06protectingour.pdf

Tom

Schlesinger

The

bankingindustry

mega-mergers

announced

last

July

and

August

areunprecedentedinsize.Analysts sayotherswillsurelyfollow.

Many

ofthe

same

analysts reassure us that

huge

banking combinations

and

indus-try-wideconsolidation are natural,inevitable,

good

for

banking

and

good

forthe

economy.

The

Bush

Admini-strationassertsthatencouragingbigbankstogetbigger

willlevelthe financial industry'sdomesticplayingfield

and

enhance

the global positionofU.S.banks.

Rather

than leveling the playing field, this bank-centered

approach

willonlypreserveitstilt.

Underregu-lated firms,particularlygiantfinancialcompanies,will

continueplaying a disruptive,

lowest-common-denomi-natorroleatthe fringeofthecreditsystem.

The

bigger-is-bettersolution won't lay a glove

on

the underlying reasons the financial industry

and

lenders ofall sizes

flocked to ill-considered speculative investmentsover the past decade.

The

real culpritsare regulatory

inequal-ity,

weak

supervision

and

decontrolled interest rates-not"too

many

banks."

There

islittleevidencethatincreasedsize will

make

U.S.-basedbanks

more

competitiveinglobal

markets-or thatsucharesultmightyieldbenefitsin thiscountry.

For

example, the

proposed NationsBank merger

will

produce

the largest

bank

inrecent U.S. historytohave

virtually

no

international presence.

Inaddition toour skepticism about banking

consoli-dation,theindustrymega-mergersannouncedthis

summer

raise threespecificconcerns: financial instability,

eco-nomic

dislocation,

and

concentrationof

economic

power. FinancialInstability.

These

deals

may

well destabilize

Tom

Schlesingeristhe directoroftheSouthern Finance

ProjectinCharlotte,

NC.

Thisarticleisadapted

from

Mr.

Schlesinger'stestimony

on

September26,1991beforethe

House Committee on

Banking, Finance

and Urban

Af-fairs.

analreadyunstableindustry,therebyincreasing govern-ment'scostsfor

bank

failures,roilingfinancialmarkets

and

sapping public confidence.

The

performance

of these

mega-merger

partners

and

the overall trackrecord oflarge

banks

send

ominous

signals.

The

primary causes of big-bankinefficienciesarenot external factorsorregulation. Several large

banks

have circumvented regulatory barriers to product

and

geo-graphic expansion.

The

resultsoften

seem

more

impres-sive aslegalstratagems than financialventures.

Given

theirexperiences,

many

employees

ofbigbanks agree thattheir firms'inefficienciesresult

from

the very

inter-nalconditions-suchas excessivebureaucracy

and

rigid-ity,

and

perverserewardstructures-that

mega-mergers

will magnify.

At

worst, the current crop of

mega-mergers

may

produce

anotherFirstRepublic- or

Bank

of

New

Eng-land-like

meltdown.

At

best,these deals probablywill

produce

sluggish institutions

whose

greatest area of synergyis

nonperforming

real estate loans

and

whose

principalactivity willbe limpingintoline atthediscount

window.

According

toa recent analysisinBarron's,fiveof the

six

banks

involvedin

pending

mega-mergers-Chemical,

North

Carolina National

Bank

(NCNB),

C&S/Sovran,

BankAmerica

andSecurity Pacific-rank

among

thenine banks with the greatest

commercial

real estate

expo-sure.1

On

average,

commercial

realestateloansequaled 120 percent ofthesefivebanks' year-end 1990net worth.

From

firstquarter1990tofirstquarter1991, foreclosed propertyroseatan averagerateof113 percentforthe

five

mega-merger

partners. Foreclosed

and problem

loansaveraged41.1percent ofthefivebanks' net

worth

asof

March

31.

INSTITUTION

CEO

mega-merger

partners ranked

among

the top

20

banks

in highlyleveragedtransactions

(HLT)

lending,witha

combined

$16.9billion in

HLT

outstanding.

That

sum

represents 28 percent ofall

HLT

exposure forthe 25 lenders

who

account for

most

ofthebankingindustry's highly leveraged financing.2

These numbers

say that bigger equals weaker, not

better.

