After years of steady declines in their rankings among world banks, U.S. and European institutions are starting to gain ground on their Japanese rivals.

Mergers are propelling institutions in the United States and Europe upward in the rankings, according to American Banker's annual survey of the world's top 500 banks, listed by asset size. (See tables beginning on page 16A.)

At the same time, some Japanese banks are shrinking because of problem loans and a stagnant economy.

To be sure, Japanese institutions still dominate the rankings. Indeed, the latest survey, based on yearend 1991 data, found that eight of the 10 largest bank in the world are in Japan.

And that country's heavyweights - like No. 1-ranked Dai-Ichi Kangyo Bank Ltd., with $446 billion in assets - are unlikely to see their lead seriously threatened anytime soon.

But the rankings themselves don't tell the full story. For one thing, the assets of foreign institutions are converted to dollars in the tables, and exchange-rate fluctuations mask some changes taking place.

What's more, megamergers are expected to continue in the West.

The upshot: U.S. and European banks appear to be reversing their decline and seem ready to give the Japanese a run for their money in the next few years.

"U.S. and European banks are growing," said Mark Gross, senior vice president in New York at IBCA Inc., a bank credit rating agency. "At the same time, we expect assets of Japanese banks will continue to remain under pressure to decline."

Many Banks Move Up

Only one U.S. banking company made it into the Top 25 -- Citicorp, ranked 23d. But several made big jumps, thanks to mergers:

* BankAmerica Corp. was officially ranked 45th at yearend, but its merger with Security Pacific Corp. in April pushed it into 28th place on a pro forma basis.

* Chemical Banking Corp., moved up to 37th from 75th after its merger with Manufacturers Hanover Trust Corp.

* NationsBank Corp. moved into 48th place, from 80th; it was created by the marriage last year of NCNB Corp. and C&S/Sovran Corp.

European banks, too, are rapidly gaining clout as a result of mergers.

Spain's Banco Espanol de Credito, for example, moved up 26 notches, to 77th place, after it consolidated accounts with its Portuguese subsidiary, and Italy's Banco di Spirito Santo moved up 86 notches, to 93d, after acquiring Cassa di Risparmio di Roma. The Italian bank will move to 40th place after completing a merger with Banco di Roma.

Yen Fluctuation's Impact

Assets held by seven giant Japanese banks in the ranking -- when converted to dollars -- increased by 3.3% last year. But the jump was due entirely to a 5.6% appreciation in the yen against the dollar. Measured in yen, the bank's assets actually decreased by 2.5%.

Meanwhile, exchange-rate fluctuations worked against European banks in the ranking because European currencies depreciated against the dollar.

For example, a 1.73% decline in the franc's value against the dollar decreased the asset size of Paris-based Credit Agricole Mutuel by $5 billion. Without that decline, the institution would have had $312 billion in assets and be ranked seventh instead of eighth.

Without the yen's rise, meanwhile, seventh-ranked Norinchukin Bank would have slipped to 12th place, behind Germany's Deutsche Bank and France's Banque Nationale de Paris.

Relative Capital Positions

Another trend emerged last year: European and American banks were boosting their capital positions while Japanese institutions, hammered by the collapse of prices on the Tokyo stock exchange, saw their ratios fall. That leaves Western banks better positioned to expand.

At yearend, top-ranked Daiichi Kangyo had total capital equal to 8.25% of risk-adjusted assets, down from 8.76% a year earlier.

No. 3 Sakura Bank Ltd.'s ratio dipped to 7.92%, short of the 8% to be required after Dec. 31.

That compares with a 10.7% ratio at Germany's Deutsche Bank, 9.6% at Britain's National Westminster Bank PLC, 10.8% at BankAmerica, and 10.3% at NationsBank.

The latest results vindicate predictions by analysts that the rising cost of capital would force Japanese banks to achieve a greater return on equity and curtail asset growth.

They also see the rapid growth in size of U.S. and European banks as a direct result of a worldwide deregulation of banking and financial services that has driven banks in the United States and elsewhere to concentrate on building domestic market share in the interest of achieving economies of scale.

"One of the cardinal rules of deregulation is that you end up with fewer firms," said Sanford Rose, an associate at the bank consulting firm of Oliver, Wyman & Co. in New York. "There will be more consolidation."

Analysts played down the significance of the fact that only one U.S. bank ranks among the top 25. What really counts, they said, are profits.

"It is important for a nation to have big, strong, competitive banks, but absolute assets don't generate strength, especially if they lead to bad loans," said bank consultant Lowell Bryan of McKinsey & Co. in New York.

"U.S. banks are, in fact, getting stronger because real earnings power is going up due to consolidation and a positive interest rate environment," he said, "and the stronger players are taking over the weaker ones."

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