Robert J. Samuelson
Newsweek
Vol.131, Iss. 18; pg. 53, 1 pgs
4 May 1998
The banking revolution in America is as much about attitudes and assumptions as about size and structure. For centuries, Americans have distrusted banks. In the 1830s, Andrew Jackson denounced and destroyed the Second Bank of the United States, which existed "to make the rich richer" at the expense of "farmers, mechanics and laborers." In the 1930s, banks were blamed for helping cause the Depression. The wonder, then, is that the latest wave of bank mergers -- the largest ever -- has inspired little more than a bewildered and, perhaps, irritated shrug from the public.
We've had mild grumbling about ATM fees but no outcry about dangerous financial power: precisely what would have happened a few decades ago. For the proposed marriages are huge. A combined Citicorp and Travelers would have assets of $700 billion; NationsBank and BankAmerica would total about $525 billion; and Banc One/First Chicago NBD would have assets of about $230 billion. Yet federal agencies probably will approve all three. And the Citicorp proposal -- which would unite a bank and insurance company -- may prompt Congress to repeal the Glass-Steagall Act, which now prevents a company from owning both.
As banks grow bigger, they seem less fearsome. Why? The answer is that banks have shrunk in power even as they have expanded in size. Traditionally, banking has been a simple business. Deposits come through one door; loans go out through another. Profits derive from the "spread" between interest rates on deposits and loans (minus, of course, overhead costs). If savers and borrowers cannot go elsewhere, banks are powerful. If there are other choices, banks are less powerful. And so it is.
Consider this indicator of banks' eroded power: Between 1990 and 1997, there were an estimated 14 billion credit-card solicitations; that's about 50 for every American. Banks (and others) are fighting to get people to borrow from them. Nor is there a scarcity of places for people to plant their money. Customers can write checks on money-market funds; stock-market mutual funds have exploded from 288 in 1980 to 2,626 in 1996. Similarly, big companies can raise or invest funds in many ways: buying or selling commercial paper in the open market, borrowing from nonbank lenders like General Electric.
"We inhabit an age of superabundant credit and its purveyors," writes Ron Chernow in his superb "The Death of the Banker." A century ago, as Chernow shows, matters were different. Small depositors could choose from only one or several local banks; getting a loan meant winning the good graces of the neighborhood banker. Even big corporations depended on a few big banks or investment houses. Back then, the two were often combined. (A commercial bank makes loans and takes deposits; an investment bank r aises capital by selling a company's stocks or bonds.)
John Reed or Hugh McColl -- the heads of Citicorp and NationsBank -- are not household names. In 1900, J. P. Morgan was. He was "a fierce, swaggering buccaneer," writes Chernow. As head of J. P. Morgan & Co., he controlled -- through stock and positions on corporate boards -- a third of U.S. railroads and 70 percent of the steel industry. A railroad executive once cheerfully confessed his dependence on Morgan's capital: "If Mr. Morgan were to order me tomorrow to China or Siberia . . . I would go." No banker today inspires such awe or fear. Time, technology and government restrictions weakened bank power. In the 1920s, auto companies popularized car loans. National credit cards originated in 1950 with the Diners Club card. In 1933 the Glass-Steagall Act required banks and their investment houses to split. After World War II, pensions and the stock market competed for consumer savings. As a result, banks command a shrinking share of the nation's wealth: 20 percent of assets of financial institutions in 1997, down from 50 percent in 1950. (Included in the tally are banks, insurance companies, mutual funds, pensions and other financial intermediaries.)
As for the present merger wave, it's being driven by three forces. The first is the dismantling of government restrictions intended to check bank power. Congress barred national banks from branching across state lines; many states (Texas and Illinois, for example) barred within-state branching. The idea was to frustrate any single bank from dominating a state. In 1994 Congress permitted interstate branching; before that, many states had repealed their restrictions. This unleashed hundreds of mergers that otherwise would have occurred years ago. In 1984 there were 14,483 banks; by year-end 1997, there were 9,166.
The second force is the prospect of cost savings. BankAmerica and NationsBank project $2 billion in annual savings from their merger. Some overlapping departments would vanish; perhaps 5,000 to 8,000 jobs out of 180,000 would be cut. Combining some computer systems would also lower costs. In the past, studies have disputed that bank mergers produce efficiencies. But a new study by economists Charles Calomiris of Columbia University and Jason Karceski of the University of Florida finds savings. "Some bank managers are just better than others," says Calomiris.
The largest force propelling these mergers, though, is a change in perceptions. The old Balkanized system of finance (where banks, brokers, insurers all had distinct identities) corresponds less and less with how savers and borrowers view the world. No one knows how customers want their choices presented and delivered: whether by one or many sellers; whether from behind a desk or over the Internet. But if banks can't freely compete to see what works best, they will wither. Realizing this, Congress and government regulators are gradually lifting restrictions.
This does not mean that these mergers will succeed or that the new world of finance will be problem-free. It won't. But it does signal that banks no longer wield the influence or incite the fear they once did. Old-time bankers, writes Chernow, conducted business "on a don't-call-us-we'll-call-you basis . . . and felt no need to pander to public curiosity." Their successors pester you to deal with them (as opposed to someone else). The remote custodian of capital is now a relentless pitchman. The upheaval is social and political as much as economic.