Even

more

important, they suggestthatbigbanks seekingto

grow

out oftheir

problems

have

systemati-cally misinvested depositors'

money

in unproductive ventures that

add

littleto the nation's

economic

well-being.

Why

should

we

expect

them

to

manage

even

largerportfolioswith keener regardforthe

bottom

line

orAmerica's

economic

health?

Inanindirectsense,

mega-mergers

are destabilizing because they offer

phony

substitutes for the difficult,

thoughtful changes that

might

actually reverse

bank-ing's fatal spiral.

The

longer

we

defer

real reform of deposit insurance, regulatory inequalities

and

other structuralproblems,the

deeper

the industrywilldigits

own

hole.

Economic

Dislocation.

Mega-mergerswill generatea

number

of problemsinthereal

economy

above

and

beyond

theeffectsofadditional bailouts

on

publicconfidence,

con-sumer

buying

power and

the

availa-bilityof publicresources.Widespread unemployment,concentratedincities

thatstakedtheir

development

on

fi-nancial industrygrowth,willbethe most obvious

consequence

of

mega-mergers.Accordingtopublished

re-ports,the

Chemical-Manufacturers

Hanover

Trust

(MHT)

merger

may

result in at least6,000 layoffs,3 the

Nationsbank merger

in 9,000 lay-offs4

and

the

BankAmerica-Secu-rity Pacific

merger

in 20,000 lay-offs.5

These

layoffshave

been

heralded

as a signofbelt-tighteningefficiency.

Yet

theywilldisproportionatelyhit

lower-paid workers,likethe employ-eesat

NCNB

Florida

whose

average

salary

and

benefits declined

from

$17,940in1989to$17,768in1990, according to

Sheshunoff

Informa-tion Services.6

The

realfat in

bank

overhead-CEO

salaries, directors'

perks

and

the like-will never be subjected to the indignityofa

cho-lesteroltest(seeTable1).

By

reducing competition,

mega-mergerswill

narrow

thechoicesavailableto

household

and

business usersof

banking

services

and

raise their costs.

Recent

studies of

commercial

lending data by Federal

Reserve

economists confirm the connection

between

banking concentration

and

higher prices for

bank

consumers. In addition,

mega-mergers

probably

will squeeze the supply of credit

and

other

banking

services toalreadyunderservedareasofthe

economy.

Concentration ofWealth.

These mergers

will result in excessiveconcentrationsof

economic

power.

They

threaten

to puta

government

sealof approval

on

the idea that fewer, ratherthan

more,

people should

own

and

control our

most

basic

economic

resources.Thispast

Septem-ber,the

Southern Finance

Project released astudy

indi-cating that 1991's

mega-mergers

will have profoundly adverseeffects

on

competitioninlocal

banking

markets, particularlythoseinaffected areasofthe

West

and

the

TABLE1: COMPENSATIONAND

PERFORMANCE

COMPARISONS FOR

MAJOR

MERGING BANKS

CEO

1990

CEO

1989

AVERAGE AVERAGE

CHANGE

EMPLOYMENT EMPLOYMENT

INSTOCK

1990 1989 PRICE

ChemicalNY

Walter Shipley

ChemicalNJ

TexasCommerce-Houston

TexasCommerce-Dallas

ManufacturersHanover JohnMcGillicuddy

NCNBTX

HughMcColl

NCNBNC

NCNBFL

NCNB SC

C&S/SovranVA

BennettBrown C&S/SovranGA

C&S/Sovran FL C&S/SovranTN

C&S/Sovran

MD

C&S/SovranSC

BankAmericaCA

RichardRosenberg Seafirst

Security PacificCA

Robert Smith

Security Pacific

WA

Security PacificAZ

Security PacificOR

$738,167 '$1,118,430

$1,082,000 $1,680,323

$752315 $1,200,000

$880,273 $978,081

$1,600,000 $1,250,000

$789,600 $1,027,900

53,291

33,713

36,966

32,205

49,662

26,528

31,343

17,768

20,880

31,199

29,421

26,425

29,114

32,874

22,427

38,189

34,054

37,490

34,926

40,352

34,887

50,356

32,160

35,803

28,404

46,395

28.524

31,018

17,940

20,286

30,086

28.117

25.594

21,288

31,394

21,389

36.898

32,265

36,151

33.645

38,507

32,193

-64.0%

-36.2%

-50.5%

-0.9%

-49.2%

CEO1990/1989: Totalcompensationincludessalary,bonus, deferredcompensationandotherformsof cash-equivalent compensation.

