The Federal Reserve Bank of Chicago recently held its 30th Annual Conference on Banking Structure and Competition. Anyone who has attended these meetings over the years must have been struck by the dramatic evolution in banking.
Listeners heard the litany of current regulatory and academic concerns about the way bankers are or are not permitted to enter various markets that might appeal to them, while at the same time hearing of the entry of non-bank firms into traditional banking markets.
A pervasive aspect of the policy debate is the competitive uniqueness 'of commercial banks.
Regulatory agencies and the Department of Justice have been concerned for more than three decades about bank mergers and their implications.
Distinctiveness Debate
Anyone familiar with the debates on merger policy will immediately recall the pivotal role of determining whether or not commercial banks are distinctive in some meaningful sense.
The Supreme Court certainly thought banks were different when it handed when it handed down its decision in United States v. Philadelphia National Bank in 1963. The court defined commercial banks as institutions that accept demand deposits, make commercial loans, and generally serve a reasonably local market in offering a unique bundle of services.
The court and most economists knew, or at least thought they knew, what a commercial bank really was. Thus, we see competitive uniqueness and merger considerations related from essentially the very beginning of debate on mergers.
Changes in services offered as well as changes in the variety of institutions offering financial services have produced a different competitive arena since 1963, however.
Nature of Change
Evolutionary, not revolutionary, changes in the banking services industry are so obvious that one may correctly be reluctant to present an extended listing of the innovations of the institutions which have begun to offer banklike services. But it is useful to remind ourselves of the nature of change.
The emergence of nonbank banks that have been organized by financial institutions and nonfinancial institutions alike, as well as development of significant, banklike financial service components of such firms as General Motors, General Electric, Sears, and major brokerage houses, emphasize the point.
Recent suggestions for regulatory overhaul of the entire banking system further demonstrate acceptance of the fact that banks and banking services have changed, We are in a period of great transition, and essentially no observers think the final configuration of the financial industry has been determined.
Money Fund Competition
One may observe that numerous money funds compete vigorously for consumer dollars that formerly found their way more or less automatically to savings accounts or even demand deposits.
Additionally, the Monetary Control Act of 1980 as well as the Garn-St Getmain Depository Institutions Act of 1982 have increased the powers of institutions that want to compete directly with commercial banks.
And we have not even considered the implications of the Financial Institution Reform, Recovery and Enforcement Act of 1989 and more recent legislation.
One has only to recall that savings and loan associations turned savings banks, or simply turned more aggressive, have recruited legions of commercial lenders from commercial banks.
These lenders do not sit idly waiting for customers to discover that the new lenders have significant lending muscle in a variety of markets. Even with current restrictions on S&L lending, they do provide competition for commercial banks.
Small-Business Lending
Such conditions imply that the markets in question are already, or are rapidly becoming, essentially open markets with low barriers to entry and exit.
This implies more actual and potential competitors in any banking market, and the unique role ascribed to banks in the PNB decision becomes less and less applicable.
One of the few areas where bankers still enjoy some unique positioning is in lending to small businesses. Comments in Chicago by Robert Litan of the U.S. Department of Justice emphasized the central role in merger analysis played by small business finance.
It would be an overstatement to suggest that small business lending is the element in merger analysis determining whether or not a particular proposal will gain Justice department approval, but it is no exaggeration to say that small business lending clearly pays a unique role in such analysis.
Bankers who translated the department position regarding merger analysis and small-business lending into a secure feeling that at least this market niche is protected from competition should not have felt any sense of security regarding lack of non-bank competition, however.
Changes Moot?
Small-business lending may be poised to undergo some of the same dramatic changes witnessed in the lending to larger firms. We have known for some time that large firms have alternative sources of funding, ranging from commercial paper (ironically made possible in many cases because of the facilitating role of commercial banks) to the financial subsidiaries of large corporations such as Ford Motor Co.
What is not - or at least has not previously been - as widely appreciated is the potential for a dramatically declining role of commercial banks in lending to small businesses. This was emphasized by a thoughtful presentation by Cynthia Glassman of Furash & Co., which underscored the potential impact of market evolution.
Ms. Glassman emphasizes that emerging patterns of lending to small businesses parallel the patterns which presaged the declining role of commercial banks in lending to larger firms, particularly in the growing role of securitization.
She also pointed to factors such as the perception of finance companies as more respectable sources of funds and more competitive in terms of rates; the importance of improved market efficiency, turning particularly on the data gathering and analysis aspects of lending; the growing role of nonbank lenders generally; and the changing nature of smaller firms themselves.
Future of Consolidation
What does all of this mean for future bank consolidation?
Traditionally, the market for financial service was much more segmented in the sense that certain types of institutions enjoyed customer patronage with little thought of significant competition - because of legal barriers, customer preference, or the simple absence of available alternatives.
If most financial markets have changed enormously and if lending to small businesses is indeed a primary concern of the United States Department of Justice, bankers contemplating merger should normally have little fear from antitrust suits.
There has been a good deal of talk recently among bankers that the department has become more aggressive in its enforcement policies; but one must realistically observe that the talk is not based on an ability to cite instances of merger cases filed by the department or by court decrees denying mergers.
Does this mean that any bank in any market can merge with any other bank? Probably not, but clearly, bankers have much wider latitude in mergers than even a relatively diligent observer might expect.
Furthermore, the Justice Department has shown itself to bc highly flexible and creative in arranging branch sales which will permit mergers to take place.
Making It Easier
One should think less about negative attitudes at Justice and focus more nearly accurately on elements of an apparent attitude revolving around how to facilitate the apparently inevitable consolidation of the banking and financial services industry.
Commercial banks do perform valuable services for customers and do enjoy some particularly important positions in facilitating payments and other aspects of the financial transactions of the nation as a whole.
This does not mean, however, that they are the unique entities they once were, and it certainly does not mean that significant mergers are likely to be enjoined by the Department of Justice.
Some dissident shareholders may be upset, for example, with a merger between BankAmerica and Continental Illinois, but they are unlikely to get much help from the Justice Department. At least, that was the message from the Chicago Fed conference.
The evolution over 30 years in the thinking of most regulators, antitrust officials, and academic economists on questions related to banking markets may have been slow, but it has been dramatic nonetheless.
Mr. Whitesell, a former Pennsylvania secretary of banking, is professor of economics at Franklin & Marshall College in Lancaster.
