Consolidation offers consumer no benefits

Northwestern Financial Review, Feb 15-Feb 29, 2004 by Cole, Chris

Another Big Bank Merger

The big banks are at it again.

Just as the Federal Reserve concluded its first public hearing on the Bank of America/Fleet Boston merger came word that there was going to be another big bank merger - J.P. Morgan and Bank One.

Where will it all stop? In a few years will the banking industry be made up of a handful of financial giants controlling the vast amount of U.S. deposits? How will it be possible for bank regulators to adequately supervise a handful of mega-sized financial institutions that control most of the deposits and banking business in the United States?

As the Independent Community Bankers of America testified at the Bank of America-Fleet hearing in Boston, the continued concentration of banking assets in this country is having an adverse effect on consumers, small businesses and local communities.

Leaving aside the J.P. Morgan/Bank One merger, the Bank of America merger will catapult Bank of America Corp. into the second largest bank holding company in the United States in terms of assets. The merger will also mean that the top eight financial institutions in this country will control approximately 51 percent of total U.S. banking assets.

In eight states - Arizona, California, Connecticut, Florida, Massachusetts, North Carolina, Rhode Island and Washington - the Bank of AmericaFleet market share of statewide deposits will exceed 20 percent. In nine other states, the market share will be between 10 percent and 20 percent. In Massachusetts alone, Bank of America's share of deposits will exceed 24 percent.

Unfortunately, the evidence shows that increased concentration in the banking industry has not benefited bank customers or the communities served by the acquired banks.

The economies of scale that supposedly justify large bank mergers either do not materialize or are not passed on to customers. For example, large bank mergers often have an adverse effect on consumer deposit pricing and often result in higher fees to customers. A Harvard study showed that instances of improved operating results after a large bank merger were due primarily to higher re-pricing, not economies of scale, suggesting the use of increased market power by the large banks to raise prices and fees to consumers.

The Federal Reserve's own annual survey of bank retail fees shows that the average fees charged by multi-state banks are significantly higher than those charged by singlestate banks.

Large bank consolidation often has an adverse effect on small business lending, a key engine for sustaining the U.S. economy. Commercial banks are the leading suppliers of credit to small businesses and community banks account for 33 percent of all small business loans, which is more than twice the community banks' share of total banking assets.

In contrast, the large banks tend to devote much smaller portions of their assets to small business lending. Mergers involving small banks tend to increase small business lending while mergers of large banks tend to reduce it.

Along with consumers and small businesses, local communities often are adversely impacted when statewide banks are acquired by large, national bank franchises located outside the state. The new, larger bank seldom has the same commitment as the acquired bank to the local communities and to local charities and civic groups.

But the biggest problem concerning large bank mergers like the Bank of America-Fleet or the J.P. Morgan-Bank One mergers is the public policy problem. Will these trillion dollar institutions be too large to regulate effectively? What happens if one gets in serious trouble?

Former FDIC Chairman Bill Seidman stated that a regulator hasn't been born who would allow a large bank to fail. Former Federal Reserve Governor Larry Meyer said it more diplomatically after the passage of the Gramm-Leach-Bliley Act in 1999, noting, "The growing scale and complexity of our largest banking organizations ... raises as never before the potential of systemic risk from a significant disruption in, let alone failure of, one of these institutions."

If these mergers are consummated, ICBA expects that the largest banks will lobby Congress to amend current federal law that prohibits mergers if the resulting bank would control more than 10 percent of the deposits in the United States. Congress should reject any attempt to amend the law.

Large bank mergers have an adverse impact on consumers, small businesses and communities and pose a huge challenge to bank regulators and to the FDIC's Bank Insurance Fund. Our diversified economic and financial system is the strength of our nation. Public policy should preserve it.

Chris Cole is regulatory counsel for the Independent Community Bankers of America.