Chemical Moves Up Date For Union of Lead Banks
Under pressure from regulators, Chemical Banking Corp. and Manufacturers Hanover Corp. have agreed to combine operations of their lead banks by March 31 - more than three months sooner than previously anticipated.
The accelerated timetable - which would combine the lead banks 90 days after the planned merger of their parent companies - apparently reflects the intention of regulators to make sure projected cost savings are exacted as soon as possible.
The latest schedule, which was confirmed by Donald E. Kline, the Federal Reserve Board's associate director for applications, marks the second flip-flop by Chemical and Manufacturers on when their lead banks will merge.
What's more, because the companies have asked for a fallback date of June 30, 1992, for the lead-bank merger, there is some question about whether they can meet the aggressive March 31 deadline.
Eye on Wall Street Credibility
If Chemical and Hanover did not move up their lead-bank merger date, they may have been forced by regulators to delay the Dec. 31 union of their holding companies. But top management evidently thought that doing so would have damaged its credibility on Wall Street.
The decision should enable the new Chemical Banking Corp. to achieve cost savings quicker, but the exact impact is unclear. A reduction of $200 million was predicted for next year, increasing to $650 million by 1994.
Most analysts already thought those projections were conservative. However, regulators became concerned when the holding companies' merger application said that their lead banks would not combine until the second half of next year.
Avoiding |Material Changes'
The Fed, which must approve the application, balked at doing so without a clearly defined plan to combine the lead banks sooner, Mr. Kline said.
"When the board acts on an application, it issues an order that typically reads that transactions must be consummated within 90 days to ensure that there will not be material changes to the terms of the merger," he said. "It raised a question in our minds as to whether the application should be processed."
Fed officials emphasized that it is not their intention to force unprepared banks to merge subsidiary institutions. In past in-market mergers, the Fed has routinely granted extensions to banks that have asked for them. And, indeed, they have already signaled they could live with a 90-day extension in the Chemical merger.
Regulators' Delicate Position
Nonetheless, merger specialists said that the Fed's unwillingness to approve the Chemical application without the change is significant.
"They want to make sure that what they are approving is what they get," said Rodgin Cohen, an attorney with Sullivan & Cromwell. "The Fed is going to want to have some level of specificity and promptness on the merging of the institutions."
The action underscores the fact that banking regulators are in a delicate position.
On the one hand, they are very supportive of the Chemical merger because it would remove excess capacity from the market and present an opportunity to create one stronger institution from two weaker ones.
But, in light of harsh criticism from Congress for past lapses, they are under the gun to ensure that any merger they approve works.
A spokesman for Hanover declined to discuss the application process.
Ironically, the top management on both sides originally wanted to merge the lead banks at the same time as the holding companies, according to a senior systems executive familiar with the project.
But the merger's architects did not anticipate some of the operational and regulatory issues that would have to be dealt with before the banks could begin doing business as a single entity.
SEC Breaks Lead-Bank News
That led to the announcement in a Securities and Exchange Commission filing last month that the lead banks would not combine until the second half of next year.
The new deadline puts extra pressure on the new, combined Chemical Banking to accelerate its huge back-office and technology systems consolidation plan.
"I call [the timetable] aggressive," said Donald M. Burset, director of the bank consulting practice at AGS Information Services Inc.
"I don't think they can consolidate all the things they need to do in the short time frame, but they can insert an interim solution. That may cost more in the short term, but it will ultimately get them to where they need to be faster."
The banks' technology executives said systems consolidation plans are entering high gear. To achieve cost savings, the bank must consolidate multiple software systems and data centers and eliminate staff, offices, and computer equipment.
"Generally speaking, we have a list we have recommendations on how to integrate most applications at this time," said Barbara D. Capsalis, Chemical's chief technology officer and coordinator of operations for the merged bank.
"Decisions regarding the integrations of wire transfer systems will be made by the end of the month, and most decisions regarding other major systems will be done by the first of December."
Combining wire transfer operations is crucial, because the merged institution must have one interface to the Federal Reserve payment system to determine its capital position at the end of the day.
Ms. Capsalis said that, in some business units, the bank is choosing the system that is technologically the best; in other areas, the system that handles the largest volume of transactions will be chosen to handle the work of the combined institutions.
Timetable for Marriage Of Back OfficesNov. 1 Decisions made on critical systems consolidationDec. 31 Merger of holding companies
March 31 Expected date of merger of lead banksJune 30 Fallback date for bank merger