A point often lost in the shuffle, though, is that these operations needn't be done by banks at all, and soon may not be. Huge subcontractors adept at doing high volume transactions cheaply are already processing payrolls and insurance claims. They are moving into banking and may soon provide even the smallest banks with access to operations as efficient as those operated by their larger competitors.
There are two distinctly different kinds of bank mergers: those linking banks in a similar market (Chemical and Manufacturers ,, Hanover), and those linking banks in disparate regions (C&S/Sovran and NCNB -- now known as NationsBank).
In-market mergers, as those in the same area are called, are the ones that must rely most heavily on cost savings. Regional linkages often use another justification, contending that a more diverse client base will provide a less risky loan portfolio.
It makes sense in theory and there are examples where it has even been true in reality, most notably in the case of North Carolina-based NCNB, which earned most of its money last year in Texas.
Historic limitations on interstate banking mean there are few similar examples of domestic diversification. Alternatively, though, banks have sought geographic diversification by going abroad. Typically, they have been clobbered. Recently, Security Pacific Corp. concluded an expensive fling in global strategy by refocusing on Orange County, California, its home base. Bank of America and Chase among U.S. banks, as well as Barclays and Midland among English banks, have similarly contracted overseas operations after suffering reverses.
Indeed size, and what can be done with it, seems to be a dubious advantage for a bank. Industry statistics compiled by IBCA, a bank ratings agency, suggest large banks are no more profitable than small ones -- often less so. Of the four major difficulties that have rocked the industry during the past two decades -- Third World loans, leveraged buyout loans, real estate loans, and desertion of core customers to alternative financial markets, the small banks have only been hit by one: real estate.
"Small banks haven't had the appetite, or the opportunity, for those other kinds of risks," said Patricia Krall, a vice president at IBCA. Instead, many small banks have focused on individuals, a far more profitable segment.
Being the nation's largest bank has been a particularly dubious honor, held at times by Chase, Bank of America, and Citicorp. All have suffered when wearing the crown. John Reed, Citicorp's chief executive, says the distinction will soon pass to Banc One of Ohio or NationsBank.
This, he contends, is not a bad thing. Banc One, the most profitable heir, has succeeded by being a big bank operating as if it was a small bank, catering through independent subsidiaries to small and mid-sized companies.
Bank analysts argue mergers are required because the U.S. banking system has too much capacity. An ironic footnote is that new capacity continues to come on line. According to Federal Deposit Insurance Corp. statistics, 159 banks failed last year, but 165 banks received new charters. Since the 1929-1934 period when the number banks fell from 25,000 to about 14,000, the number of banks operating in the United States has been fairly stable, vacillating between 13,000 and 14,000. The post-Depression peak of 14,496 achieved was reached as recently as 1984.
Since then, a wave of failures and mergers has reduced the total to 12,343. Because some of the failures and the mergers have occurred among big institutions, the actual contraction is understated. Interestingly, though, the most consistent trend in the industry since the early 1930s has been the steady expansion in the number of branches. It may come as a shock, but despite all the upheaval, banking continues to be a growing business.
Thomas Easton writes about business from The Sun's New York bureau.
The five largest U.S. bank mergers of the past four years. The acquisitions are rated according to the amount of the assets the absorbed bank now holds.
BUYER: Chemical Banking Corp., (N.Y.)
SELLER: Manufacturers Hanover Trust Corp., (N.Y.)
.. .. .. .. .. .. .. .. .. .. .. .. ..$61.3 billion in assets
BUYER: NCNB Corp., Charlotte (N.C.)
SELLER: C&S-Sovran Corp., Norfolk (Va.)
.. .. .. .. .. .. .. .. .. .. .. .. ..$49.2 billion
BUYER: Bank of New York Co. (N.Y.)
SELLER: Irving Bank Corp., (N.Y.)
.. .. .. .. .. .. .. .. .. .. .. .. ..$24.2 billion
BUYER: Sovran Financial Corp., Norfold (Va.)
SELLER: Citizens & Southern Corp, Atlanta (Ga.)
.. .. .. .. .. .. .. .. .. .. .. .. ..$23.0 billion
BUYER: Chemical New York Corp., New York (N.Y.)
SELLER: Texas Commerce Bancshares, Houston, (Texas)
.. .. .. .. .. .. .. .. .. .. .. .. ..$19.2 billion
SOURCE: Alex Sheshunoff & Co. Inc/ASSOCIATED PRESS