'National' banks becoming more than a name; 3-tier system forecast

J. Terrence Murray, chairman and president of the Fleet Financial Group in Providence, R.I., drove over the Rhode Island-Massachusetts border this week to announce plans to open a new national bank July 2 in Boston. Mr. Murray made a similar announcement last week in Connecticut, for Hartford.

A few years ago, such a business venture would have been impossible. But with the help of changing state banking laws, the growth of electronic banking, and the expansion of financial services to "nonbank banks" like Merrill Lynch & Co. and Sears, Roebuck & Co., the banking industry is moving quickly to develop an interstate banking system. This system may benefit some customers with its electronic conveniences but alienate others who want more personal attention from their bankers.

The leader of this movement is Citicorp, the giant New York bank holding company, and its flagship institution, Citibank. Last week Citicorp got the goahead to buy financially troubled savings-and-loan associations in Chicago and Miami; last year it took over an S&L in California.

For bankers like John W. Heilshorn, Citicorp's executive vice-president in charge of strategy and development, the move to interstate banking is just a matter of meeting the competition head-on.

The threat of the nonbanks is "very real," he says. "It demonstrates very well what a free market can do."

By selling real estate, stocks, and writing consumer loans in every state, Mr. Heilshorn continues, "Sears has shown it can make money for its stockholders . . . banks should be able to do the same."

Besides, he adds, banks are the only industry that cannot sell all their products in any state they choose. And with the expansion and sophistication of electronic banking systems, that prohibition is out of date, he contends.

"The sheer cost of delivering some of these interstate services -- data processing, telecommunications -- is just gigantic," says Robert Person, a partner and banking specialist in the Los Angeles office of Coopers & Lybrand, the accounting firm. "Small banks just can't afford it."

"Interstate banking has to come," Muriel Siebert, former New York State banking commissioner, contends. "We're going to start with regional banking. . . . We've had all the electronic wonders that have happened. Banking has changed. Financial management has changed. But the laws haven't changed. As a result, we've had what I call banking by loophole, innovation by loophole."

The loopholes Miss Siebert refers to include the selling of certificates of deposit and money-market deposit accounts by mail, even though banks are supposedly prohibited from taking consumer deposits on an interstate basis; nationwide credit card distribution; discount-brokerage offices being opened in several states by one bank; and loan-production offices turned into branches that can offer almost all banking services -- particularly the most profitable ones.

"Interstate banking is, in effect, here today," says David D. Whitehead, an economist with the Federal Reserve Bank of Atlanta. "Market forces alone are helping move the industry in that direction."

Regulatory forces have helped, too. When the Federal Home Loan Bank Board permitted Citibank to take over the troubled Freedom Federal Savings & Loan in California last year, notes Michael Rosen, a Boston lawyer who specializes in banking and bank mergers, "it broke down a major barrier" to interstate banking.

The result of these moves, observers believe, will be a loosely constructed three-tiered banking system:

* The top tier will consist of firms like Citibank and Bank of America, offering products and services on a nationwide basis, while taking over institutions in selected cities.

* In the second tier will be institutions like Bank of Boston and Fleet Financial, two banks trying to become dominant in their region by capitalizing on agreements among several New England states that permit New England banks to acquire banks in other states in the region while prohibiting those from outside the region from doing so.

Citicorp recently filed suit in federal court in Boston, seeking the immediate suspension of this so-called New England Compact. It complained that the arrangement by state legislatures illegally bars non-New England banks from doing what they can do in other states and so is unconstitutional. The outcome will be closely watched by other states planning to forge regional interstate banking agreements.

* The third tier will be made up of the thousands of smaller, community banks that manage to stay independent, or that have agreements with other similar banks to share the expenses of some services, like electronic banking.

For the banking consumer, the move to interstate banking could be a mixed blessing. Those who can do more banking at home, either by telephone or home computer, will have access to a much broader range of banking services and products. They will be able to find the highest-yielding accounts and move money at any times, buy stocks, pay bills, and order gifts.

People who prefer the brick-and-mortar bank on the corner are expected to see fewer of these and will find encouragement to do more banking by mail or phone.

And for everyone, the cost structure of various banking services, like checking accounts, use of automatic teller machines (ATM), and bill-paying at home, will change, with some fees being cut and some going down. Mr. Person compares the change to the pricing of telephone company services. As the breakup of the American Telephone & Telegraph Company is expected to result in more specific pricing of phone services and products, the consolidation of the banking industry could have the same result, Person thinks. It may be cheaper, for instance, to use an ATM in the evening, when the bank's computers are not as busy, than during the day.

For the industry as a whole, the most visible effect is expected to be fewer banks.

There are about 14,500 banks in the United States today. Of these, about 13, 000 are considered "small," with assets of less than $120 million, according to the American Bankers Association. By comparison, Citibank's assets last year totaled some $111.1 billion, putting it in second place behind Bank of America's

Estimates vary widely as to how many of the smaller banks will be eliminated or absorbed.Instead of 14,500, there might be about 9,500 by the end of the decade, Person says. Others believe the figure may go as low as 5,000. But predictions of a massive reduction in the banking industry to a few hundred are widely discounted.

"There will always be room for a well-run, well-capitalized community bank," Person said.

For now, at least, there are enough of these small banks to give them the clout in Congress to prevent any move to full, unfettered interstate banking that might threaten their existence.

"It would be like attacking motherhood" for Congress to remove protections from the small banks, Mr. Rosen says, particularly since many of the bankers running these institutions have made themselves well-known to the congressmen from their districts.