A time bomb is ticking in my home state, Massachusetts. The explosion could cost many more bank employees their jobs, many more shareholders their fortunes, some depositors their personal savings above insured levels, and us taxpayers even more money.

On Dec. 19, the anniversary of the signing into law of the 1991 banking legislation, new rules will take effect that may prompt a deluge of additional bank failures.

Under the pending rules, 51 "small" banks in Massachusetts now are candidates for failure -- "banks on the edge," as The New York Times has called them.

Mandate for Closures

While only three of those banks have assets of more than $1 billion, the 51 have total assets of nearly $15 billion. They are community banks in towns from Newburyport to Holyoke.

After Dec. 19, federal regulators must start closing all banks whose shareholder capital sinks below 2% of total assets, unless the banks can show very good cause why regulators should let them remain open.

One exceptionally good reason, according to the Federal Deposit Insurance Corp., would be for banks on the edge to come up with a workable plan to merge with a healthy bank.

Unfortunately, that is not happening. It seems that bank presidents and bank boards need to be reminded of their responsibilities to employees, depositors, shareholders and taxpayers.

The banks on the edge need to be encouraged to band together with healthier institutions so they can become more efficient in certain fundamental banking activities, such as marketing and asset-liability management.

Through consolidation into "midsize" organizations, with assets of $500 million to $10 billion, operating costs can be reduced and teetering banks will can stay open.

The performance of midsize banks in the 1980s, in comparison with the results of small and big banks, supports this solution.

Indeed, a study by Robert E. Litan of the Brookings Institution found that the most profitable banks of the 1980s were in the midsize category, while the worst performers by far were the largest institutions, those with more than $10 billion in assets."

Midsize banks were the "stars of the industry for a simple reason," according to Mr. Litan: "They were large enough to realize economies of scale but not too large to grow distant from the risks and rewards of their customer base."

Prodding Needed

Now is the time for all of us to urge banks on the edge to begin serious discussions with healthy banks about combining their organizations.

Such consolidations would yield numerous benefits to customers, employees, and shareholders of those institutions -- not to mention taxpayers.

The right combinations would produce much stronger depository institutions and would ensure the continuity and stability of community banking throughout Massachusetts.

Let's have the good sense to realize consolidation of banks on the edge with healthy banks before it's too late.

Mr. Titcomb is president and chief executive of Peoples Bancorp of Worcester, Mass. He was appointed by the Federal Reserve Board to represent New England on the Thrift Institutions Advisory Council.

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