no-fee checking accounts and waiver of ATM fees for many low-income households, provides that new job openings will be available to displaced workers first, and ensures that First Union will honor a promise wrested from it by the Philadelphia Low-Income Housing Coalition and the Philadelphia Association of Community Development Corporations that it would keep a number of particular inner-city bank branches open for at least several years.It remains to be seen how this story will play itself out as the consolidation of the banking industry continues in the years ahead. But Chris Bohner was right on target back in January 1996 when he observed that "the march toward the mega-bank will not go unchallenged [by] a vibrant social movement of community-based organizations... pushing for more democratic control of banking."This article originally appeared in Dollars and Sense.