AVERAGE

EMPLOYMENT

1990/1989: Averagesalaryandbenefitsperemployeeat affiliatebanks.

CHANGE

INSTOCKPRICE: Percentchangeinstockpricefromyear-end 1989toyear-end 1990.

SOURCES: SNLExecutiveCompensationReview: 1991 and1990.

Southeast.7

The

studyshows:

•

According

_{toU.S. Justice}

Department

guidelines, the

BankAmerica

and Nationsbank

deals

would produce

"highly concentrated" conditions in 81 of the 99 countiesinArizona, California,

South

Carolina

and

Washington where

the

merger

partners currently op-erate

competing

offices.

• _{Ina quarterof thosecounties,}post-merger

concen-tration levels

would

rise to

more

than double the

statistical threshold that signals adverse effects

on

competition

and

triggers antitrust action.

• _Despitea record of_{generallylax antitrust}

enforce-ment

duringthe 1980s, the Justice

Department

chal-lengeda

number

ofbanking mergers overlocal con-centration levels farlower than those threatened by 1991'smega-mergers.In42of the99affected counties

inArizona,California,

South

Carolina

and

Washing-ton,post-merger concentrationlevels

would

surpass the levels that generated a recent federal antitrust

challengetoFleet/Norstar'sFDIC-assisted takeover of

Maine

NationalBank.

Bargain-basement

government

sales offailedbanks

and

thrifts to

NCNB,

BankAmerica

and

Security

Pacific will

compound

theanticompetitiveeffectsof 1991's mega-mergers.

The

report terms the

BofA-SecPac

deal "theworld's largest

RTC

trophycase,"

sincethe bailoutagency hasfurnished the

two

banks with $24.6billion in

banking

resources

-74

percentof

alldeposits soldby Resolution Trust

Company (RTC)

in

Western

states.

The

extremelyfavorabletermsof those deals put BofA-SecPac's rivals at a double disadvantage.

Afteramerger,

NCNB

and

Bank

of

America would

dominate

non-local

banking

markets for

medium-sized businessborrowersin

South

Carolina

and

parts

A

Proposal

for

Public

Purpose

Banking

This outline for public

purpose

banksshouldbeconsideredasabroad concept,recognizing that

many

de-tails

remain

tobe debated

and

re-finedbycitizens,policy

makers and

public-spirited lenders

whose

expe-riences provide

models

for such a system.

The

purpose

forsucha

sys-tem

istorestorethewidespread

own-ership of financial intermediaries whileinvestingina

broad spectrum

ofresources

needed

to

enhance

the national

economic

performance

and

revitalize communities.

A

public purpose banking system should

be

builtincrementallybyexpandingthe

existing, but tiny, infrastructure,of public-spirited lenders through a)

the application of tough antitrust

standardsto bankingindustry con-solidation;

and

b)the resolutionof

bank and

thriftfailures.

Ownership

Public

purpose

banks

will be mutually

owned

bytheirdepositors.

The

principal

means

fordefining the banks'

ownership group

will

be

the

communities

they arechartered to

serve.

By

complying

with public

purpose

standards for governance, lending

and

supervision,other

tra-ditional

and

non-traditional lenders

(community

development loanfunds andcreditunions,stockholder-owned

development banks and commercial

banks, hybrid intermediaries, etc.)

alsocouldoperateaspublic

purpose

banks.

