World's superbanks find bigger may not be better

Koji Takahashi hands out the American Banker's list of the world's biggest 500 banks with a certain glee. There at the top of the newspaper's list is his bank, Dai-Ichi Kangyo Bank Ltd. The Japanese bank has total assets of more than $330 billion, far above those of Citibank, the largest American bank. The New York bank ranks only 17th.

In perhaps typical Japanese style, Mr. Takahashi speaks of his ``heavy responsibility'' to help manage Dai-Ichi as a model institution in the interest of both the domestic and overseas public.

Takahashi, who has just become the No. 2 executive of Dai-Ichi, was in Chicago this week for the International Monetary Conference, attended each year by the top executives of the noncommunist world's largest 106 commercial banks and their guests.

One discussion topic was close to his heart: ``Regional banks, global banks, superbanks, universal banks: A look into the future.''

Dai-Ichi, with at least one branch in each prefecture in Japan and 59 offices in 28 other nations, qualifies as a global bank and superbank, but perhaps not as a universal bank. Japanese banks, like American banks, cannot fully enter the securities business at home. But Dai-Ichi does join in underwriting and trading corporate stocks in London, Hong Kong, Amsterdam, and Zurich, as do some American banks.

In recent years, banks around the world have been striving mightily, often through mergers, to become bigger. Faced with the increasing ``globalization'' of financial activity, their general theory has been that bigger is better.

Frederick Heldring, chief executive officer of a regional bank, Philadelphia National Bank, challenged that view.

``True, there are some real attractions in sheer size - an ability to compete for the limited number of truly global-sized financial deals, and greater opportunity for risk diversification, to name two,'' he told his fellow bankers. ``If this requires global superbanks, then here is a legitimate economic rationale for a limited number of such banks.

``I often hear about `economies of scale' in banking,'' he continued. ``But our business is by no means always scale driven. In many areas [for example, small- and middle-size business banking, private banking, personal trust], size actually seems to hinder effective customer service.''

The Philadelphia banker noted that the world's largest banks in size rank near the bottom of the top 150 in profitability. They have a lower return on investment than smaller institutions.

Dai-Ichi Kangyo's Takahashi conceded this was a challenge. His bank has 40 percent of its assets abroad, but gets only 20 percent of its profits from these foreign activities. Like other major Japanese banks, Dai-Ichi Kangyo has been expanding aggressively overseas, and not always at a good profit.

Mr. Heldring says that one problem of many banking giants may be ``a lack of focus.'' In the United States, the only superbanks that show profit levels close to those of the regional banks are the relatively few ``money-center banks,'' such as Morgan Guaranty Trust Company or Bankers Trust. These banks do have a focus, in this case on wholesale money market activities.

``It seems to me that the global superbank concept could be the last stand of the `all-things-to-all-customers' philosophy of banking, which at least among regional and smaller banks is markedly receding,'' he went on.

Adding injury to insult, Heldring suggested that the superbanks should be ``extra carefully regulated.'' He noted that because of their size, government regulators will not generally allow such major financial institutions to fail, for fear of prompting financial panic. The Federal Deposit Insurance Corporation will even repay customer deposits beyond the statutory limit of $100,000.

As a result, he argued, these big banks will be inclined to assume greater risks than they otherwise would.

John S. Reed, chairman of Citibank, admitted that the government might prevent such major banks as his own from failing, should they face the danger of failure. But it makes these banks ``vulnerable'' to being bullied by regulators, he said.

He held, however, that these banks are run in the interest of their stockholders, and thus their executives aim to avoid failure.

Another problem for many big banks would be boosting their capital to meet new international reserve requirements being considered by the central banks of the major industrial nations. The requirement, 8 percent of assets, is intended to reduce the risk of bank failures.

``It is not so easy to achieve,'' says Takahashi. His bank has been selling shares and convertible bonds (including 100 million yen, or $7.96 million, of convertible bonds in May) to raise capital.

The new capital requirements proposal is under review in each of the nations. If approved, it will go into effect at the end of 1992. A secondary goal will be ``leveling of the playing field'' - equalizing an important competitive factor among the major banks even though they have different national regulatory frameworks.