WASHINGTON — A wave of mergers has given the nation's 100 largest banks a huge deposit increase of $454 billion since 1985 and threatens to cripple lending in local communities, Rep. Henry Gonzalez (D-Tex.), chairman of the House Banking Committee, said Sunday.
"The draining of funds" may cause "substantial economic and social" problems as local businesses and families find it harder to get loans, Gonzalez said as he issued a committee staff study on bank mergers.
The big banks, federal financial regulators and Bush Administration officials are enthusiastic about the prospects for mergers to produce a more efficient industry by cutting costs, reducing the number of branches and slashing payrolls.
The Administration wants Congress to give banks the power to move across state lines without restrictions, a step that would lead to further consolidation.
On Friday, the Justice Department announced its support for one of the biggest proposed mergers, the combination of BankAmerica and Security Pacific Corp., which is expected to win final approval by the Federal Reserve Board this spring.
However, Gonzalez remains deeply skeptical of the merger trend. His staff report claimed that big bank holding companies drain money from many of the states where they own subsidiary banks and shift it back to the company's home state.
The report studied the 15 largest banks with interstate activity, including BankAmerica, Security Pacific and First Interstate Corp.
The "satellite organizations," the local banks in 38 states, had assets of $359 billion.
There were 83 satellite banking groups, and 33 of them were draining funds from the host states--their loan volume was 20% below the general level of lending activity in the states, according to the report.
"If funds are in fact drained from local communities by interstate banks," the report said, "the end result of the disinvestment will be reduced economic opportunities in the community accompanied by a tangible decline in the quality of life within that community. Disinvestment in states and local communities could be accelerated by interstate branching or banking."
Arizona, Nevada, Oregon and Colorado were among the 25 states from which a satellite bank was draining funds, the report said.
The argument over whether big banks hurt local markets is sure to intensify as the merger trend accelerates.
The biggest banks hold an ever-increasing share of industry assets and deposits. There are 12,096 banks with aggregate domestic loans of $2.8 trillion, assets of $4.5 trillion and domestic deposits of $3.3 trillion.
But a comparative handful of institutions--the 100 largest--account for 51.6% of domestic loans, 53.9% of assets and 45.4% of all domestic deposits.
The holdings are becoming more concentrated every year. Since 1985, for example, total assets climbed $712.3 billion, with $623.1 billion at the biggest banks. Domestic deposits climbed $511.8 billion, with $454.7 billion at the leading institutions.
When "fewer organizations and fewer people" make the decisions on lending money, there is a much greater danger of economic volatility, the report warned. A decision by two or three banks to cut back lending could turn an economic slowdown into a major slump. A decision to make more loans by some big banks could promote a recovery, or even a boom, the report suggested.
Gonzalez and others in Congress worry about the implications of this power for economic and political consequences.
It's a familiar tale in American history, with a struggle over the power and influence of banks, the report said. "It is the fear of undue economic influence by a few large institutions and the necessarily close relationship between these institutions and the government, and the potential for abuse of that relationship, that has been at the heart of all arguments against a consolidated (banking) industry since this country was founded."
The report argued that the disappearance of more than 2,600 banks since 1985 has brought scant benefits. "There has been no increase in industry profitability over this period, in fact, loan losses and institution failures have skyrocketed and the (federal) deposit insurance funds are now dependent on U.S. Department of Treasury borrowings to meet their obligations."