President's Message: Life after Bank Mergers

Stories about bank mergers, like the blockbuster combination of Chase Manhattan and Chemical Bank, have blanketed the news recently, with economists forecasting even more to come now that the Riegle-Neal Interstate Banking and Branching Act has begun to take effect. This proliferation has caused some people to become uneasy about the level of choice and service they'll be left with in the post-consolidation era.

Although understandable, such concern is unfounded for several reasons. To begin with, competition is ultimately protected by government regulation. Although it generally allows banks to broaden their businesses, Riegle-Neal also limits the portion of a state's banking deposits that can be held by any one bank. Depending on the gravity of the situation, federal antitrust laws could be invoked, as well.

Regulatory measures aside, market safeguards are also in place and are likely much more important. Our country has a plethora of banks—more than 10,000 at present. Thus, their number could shrink substantially before loss of competition ever becomes a serious issue. Moreover, removal of geographic restrictions can actually enhance competition by opening up formerly protected local markets to entry by outside banks. Electronic banking services, which are essentially free from physical and geographical constraints, have the same ability to penetrate formerly closed markets. Add to that the competition that comes from other types of financial institutions, such as mutual funds and securities brokers, which are increasingly offering services like transaction accounts that were formerly the sole province of commercial banks.

While leading to consolidation, increased branching is also likely to make banking more convenient for consumers. For example, businesses with locations in more than one state will be able to conduct their financial transactions through a single bank that has interstate operations. Consumers who live in one state and work in another would realize similar benefits.

Finally, expanded branching can also make the banking industry less failure-prone, which benefits everyone in the long run. Through geographical diversification, bankers are able to offset losses they may suffer when one region of the country experiences a downturn with profits earned in another region that is faring better.

Of course, the ultimate structure of the banking industry rests largely with consumers themselves. If the public chooses to patronize small community banks, which may offer more personalized service, these banks will stay in business. If, however, the public opts for the convenience that bigger banks can provide, they will win out. My guess is that consumers will continue to have choices for a long time to come.