Katie bar the door! The dealmakers were working overtime recently when in the short space of two weeks, a bunch of bank mergers were announced in various markets throughout the country. It could only be coincidence, but given the industry's well-known herd effect, that sounds like the beginnings of a stampede to me.
The merger drum has been beating since the mid-1980s--except that now we're starting to see a concentration of financial power in banking. And that leads me to ask whether this activity is good for the country, or for banking? Conventional wisdom holds that America is over-banked and in great need of consolidation, a position that even many federal bank regulators support. By allowing banks to expand coast-to-coast--or so the argument goes--the system will gain a measure of geographical diversity, which in turn will lead to a greater level of safety and soundness.
I would say that consolidation is good for the country if the expected advantages of scale--lower prices--are made available to all customers regardless of location. I can't help but think of the airline industry, where the U.S. market is served by fewer than 10 major domestic carriers. Why should it cost less to fly from New York to Miami than, say, to Cleveland or Charlotte--destinations that are much closer? Presumably it's because regional markets are not as well served as large urban ones, enabling carriers to charge more. I know some bankers who would howl that as businessmen operating in a market economy, they should be free to charge whatever price the market will bear. But in the main, banks continue to serve a utility-like function despite the incursions of non-bank competitors. People still rely on them to pay their bills, to borrow money or to save it.
I also would say that consolidation is good for banking if our growing giants don't squander the theoretical benefits of size--and I say theoretical because I'm as yet unconvinced that size automatically confers any special advantages. It was pretty much dictum once that smaller banks were more profitable than larger ones, and that size tended to have an averaging effect on performance.
That phenomenon may be changing. The industry's attitude about efficiency has changed noticeably in recent years. An increasing number of banks, including money centers like Chemical Bank and Chase Manhattan, are closing in on the standard expense-to-income benchmark of 60%. And regionals like Wells Fargo, First Chicago, Bank of New York and PNC have driven their costs even lower. Most of the credit goes to improved use of technology, as well as a hard-nosed attitude toward overhead that came out of the banking crisis a few years ago. (As Samuel Johnson once said, "When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.")
Yet it's also fair to say that the vast majority of large banks are still early converts to this new religion. In my mind, it's too early to say whether they've fully internalized the dogma with the zeal of True Believers. And if we merely trade profitability for size as our biggest institutions grow even bigger, I don't see what anyone gains. Consolidation might end up being good for America and its banks, but that shouldn't be taken as a foregone conclusion.
