The following is excerpted from a May 11 speech at a Chicago Fed conference.

A great deal has been said and written since the passage of the Riegle- Neal Interstate Banking and Branching Act last summer.

I'll stop short of responding to those who dubbed it the NationsBank Bill. Suffice it to say that we do believe banks, their customers, and their shareholders will be far better off with a U.S. banking system that is stronger, more efficient, and more convenient.

And I speak from seeing the principles of geographic balance in action at my company. The strength of our banks on the East Coast helped us fuel the recovery in Texas in the late 1980s. In turn, Texas' recovery made our company stronger amid the East Coast recession of the early 1990s, protecting earnings and positioning us to lead the market.

These advantages multiply in 1997, when multistate bank holding companies are allowed to consolidate their bank subsidiaries - at least those that have not opted out. The additional advantages include:

First, more efficient use of capital. At the time that NCNB sought to bid on Southeast in Miami, our Florida bank simply lacked the capital to do the deal - although the consolidated company had more than enough. In boxing, they call this a technical knockout - and, at the time, it was the cause of no small amount of frustration.

Second, for the regulators who flinch at that example, consider that the full merger of operating banks is, at the end of the day, the source of strength doctrine. With consolidation, all of the equity will be available to back any loan.

Third, an elimination of interbank lending.

Fourth, less paperwork.

Fifth, fewer boards and committees.

Sixth, and finally, a vastly more convenient banking system for our customers - which we must deliver.

A handful of institutions - including my own - are moving now to provide these advantages to the extent possible through the 30-mile rule. At NationsBank, we have consolidated in the Carolinas and in the Middle Atlantic states - and the response from our customers is a resounding, "Thank you."

As a final note on consolidation, I might add that our corporate bank also is moving toward the one-bank concept for many of the same advantages of convenience and efficiency.

Now, having reviewed those advantages, let me be clear. I do not expect the advent of full interstate banking and branching to set off major and immediate tectonic shifts in the industry - especially among bank holding companies.

The consolidation already underway is being driven by market forces; it will continue - and at a slightly faster pace after the regional fences are torn down. In that regard, our forecast at NationsBank for the industry shakeout hasn't changed.

But what has changed is our estimate of the threshold for survival.

I always have subscribed to the barbell theory of industry consolidation: That the industry ultimately will resemble a barbell - with a group of very large bank holding companies on one end and thousands of community banks on the other - with very little in between.

Only a couple of years ago, I was saying in speeches that those in the middle - which we believe will find competing increasingly difficult - would fit in the range of $1 billion to $10 billion of assets. But today, the upper end of that range may be more like $30 billion to $50 billion of assets.

What also has changed in our minds is not whether community banks could compete, but how they must compete to survive.

Again, only a couple of years ago I was saying that if a bank was such a size that the president could visit all the branches in one day (hence, almost certainly under $1 billion of assets),+ and if that bank provided consistently superior service, it would always have a role in the marketplace.

Either way, we believe it is inevitable that the larger competitors will win an increasing share of the business.

In many respects, the evolution of banking in North Carolina provides a glimpse of our industry's future - and this is another one. As of yearend 1994, the top eight of the state's 67 national and state-chartered banks controlled 90% of both assets and deposits, according to the state banking commissioner.

Already, the industry's largest players have a much greater share of loans than they do deposits. The 10 largest bank holding companies have loan-to-deposit ratios averaging more than 100%, while many of the community banks have ratios of less than 50%.

The reasons are clear: Larger competitors match the offerings of the smaller ones - and additionally offer products ranging from bank cards to dealer finance to leasing and other asset-based lending and, of course, much larger commercial loans.

On the deposit side, the smaller banks can compete. However, if the customer's choice is an annuity, a mutual fund or any other alternative to a deposit, the more technologically sophisticated (and probably larger) competitor gets the edge.

So, as for the small-bank end of the barbell, we believe the necessity of understanding exactly how you are different and better than your competition has never been greater. (But I can't help but question how the small bank officer by rule really knows his or her customer better). And, at the end of the day, even that still may not be enough for many.

For the same reasons, we believe the industry consolidation will make it even more difficult for midsize institutions. More large regional banks and nonbanks are leveraging their sheer size and scale, marketing research and innovation in product delivery. (This is the lion tamer's ring I will address in a moment.) That will force community banks to scramble to identify a niche no other competitor can fill. But midsize institutions may well get caught in the middle - with neither the ability to compete with niche players in service or specialized products nor the size and the scale to provide value and convenience.

What about the other end of the barbell? Will we see a merger frenzy among the larger players as the industry finally realizes full interstate banking and branching freedoms?

For starters, I go back to something I said a moment ago - that market forces are the more important factor in consolidation. A review of the three huge mergers announced in the summer of 1991 - the combinations of NCNB and C&S/Sovran, Manufacturers Hanover and Chemical, and Wells Fargo and Security Pacific - proves the point. Each was keyed to a problem that at least one of the parties in each deal could not solve on its own.

Today, that influence appears to be all but absent. Those who were wounded in the rolling recessions of the late 1980s and early 1990s are either gone or have recovered. And, even though we all continue to face long-term industry challenges, the industry overall is in record good health - for now.

I also do not subscribe to the theory that we will see an immediate round of mergers driven purely by defensive strategies. Managements must believe there truly are significant advantages to be gained and - especially in the cases of so-called mergers of equals - that two and two really equal five.

I believe we will see several large interregional combinations driven by the advantages of doing business in differing regional economies. (I noticed that First Union chairman Ed Crutchfield - at $77 billion of assets - said at his annual shareholders meeting that he intends to create a $300 billion company. It sounds like he'll be doing quite a few deals - including several of a very large scale. This should be interesting to watch. But the point is he won't be alone.)

How will a company like First Union or, more immediately, NationsBank, reach that kind of size? Either through several acquisition of midsize players - which I believe will be the most involved in merger activities in the coming years - or through a megadeal or two. But not through a string of small acquisitions on the scale of anything under 5% to 10% of the acquiring company's assets. There is a size that will prove too small for an acquirer simply to enter a new market, a size where merger costs outweigh the advantages.

As for large combinations, I do anticipate some spectacular deals comparable to those in 1991. And they will be of two types. First, mergers of equals (or low-premium acquisitions), in which both management teams decide they can truly compete better together. The other type will be acquisitions of very large banks that do not succeed in the second ring or third rings and fall behind - or are otherwise wounded.

Of course, your question is "How soon?" My only thought is to follow the advice of my first boss, an economist, who advised me when making a forecast to give them a number or a date - but never both.

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