The architects of bank megamergers ran smack into a wall of skepticism at a marathon hearing Wednesday before the House Banking Committee.
The 23 witnesses who trooped to Capitol Hill to air their views included executives who have proposed the transactions, regulators who will review them, and advocates for the consumers who will live with the results.
"The critical question is whether these consolidations bring more products to more consumers at lower costs or whether they fuel anti- competitive forces," said committee Chairman Jim Leach, R-Iowa.
He and other lawmakers warned regulators against allowing merger partners to exploit legal loopholes to build financial conglomerates.
Though the hearing covered the parade of giant mergers announced this month, the proposed merger of Citicorp and Travelers Group drew the greatest attention.
The $70 billion deal, unveiled April 6, would combine a bank and an insurance underwriter under one roof, in defiance of the current regulatory framework. The proposed Citigroup was widely seen as a bid to push lawmakers to enact a sweeping overhaul of financial laws. Some in Congress were plainly irritated.
"Citigroup is essentially playing an expensive game of chicken with Congress," said Rep. Maurice D. Hinchey, D-N.Y.
Consumer activist Ralph Nader was equally skeptical. "They're betting billions that they can bulldog Congress into validating the merger," he said.
Fed Governor Laurence H. Meyer assured lawmakers that the central bank will not allow Citicorp and Travelers to abuse the law.
"They have to be in a position where they could reasonably divest and where that merger would make sense under those circumstances," he said. "They are required to be moving in the direction and being in compliance ... at the end of the two-year period" although the Fed can extend the grace period up to three years.
In response to a direct question, Mr. Meyer said that Citigroup would have to sell its insurance underwriting business unless the law is changed.
Appearing later, officials of the merging companies disagreed.
"No change in the law is necessary," insisted Charles O. Prince, Travelers' general counsel."We do not seek-and do not require-any special legislative or regulatory accommodation to create Citigroup."
Under current law, the Fed may give Citigroup two years to sell off this business. But Citicorp and Travelers executives are hoping Congress will pass legislation that allows cross-ownership of banking and insurance before the deadline is reached.
House Republican leaders plan to bring such a bill to the floor next week, their second attempt this year. Its prospects are murky because of heavy opposition from any banks and the Clinton administration.
Rep. John J. LaFalce asked how the merger could work without legislation.
"This merger is about distribution of bank products with insurance and securities products," Citicorp general counsel John J. Roche said. "We believe we can maintain the insurance distribution portion should the day come that we have to divest the insurance underwriting." Mr. Roche acknowledged such a move would cost the combined company 20% of its revenues.
Lawmakers also expressed concern about the impact that large bank mergers would have on fees, customer service, consumer choice, community reinvestment, and jobs.
The bankers said fees would not rise because too much competition exists for financial services.
"We can't increase fees simply because we're bigger and expect to keep customers," Mr. Roche said. "We're not going to see an increase in our market power."
Paul Polking, general counsel at NationsBank Corp., said his bank-which announced plans April 13 to merge with BankAmerica Corp.-has frozen fees on two of its most popular products until 2000 and will cut other fees. "We can, and will, pass along the benefits of these mergers," he said.
Some Democrats, including Reps. Maxine Waters of California and Joseph P. Kennedy 2d of Massachusetts, urged regulators to postpone their approvals until the consequences of megamergers can be studied.
"We are responsible to make sure the benefits of these mergers are not accruing to a few people ... but to the American consumer," Rep. Kennedy said at a press conference preceding the hearing.
Members of the committee asked whether the deposit insurance funds were large enough to handle a failure of an institution like the size of the proposed NationsBank-BankAmerica combination. It would have $292 billion of assets, 8.1% of the nation's total.
"I am concerned about mega-anythings-especially mega-entities with deposit insurance backed by the taxpayer," said Rep. Bruce F. Vento, D- Minn.
Andrew C. Hove Jr., acting chairman of the Federal Deposit Insurance Corp., said the insurance funds could handle a major hit. However, he was less certain when questioned whether the agency could pay for two simultaneous large bank failures.
Massive banks pose risks because of their complexity, he said, but their geographic diversity would also reduce the likelihood of failure. "The merger of banks serving different markets can diversify risk and decrease the volatility of earnings," Mr. Hove said.
Citicorp's Mr. Roche agreed. "We are spreading risk, not consolidating it."
Federal regulators assured the committee that their development of risk- based supervision and use of prompt corrective action would allow them to effectively oversee these large financial institutions.
Julie L. Williams, acting comptroller of the currency, said regulators would closely watch the pricing of banking products, cross-selling practices, and privacy of financial data.
But Rep. Marge Roukema, R-N.J., asked whether Congress ought to require regulators to move in on banks sooner. Currently, a bank with 2% capital must be seized; Rep. Roukema suggested the level could be raised as high as 5%. Still she appeared less concerned about the competitive impact of big bank mergers.
"I do not believe big per se is wrong," Rep. Roukema said. "The U.S. banking industry is one of the least concentrated in the world."