Megamerger Not a Disservice To Consumer, Fed Study Hints

A new study by an economist at the Federal Reserve Bank of San Francisco punches a hole in a popular argument against large bank mergers.

The study, released last week, examined the effect on deposit rates in California from the 1992 megamerger of BankAmerica Corp. and Security Pacific Corp.

The finding: Despite the loud insistence of consumer groups that deposit rates in California would decrease relative to the national average, they have not done so in the four years since the deal.

"It certainly does not bolster the argument that such mergers are bad for the consumer," said Elizabeth S. Laderman, the author of the report.

The $5.1 billion deal instigated a fire storm of protest after it was announced in the summer of 1991.

The attorney general in the state of Washington threatened legal action if certain antitrust concerns weren't met; legislatures in some surrounding states passed new laws introducing market share limits; and consumer advocacy groups warned about the decline of customer service due to branch closures.

One San Francisco consumer advocate called the deal "illegal" because, he said, the new monolith would dominate the market, reducing deposit rates and hiking loan rates at will.

Ms. Laderman cautioned that the question of whether such deals hurt the consumer is "a multifaceted one," but looking at just deposit rates in this example, the effects appear to be minimal, she said.

"It's often been ignored that banks can enter markets as well as merge," Ms. Laderman said. "Market share among banks in a given market move around - they aren't static."

For her study, Ms. Laderman compared California's rates on six-month certificates of deposit and money market deposit accounts with U.S. averages over the past decade. California traditionally has had slightly lower retail rates compared with the rest of the country, so if the concerns about the merger bore out, that rate gap between the state and the national averages would have grown, she said.

But Ms. Laderman found the opposite. For example, while California's six-month CD rates were slightly below the U.S. average in the years leading up to the merger, the state and federal averages fell and rose together in the succeeding years.

In fact, the most recent numbers for 1996 show that California six-month CD rates are slightly higher than the U.S. average - 4.6% compared to 4.5%.

The Fed findings did not surprise other analysts.

"All those who were crying about a lack of competition pushing down deposit rates were not looking at the whole picture," said Sandler O'Neill & Partners analyst Campbell Chaney, a former San Francisco Fed official. "They were using a tunnel-vision scenario and not looking at the new competitors coming in."

Discount brokerages, credit card companies, and other nonbank finance companies have more than made up for the decline in the number of banks in the state, analysts said.

The decline of customer service, as a result of branch closings, and a lack of attention to low-income neighborhoods are much more valid concerns of consumer groups, analysts said.

Robert Gnaizda, policy director for the Greenlining Institute, a California advocacy group, said he believes consolidation hurts customers in their pocketbooks as well.

"The BankAmerica deal did harm competition in the state because it established a giant relative to any other bank," Mr. Gnaizda said. "That's why we supported the Wells-First Interstate deal, because it created more competition for BankAmerica."

BankAmerica leads all banks in California in deposit market share, with 20.9% of the state's deposits, followed by Wells Fargo & Co. with 15.6%; H.F. Ahmanson & Co. with 7.4%; and Great Western Financial Corp. with 6%, according to Sheshunoff Information Services.

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