Who Says We Have Too Many Banks?

Is the United States overbanked?

Yes, says Treasury Secretary Nicholas Brady. In a recent speech before the Securities Industry Association, he made the point that the United States has many more commercial banks than its major trading partners.

Mr. Brady cited this large number of banks as an underlying structural flaw of our banking system. We have 12,500 commercial banks - many more than in Germany, Japan, France, and other competing nations.

But that is the number of banking companies. We would get a better handle on this question by comparing the number of banking offices here with the number in foreign countries. This would give us a view of the total number of brick-and-mortar structures maintained by the banks, not merely their main offices.

The Branching Perspective

The United States actually has fewer banking offices per capita than Germany, France, the United Kingdom, most other European countries, and Japan.

One study by the Organization for Economic Cooperation and Development shows that the United States has 24 banking offices per 100,000 inhabitants. For the same number of inhabitants, France has 46; Germany, 73; United Kingdom, 37; and Japan, 37.

The average bank in virtually all of our international competitors maintains many more branches than the average U.S. bank. The United States has

approximately four branches per bank. The ratio is 6 to 1 in Japan, 8.5 to 1 in Germany, 17 to 1 in France, and 31 to 1 in the United Kingdom.

The European Community countries and Japan have many other types of depository institutions - such as small loan companies and home building societies - that are not found in the United States. Any comparison limited to commercial banks overlooks the presence of these banklike depository institutions.

The Italian Bankers Association attempted to capture this broader information by studying the number of depository institutions in developed countries. This study showed that, per capita, the United States has fewer offices of depository institutions (even when savings and loans and credit unions are included) than the EC countries.

Room for Expansion

New bank charters continue to be granted - and these new institutions succeed. State bank authorities and the Office of the Comptroller of the Currency approved 160 new bank charter applications in 1990; the total indicates that there are opportunities for expansion in many local markets.

A 1991 study by the Federal Reserve Bank of Philadelphia examines the performance of newly chartered banks in Pennsylvania, New Jersey, and Delaware: no failures whatsoever among 38 banks chartered in these states since 1985.

Banks in this Fed study are generally profitable, with average return on assets of 0.5% and return on equity of 5%. (These figures are below averages for all banks in their district, but not unusual for new banks.)

Compared with our major trading partners, the United States has fewer banking offices per capita and fewer depository institutions. New banks continue to be chartered and to prosper. So the United States is not overbanked - at least not relative to our major trading partners.

Focus on Market Forces

Should the administration and Congress attempt to reduce the number of banks via the public-policy approach, by changing the nation's banking laws? Or should consolidations be driven by market forces?

The number of U.S. banks has already fallen 18%, to 12,500 in 1990 from over 15,000 in 1980. Interstate banking is now permitted by 48 states, among which 33 allow nationwide banking. And every state now allows some form of intrastate branching.

These interstate and intrastate developments facilitate further industry consolidation - when it makes economic sense.

Any major changes in legislation need to be based on solid policy and economic arguments. The Congress and Treasury should not dictate a "one size fits all" change in policy that artificially accelerates a process already occurring in a safe and deliberate manner.

Mr. Watt is president of the Conference of State Bank Supervisors in Washington.

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