Governance

Public

purpose

banks should

be

democratically governed by their

owners,

who

would

be responsible

forselecting amajorityofeach

insti-tution's directors. Accountability

mechanisms

linking

management,

di-rectors

and owners

could include:

regular,detaileddisclosureof

finan-cialinformation;annual independ-entaudits;votesby

owners

on major

policyinitiatives bythebanks;

and

freeaccessby

owners

tothe vote. Inordertopreventeffective

con-trol of the institution passing to a small

number

ofaffluentor

power-ful

members

(as has

happened

at

Farm

Credit

System

Production Credit Associations

(PCAs)

and

many

mutually-owned

depositories), the board should maintain aggressive

member

education

and

involvement programs.

Capitalization

Inorder togain the solidequity base

needed

for effective

interme-diation,publicpurpose banksshould

be

abletoobtaincapitalthroughthe following

means:

• Equity contributionsfrom_{the Tier}

1 capital of

megamerging

Bank

Holding

Companies

(BHCs)

that areproportionatetothe divested branches'percentageof the merg-inginstitutions' totalresources;

•

Voluntary

investments by _state

governments,local

governments

and

pension funds in a special

classofrestricted-voting shares;

•

A

_{portion ofreceipts}

from

_asset

appreciationfeeslevied

on

inves-tors

who

resell

RTC

and

FDIC

properties within five years of purchasingthem.

One

precedent

for this fee is the net recapture

agreement

provisionofthe1987 AgriculturalCredit Act,which

ex-poses

Farm

Home

Administra-tion borrowers to

an

apprecia-tiontax

on

farmassets.

• Tax-advantaged investments by

individuals in a limited class of votingshares.

Sources

of

Funds

Public

purpose banks

should be able to accessfundsthroughthe

fol-lowing

mechanisms:

of the

West

Coast.

Such

firms already rely

on

an

narrow

universe of competitors for their primary bankingrelationships.

These

research findings raisea

number

ofpractical

questionsfor state

and

federal antitrustenforcers.

They

alsoraisebroader questionsabout

who

willcontrol the nation's

most

vital

economic functions-money

crea-tion,the

payments

system

and

financialintermediation.

The Supreme

Court's

landmark

PhiladelphiaNational

Bank

decision addressed those

broad

questions with blunteloquence. In 1963, the

Court

wrote:

The

fact that

banking

isa highly regulated industry

criticaltotheNation's welfare

makes

the playof

com-petitionnotlessimportant but

more

so. Ifthe

busi-nessman

isdeniedcreditbecausehis

banking

alterna-tives have

been

eliminated by mergers, the

whole

edificeof

an

entrepreneurialsystemisthreatened;if

the costsof

banking

services

and

creditareallowedto

become

excessivebytheabsence of competitive

pres-sures, virtuallyallcostsin

our

credit

economy

willbe

affected;

and

unlesscompetitionisallowedto fulfill its role as

an economic

regulator in the

banking

industry,the result

may

well

be

even

more

govern-ment

regulation.It issurely the case thatcompetition

isour

fundamental

national

economic

policy,

offer-ing asitdoestheonlyalternative tothe cartelization

or

governmental

regimentation oflargeportions of the

economy.

Recommendations

for

Change

Government

should take the folowingsteps to

re-spond

to

banking mega-mergers and

the

problems

of concentration,

economic

dislocation

and

financial

in-stabilityassociatedwith them.

1.

The

standards used byfederal financialregulators

megamerging and

failedinstitutions.

Specifically, receiving the deposits ofbranchesdivestedby

mega-merger

partners in order to

comply

with

antitruststandards; receiving,

on

a

first optionbasis,depositsof

insol-vent institutions resolved by

RTC

and

FDIC

in insureddeposit

trans-fers.Publicpurpose banksalsoshould

receive preferentialaccess to deposit

franchisesresolvedby

RTC

and

FDIC

inpurchase

and assumption

deals.

Discounteddepositinsurance pre-miums.Publicpurposebanks should pay

premiums

at

80

percentofthe lowest prevailingassessmentratefor

other insured depositories.

For

ex-ample,ifthelowestassessment paid bybanks,thrifts

and

creditunionsto the

FDIC

and

NCUSIFwere

20basis points,public

purpose banks

would

beassessed 16basispoints.

