April 21, 1998 – published in St. Paul Pioneer Press
The announced marriage of Travelers Group and Citicorp, and the wave of megamergers it inspired, once again puts size into the policy spotlight. Size matters. But contrary to what the bolsters of bigness promise, when it comes to those elements that matter most—cost, profitability, responsiveness, creativity–the bigger they are, the harder they fail. As Alan Abelson of Barrons notes, “If size equaled success, then Deutsche Bank and Bank of Tokyo-Mitsubishi would be eating Wall Street’s lunch.”
When Fed Chairman Alan Greenspan opens wide the door to giantism, he is ignoring the findings of his own institution. Robert Parry, President of the San Francisco Federal Reserve Bank is more forthright. “(O)nce a bank is larger than $400 million in deposits, economies of scale appear to be exhausted.” An in-depth study by two other Federal Reserve economists concluded, “Small banks generally perform as well, or better, than large banks.” In 1990, 11,194 of the 12,165 banks in the United States had assets under $300 million. The proposed Citigroup would have assets over $700 billion.
Large banks like to do business with large corporations. That’s why 90 percent of all loans to small businesses are made by small banks. According to the National Federation of Independent Businesses, members, “located in unit branching states(with few branches) rated their bank’s performance significantly better than firms in statewide branching states.”
Large banks are less responsive to the needs of households. According to Public Citizen, big banks impose higher fees on their customers than smaller banks or credit unions. No wonder almost 7 out of 10 respondents to American Banker’s consumer survey preferred community banks.
Breaking down the firewalls Congress constructed in the 1930s between the speculative and investment sides of the finance industry will bring few if any efficiencies. Last year the GAO concluded, “the potential benefits of mixing banking and commerce generally lacked empirical support…”
The benefits of giant banks may be trivial. The potential harm is not. Separating banks from their communities is a costly proposition. Some 15 years ago Congress severed the link between money and community in the savings and loan industry. The tab for that error in judgment has already reached $150 billion.
Banking expert Martin Mayer observes that in “countries that opted for a more ‘universal bank'”, like France, Spain, Sweden and Finland, “the outcome was the same: failed big banks, money-losing nonfinancial subsidiaries, huge bills to the taxpayer…”
The bigger you are, the less likely that government will let you fail. In the last 20 years, taxpayers have been forced to step in several times to bail out teetering banks that were a fraction the size of the proposed behemoths.
Concentrated power breeds arrogance. What else would you call it when a few days after Congress, for the dozenth time, failed to make it legal for insurance companies and banks to merge, the CEOs of Travelers and Citicorp announced they would ignore Congress and go ahead anyway? Did our national legislators stand up and tell CEOs Weill and Reed they would not be cowed? Hardly. Instead, they scrambled to reconsider their rejection.
The New York Times editorializes that the merger “threatens no one”. I would say it and all of its brethren threatens all of us. Bigness concentrates economic power. And concentrated economic power begets concentrated political power. As Thomas Jefferson once observed, “Banks are more dangerous than standing armies.” Congress has the power to stop this danger in its tracks. It can, and should, put an end to the piecemeal dismantling of the curbs on bigness by the regulatory agencies by enacting legislation that declares once and for all, “Financial giantism is a threat to democracy.”
This is an election year. Those who want to make decisions on our behalf should be compelled to tell us what they would do to stop this rapid concentration of economic power. Giantism is not inevitable. It happens when we let it happen. A hundred years ago we allowed manufacturing industries to merge. The result was an unprecedented concentration of economic and political power. After much pain, we came to our senses and enacted legislation that broke up the industrial trusts and paved the way for a more competitive, democratic economic system.
In the last few years we have forgotten our own painful history. It’s time to wake up. We should tell Travelers and Citicorp, and Bank of America and NationsBank, and First Chicago and Bank One that what they propose is dangerous to the nation’s health and we won’t allow it.