Are Regulators Stacking the Deck On Big Mergers?

Many people think the nation's next big bank merger will be between Shawmut National Corp. and Bank of Boston Corp.

Such a New England union would raise a question about the regulators: Are they interfering with the free market?

It's no secret that the federal bank regulators have given behind-the-scenes approval to four big in-market mergers this year: Fleet/Norstar Financial Group and Bank of New England; Chemical Banking and Manufacturers Hanover; NCNB and C&S/Sovran; and most recently, Bank America and Security Pacific.

But in the spring the regulators blocked a truly nationwide merger by counting BankAmerica out of the contest to buy Bank of New England - even though BankAmerica bid more money than Fleet did. (The regulators said Fleet's bid would cost the Bank Insurance Fund less.)

Brushed Aside

BankAmerica also expressed interest in buying Shawmut, but the California giant ended up corralled in its home market, doing a deal with Security Pacific.

"Regulators want to see mergers in-market," said Bert Ely, a Washington consultant to banks on regulatory matters. "They feel they missed a chance in Texas and should have encouraged more consolidation."

It can be argued that the banking industry is far better off consolidating through in-market mergers than through nationwide deals. In-market mergers eliminate competition and force the tough reductions in staff and overhead that must be made.

Example: Removing BankAmerica from the Bank of New England bidding meant keeping a strong rival out of the region - good news for ailing banks like Bank of Boston and Shawmut.

But here's the tough question: Where do the regulators get the power to make such decisions?

In some ways, the authority is unclear. By relying on their mandate to protect the safety and soundness of the banking system, they could forcefully argue that they have every right to encourage in-market mergers.

But they don't seem to be making that argument. Instead, in the Bank of New England bidding they resorted to some convoluted logic in picking Fleet and its partner Kohlberg Kravis Roberts & Co.

What happens next? Keep your eye on New England.

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