Banks Big and Small Should Be Allies

Conventional wisdom holds that the interests of small banks and large ones are incompatible.

Small banks fear being gobbled up by large banks. Large banks see well-run community institutions as competitors that can offer superior service and therefore attract profitable customers.

In fact, small and large banks have a lot more in common than meets the eye. If they recognized their commonality of interests, they would be much more effective in bringing about cooperative ventures that could enhance the profitability of both.

And in the political sector, more cooperation would make it easier for banks to present a united front on legislation to overhaul the industry.

Bankers Should Lead

A reform program written by bankers for bankers would probably be much more realistic and practical than many proposals that regulators, legislators, and consultants have promulgated.

The industry as a whole should generate a restructuring plan to improve the safety and soundness of the system while maintaining such cornerstones as the dual banking system.

Traditionally, such cooperation has eluded the various industry trade associations. The proliferation of groups reflected self-perceived divisions within the industry and incompatibility of purposes.

Harmony in California

There are many countries where large and small banks live side by side in peace and profit, each fulfilling the needs of a specific segment of the community.

In the United States we have a model of such peaceful coexistence in California, which has a handful of very large banks. Those banks offer a broad range of basic products as well as sophisticated services through an extensive branch network.

Though these large banks provide excellent coverage of the state, dozens of small banks thrive. The small banks serve communities and customer segments whose needs are apparently not as well met by the large institutions.

Bank of America's recent shrinkage of its branch system may be an acknowledgment of overcapacity in certain areas and a move toward a more manageable branch network.

Alongside Bank of America there are banks with assets of $20 million to $30 million, medium-size banks in the range of $200 million to $500 million, and even some multibank holding companies.

Profits for All

California therefore provides a model of the lion and the lamb lying down together in peace.

There is enough profit for all because each bank serves as well-defined niche.

Although large and small banks compete in certain segments, they still maintain their primary identity in different markets.

For example, Bank of America may send credit card solicitations to many customers of small banks, thereby competing with the smaller bank. However, by and large, this does not significantly threaten the customer relationships that smaller banks have.

Banks of different sizes coexist this way in many other countries. Japan has many small banks that remain unnoticed on the international scene. They do not seek global competitiveness. Rather, their purpose is to serve markets that are geographically confined, in keeping with the banks' small size.

Even outside California, where consolidation is rampant, many small banks remain. I predict that many will survive, since they fill a void that only a small community bank can fill.

Another sign that the large and small banks are compatible is that they do in fact coexist in this country. Twelve thousand small banks coexist with 100 large ones, though the large are becoming even larger.

Unnecessary Conflict

Small banks oppose interstate branching and the liberalization of the McFadden Act and the Douglas Amendment, which restrict branching. That position is unnecessary.

In markets where no such restrictions exist -- California, for example -- small banks were not eliminated. In fact, they thrive.

Therefore, interstate branching does not necessarily mean a threat to small banks.

Many other seeming conflicts can be reconciled once the facts are examined. The banking industry, large and small banks alike, must recognize that an active, united front will serve the industry well in taking the needed steps toward restructuring.

Let bankers lead in reshaping the industry and determining their own destiny.

Ms. Anat Bird is national director of financial institutions consulting at BDO Seidman, New York.

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