The

discount

would

give public purpose

banks

a structural advan-tage similartothelow-costfunding

that an earlier type of specialized lender

(S&Ls)

receivedvia interest rate controls. Since

we

believe itis

necessary to reform the current depositinsurance assessment,

pref-erence for public

purpose

banks

ultimatelyshould

be

replacedbyrate

mechanisms

built into a system of

flexibilityrecontrolledrates. Public Deposits.

A

federal

require-ment

that publicbodies (e.g.,local

governments, school boards, port

authorities,etc.)

and

Pension

Bene-fit

Guarantee

Corporation-backed

pension fundsplacea designated small percentage oftheir totaltransaction deposits

and

adesignated small per-centage oftheir total non-transac-tionaccounts withlocalpublic pur-posebanks.

Lending

Mandate

Portfoliorequirementsforpublic

purpose banks

should

be

character-izedbyflexibility

and

diversificatioa

They

must

reflect

community

eco-nomic

needs

and

nationalpriorities.

• Investmentsinhousing,

commu-nity

and

industrialdevelopment, health

and

childcare,agriculture

and

environmental protection shouldconstitute

no

lessthan

80

percent of the banks' loans

(Quali-fiedPublic

Lender

test).

• _Public

_purpose

_{banks should}

maintain anannualloan-to-asset

ratio that exceeds by

some

fixed

percentage the loan-to-asset

ra-tio (averaged over three years)

for

Bank

InsuranceFund-insured

institutions with less than

one

billiondollarsin assets.

•

Loans

shouldbe

made

within100

milesofthebank's headquarters

in

MSAcounties

and

withina rea-sonable (perhaps multi-county)

serviceareasurroundingthebank's headquartersin

non-MSA

coun-ties.

Some

exemptions

may

be

made

on

acase-by-case basis for

syndicatingorparticipating in

non-local ventures of special public

interest.

A

reasonable portionof

bank

loans (the exact portion to

be

deter-mined

annually bythe chartering agency)shouldinvolvethe

banks

in state

and

federal credit

pro-grams

consistentwith their

over-all lending mission (e.g., Small

BusinessAdministration,

FmHA

etc.).

Loans

toasingleborrower should be restricted. Off-balance-sheet

activities

and

loans toofficers,

di-rectors,

and

theirrelated parties should

be

prohibitedorseverely

restricted.

Banks

should

have

access to a public

purpose

secondary

market

established

through

their char-teringagency.

Banks

should providetheir bor-rowersdebt mediationand restruc-turing servicesfinancedbyretained

to evaluate

proposed bank

mergers-especially large mergersthat exceeda specifiedsize threshold-should beclarified,codified

and

made

public.

The

vague,

shift-ing,subjective

and

unwrittenguidelines currentlyused

for

merger

reviewsshouldbe replaced byexplicitwritten standardsthat:

• _{Spelloutthe typesof product}

and

geographic

mar-kets tobeanalyzed;

• _Quantify the

benchmarks

by

which

competitive

ef-fectsare evaluated;

• _{Fully factorin} any_existing competitiveadvantages

thatthe

government

hasconferred

on

the applicants;

• Eliminatethe "convenience

and

needs" defense of

banking mergers

due

to its slippery

meaning and

historyofusage.

• Consider_theeffectsofmergers

on

customers such_as

middle-marketbusinesses thatuse non-localbanking markets

and

arecrucial tothehealthoflocal econo-mies.

These

measures

would

reduce the discretion

and

enhance

the public disclosure of regulatory activity.

Like

complementary

proposalsfor"early intervention"

in failing

banks and

restrictinguse ofthe Fed's discount

window,

such initiatives

would

make

financial regula-tion

more

transparent,

more

consistent

and

more

clearly inthepublicinterest.

2. Restrictions should

be

placed

on

the portion of

totaldeposits

and

IPC

deposits thatcan becontrolledby anysingle institution

on

astate,county

and

Metropoli-tanStatistical

Area

basis. Ifnecessary, the federal

bench-mark

should

preempt

more

liberalstatestandards.

3.

Banking

regulatorsshoulddirect

government and

non-governmental

organizations in affected areas to

conduct

comprehensive

social

and

economic

impact studiesprior toapproving

bank

mergersinvolving

insti-tutions

whose

parent

companies

hold

combined

assets

exceeding S50billion.Ifthese studies predict substantial

socialor economicdislocation,regulatoryapproval should be conditioned

on

the

implementation

ofa

comprehen-sivemitigationprogram,

funded

bya

merger

tax

on

the

merging

institutions.

