Greasing The Rails For The Bank Merger Express

First came the stealthy forays into the securities business. Now, it's the one-a-week megamergers. Surely and not so slowly, the banking industry is remaking itself. And it's doing so without the imprimatur of legislation from Congress.

That raises the question of what Washington's role should be as the battered industry searches for ways to restore its health. The short answer is: a supporting role. Regulators should continue to forbear, and Congress should clean up the legislative mess it has made over the years. The industry, perhaps tardily, is attempting to face reality. Lawmakers need to erase Depression-era laws that prevent banks from making business decisions that could solve their woes.

MAKE A WISH. The moves banks have made so far are steps in the right direction. By closing bank branches and combining back-office operations, merged banks can cut costs and help stem incessant losses. "There's no question that these large-bank combinations are good for the banking system," says James J. McDermott Jr., president of Keefe, Bruyette & Woods Inc. "They are creating stronger, better-earning institutions." That means we'll see more linkups such as the mergers of Bank of America and Security Pacific, Chemical Bank and Manufacturers Hanover, and NCNB and C&S/Sovran.

Those gargantuan deals should go through with surprisingly little comment from Washington. Aside from assuring themselves that the big new banks have adequate capital, the regulators mostly have been cheerleaders, strongly endorsing bank consolidation. Federal Reserve Bank of New York President E. Gerald Corrigan, for instance, sent a clear message at a New York State Bankers Assn. meeting in January, when he praised the cost savings and business synergies in mergers. "I would be very surprised--perhaps disappointed--if when we meet here next year, one or more mergers among the largest banks in the U. S. are not already a reality," he said.He got his wish in spades, without overt government intervention. "It's essentially a private-sector decision," says Federal Deposit Insurance Corp. Chairman L. William Seidman. "We're not the matchmakers."

And they're not home wreckers. Not long ago, the sheer size of the deals--the new Bank of America will be the second-largest bank in the country, with $190 billion in assets--would have set off alarms at the Justice Dept.'s Antitrust Div. Tot up the mergers already announced, plus the others now in the rumor stage, and the nation's seven biggest banks could soon control about a third of U. S. banking assets.

NEW LOANS? The trustbusters don't blink at that number because they no longer see banks as the only players in the savings-and-lending business. Now, nonbank companies, including local credit unions, GE Capital, and American Express, count, too. Such competition ensures that consumers aren't likely to be hurt by the new banking giants. In fact, consumers and businesses alike could eventually benefit when chastened banks start making loans again rather than pumping money into their shriveled capital bases.

If this be the fruit of the regulators' benign neglect, what should Congress do? Should it, too, just butt out? Not at all. Congress is one place in official Washington where action on banking is long overdue. Lawmakers, who have been wrangling over bank reform for years, should finally dismantle the nation's outdated banking laws. Congress should let banks move freely across state lines and offer other financial services such as securities underwriting and insurance. That way, banks can adopt strategies based on the needs of the markets, rather than on rules drafted in Washington.

The industry may need a radical restructuring to solve its financial ills. Congress should smooth the way, and the rest of Washington should do what it does best: nothing.

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