Sidney A. Bailey, Virginia's banking commissioner for the past 16 years, says mergers between large regional banks are creating dissatisfied customers' who are flocking to smaller institutions.

The 63-year-old regulator also is discouraged with big regional banks' philosophy. They tout cost savings and efficiencies, he says, but he sees few signs that they achieve those goals. Instead, he sees layoffs and displaced customers who don't qualify for loans under new, "standardized" terms.

Mr. Bailey believes these conditions play into the hands of community bankers.

Q.: Isn't there a widespread fear among community bankers that they are going to be run out of business by regional giants?

BAILEY: There used to be. I think the majority or a fairly large proportion of community banks couldn't care less what NationsBank or First Union do.

What they have observed is that they are not losing business but gaining business.

That has really happened. In those towns in Virginia where there is a community bank and a branch of NationsBank or First Union, the community banks have found themselves opening new accounts at an astounding rate with former customers of those two [big] banks.

Community banks have looked up and observed, |Well, gee, I don't have much to worry about it [the regional bank] - it is a paper tiger.

It is not so much the community banks that are concerned, it is what is happening to the system [that is worrisome].

Q.: What's happening to the system?

BAILEY: Consolidation of control. More banking resources are concentrated in fewer and fewer hands.

It is only relatively recently that some of those disadvantages are becoming more visible.

One of them is concentration of control in a small group of people who then are able to set policy with the view toward advancing the corporate purpose. The need of the corporation is given priority over the central need of the community.

Q.: But isn't bigger better - or at least more efficient?

BAILEY: Improved efficiency? What does that mean? Is there some benefit to somebody? What is it that improved efficiency does?

It is a very vague term. It is kind of a catchphrase that no-body seems to look behind anymore. With improved efficiency and 75 cents you can buy a cup of coffee.

Q.: You don't buy the argument that efficiencies can be gained?

BAILEY: I am increasingly of the opinion that the benefits that have been emphasized, and almost always are emphasized, never seem to materialize.

[Hugh McColl, chairman of NationsBank] has demonstrated an ability to reduce costs by the simple expedient method of reducing employment. He simply fires people.

Theoretically, [mergers] should translate into a higher return on assets, a higher return to shareholder's on equity, lower rates on products and services, lower interest rates on loans, more branches, and more convenience.

Well, the net result that I can see is a reduction in payroll costs, which translates into a lot of people out of work.

Q.: Are these mergers bad for banking.?

BAILEY: There are good aspects, perhaps, to some people, but I don't know that it is universally good.

The people to whom it is good are the shareholders of the target banks, who find themselves with a one-time windfall profit on their stock ... provided there is a preminum.

But the communities in which the banks are being acquired - generally what I hear is expressions of dissatisfaction. Suddenly, they [customers] are bound by new policies established on the 60th floor in some other city, perhaps in some other state.

One fellow wrote to me and said he had a line of working capital with Sovran. [Sovran was acquired by NationsBank in Dec. 31, 199 1.] He made a product for which there was growing demand - actually, it was baseball caps of some kind. He needed to renew his revolving line of working capital. NationsBank said: Not on your life.

Not to say that is illogical on the part of NationsBank. It would have to have some operating standards. It sees consistent standards as absolutely necessary to prevent chaos from developing in the organization.

But turn that around and look at it from the other end. It's like stretch socks: One size fits all. Except in this case, they don't stretch very much. There is not much give.

Q.: So is there a future for community banks?

BAILEY: Oh, yes, I think so. As long as there are small towns and rural communities.

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