The

principal

components

ofmerger-mitigation

pro-grams

shouldinclude (butnotbelimitedto)the follow-ingelements:

• _Strict

compliance

_{with the}

Worker

Adjustment and

(continued

from page

9)

Such

servicesshould beavailable to distressed borrowers

whose

income

fallswithin a reasonable standard(e.g.,120 percent)oflocal

median income and

whose

loanis

partofthebank'sQualified

Pub-lic

Lender

portfolio.

Regulation

and

Supervision

A

federal agency, the Office of PublicBanks, should

be

created to

charter

and promote

theexpansion of public

purpose

banks. Like the FederalReserve

and

the

FHLB

sys-tems,the Officeshould maintain

re-serves for

and

provide

backup

li-quidity topublicpurposebanks.

The

Office could be established

on

a national, regionalorstate basis.

The

Officeshouldhave

no

regulatoryor insurancefunctions.

A

completely separate (existing

or

new)

federalagency shouldserve

asprimaryregulator

and

insurerof public purpose banks, performing examination

and

supervision

func-tions.

Only

a federal chartershould beavailable forpublicpurposebanks;

however,existingstate-or

federally-charted institutions should

be

al-lowed

toconverttoa public

purpose

charterifthey

meet

theappropriate ownership, governance,

capitaliza-tion,portfolioand

management

tests.

Inadditionto

meeting

the reserve requirements ofthe OfficeofPublic Banks, public

purpose

institutions

should

meet

soundness standards

comparable

to those

demanded

of other insuredfinancialinstitutions.

However,

the primary regulator shoulddetermine

and

enforce sepa-rate risk-weighted capital

and

re-servestandards for public

purpose

banks.Supervisionalsoshould take intoaccountthecaseofpublic pur-pose banks that

choose

to operate

on

a not-for-profitbasis.Public pur-pose banks should operate with a

state

and

federal tax exemption. Failureto

comply

with lending stan-dards shouldresult inthelossofthe exemption.

Management

Public

purpose

banks should present aqualified

management

team

and sound

management

planin

or-der to receive a charter

from

the

Officeof PublicBanks.

To

help

stimu-late

and

sustain the infusion of managerial

and

technical skills

needed

forpublic

purpose

banking success:

The

Office of

Pub

lie

Banks

should maintain

an

active technical

as-sistancedivision,dedicatedtothe support

and

continuingeducation of start-up

management

teams.

The

divisionshould be funded by

mega-merger

taxes

and

a fee

on

clearinghouse transactions.

•

Matching

state-federal

ED

WAA

fundsshould be usedto train

and

place in public

purpose

banking jobs a corps of

employees

who

have

been

laidoff as a result of

banking

mega-mergers.

The

"Lender Corps"notionalsocould

be

expanded

to include the

RetrainingNotification

(WARN)

Act's 60-day

no-ticeprovision.

•

A

mandatory

60-day consultation period, triggered

by the

WARN

notice, in

which

representatives of employees,

management

and government

negotiate alternativesto a closingorlayoff.

• Establishment of adjustment

committees

based

on

the

Canadian

model

tooverseeretraining,education

and

relocation

programs

for laid-off

bank

employees.

The

Economic

Dislocation

and

Worker

Adjustment

Assistance

Act

(EDWAA)

provides resources for these jointlabor-management committeestobestaffed

byan independent third party.

The

committees

are authorizedtosurveydislocatedworkersfor outplace-ment;screen, hire

and

fireadjustmentservice

provid-ers;

and

monitor

the

re-employment

process.

For

instance,the

United

Food

and

Commercial Workers

have

proposed

a

model

assistancecenter for

dislo-cated SecurityPacific

and

Seafirstemployees.

•

Use

of

EDWAA

funds_{foralternative}

ownership

_pre

-feasibilitystudies that

draw up

detailed

management

plans for converting divested branches into public purposebanks.

•

A

"Lender Corps"

program,_subsidizedby

EDWAA

discretionaryfunds

and

a

merger

tax,thatretrains

and

places laid-off

bank employees

in staff positions at

thesepublic

purpose

banks.

These employees

would

help fill the managerial

and

technical gaps that nag

existing

community

lenders.

4. Branches divested by

mega-merger

partners in

orderto

comply

withantitruststandards shouldbe con-vertedto

mutually-owned

"public

purpose

banks" with

alendingmissionthat serve

community

needs

and

na-tional

economic

priorities.

Branches and

franchises in

RTC

and

FDIC

conservatorshipalsoshouldbeeligible forconversiontopublic

purpose banks

(see sidebar).

Such

banks could be given orsold

on

a preferential

basis to existing

development

banks,

community

devel-opment

credit unions,

community

development

loan funds or similar intermediaries.

Another

possibility is

that thesebanks be charteredseparately

on

the credit

union model, withthe

community

definedas theaffinity

group. State

and

local

government

units could also

invest insuch

banks

as could pension funds. Portfolio requirements

would

reflect

broad

national investment needsaswell asdiversification

and

otherprudent

stan-dards.

The

principlebehindpublicpurpose bankingissimple.

If the

government

is going to

promote

or

condone

a dramatic concentration in

ownership and

control of

banking resources,itshould simultaneously supporta secondtieroffinancial institutionsbetterattunedto the nation's credit needs

and

the

American

tradition of widespread

economic

ownership.

The

two-tiered

approach

isalong-standingreality in

some

countries, including nations

whose

ostensibly centralized

banking

systemsarerelentlesslycitedasthe

wave

ofthe futureby

bank

consolidationadvocatesin

the U.S.

For

example, the

German

banking

system is

best

known

foritshandful of

mammoth

universalbanks.

But

thecountryalsohosts.and

promotes

throughpublic

policy,aflourishingtierof smallerfinancial

intermedi-ariesthatincludesthousandsof cooperative banks,savings

banks,

mortgage banks and

postal savingsoffices.

Even

though

these smaller institutions

have undergone

a

merger

boom

in recentyears,

Germany

still has

more

banking

institutionspercapitathanthe U.S. has

banks

and

thrifts.

5. All financial firmsshould

be

subject to

uniform

licensing

and

regulation

and

should

meet

a

modicum

of public obligationsin returnfortheir license.

The

S&L

experience demonstratesthe foolishnessofleveling the playingfieldby loweringit toaless-regulated

common

denominator. Inorderto stabilizethefinancialsystem

and

achieverealregulatory equality,

comparablesound-ness requirements (capital

and

reserve standards,

dis-closure,etc.)

and

prohibitions againstconflictof inter-est

and

unfair competition should

be

applied to any

entity that: directly accepts funds

from

the public for

investment;

makes

loans to thepublicusingfunds other thanits

own

equity capital

and

retained earnings;orsells

loans to financial institutionsorinvestors.

Regulatoryequalityisnotan

answer

to

mega-mergers

perse.Rather,itrepresents

an

alternativetothe

banking

industry'sbroad

program

of consolidation

and

decon-trol.It

may

or

may

notimply

"more"

regulation;it

would

certainlyprovide smarterregulation.

As

the

body

count

mounts

in the financial industry, the nation needs to

debate

and implement

realreform,ratherthan

permit-ting

mega-mergers

todelay the

banking

system'sday of reckoning

and

make

that dayvastly

more

expensiveto taxpayers.

Notes

MaggieMahar,"TheGreatCollapse:CommercialRealEstateison theSkids across theNation",Barron's,July22,1991.

•'AmericanBanker,RankingtheBanks1991. 3_{fVall StreetJournal,}

pg.1,July16,1991.

''Robert Trigaux,"Are BiggerBanksBetterBanks?"PublicCitizen,

Sept/Oct1991.

-'LosAngelesTimes,pg.1,BusinessSection,August13,1991.

°SNL

ExecutiveCompensationReview:1991;Sheshunoff 1000

Larg-estU.S.Banks,1991and1990.

'Southern FinanceProject, "The BiggerThey Come," September