A small thrift institution does business just down the street. A block away, a branch of the failed Bank of New England, now owned by the government, remains open. Several paces further, the Bank of Boston - New England's biggest bank - receives customers. A few other banks have branches within a five-minute walk. That's an indication, in one city district, that the United States is, as many economists put it, ``over-banked.'' Competition among banks and with other financial institutions is fierce. In the US, there are more than 13,000 commercial banks, several thousand thrift institutions, and tens of thousands of branches.
The Bush administration's banking reform proposals of this week, if approved by Congress, would rapidly reduce the number of banks and thrifts in the country.
``Reform is overdue,'' says Harry Guenther, a professor of banking and finance at Northern Michigan University.
The Bush proposals would stimulate banking consolidation by allowing banks to branch nationwide. The reform would also abolish the 1933 Glass-Steagall Act that prevents banks from entering the securities business. Well-capitalized banks would be permitted to affiliate with securities firms, insurance companies, and mutual funds under a new financial-services holding-company structure. These holding companies could be owned by nonfinancial corporations. But how far does the US want to go with banking consolidation?
By comparison, Canada has eight domestic banks nationwide and a single bank regulator. In Germany, three big banks dominate the financial scene - and in a way, the economy, since they own large chunks of stock of many large companies.
Professor Guenther, who in the late 1970s ran the Conference of State Bank Supervisors and in the early 1980s was president of a well-known bank consulting firm in Washington, Carter Golembe Associates Inc., would not want and does not expect to see the number of banks reduced to the Canadian-German levels.
Andrew Brimmer, a former Federal Reserve Board governor, agrees. Should Congress repeal the McFadden Act, which limits interstate banking, he foresees banks getting bigger. Indeed, he says, it would result after many years in the formation of less than two dozen nationwide commercial banks - banks with branches in more than a third of the states or more than half of the 25 largest metropolitan areas. But another 50 or 60 banks would operate in two or more regions of the country - for example, the Northeast and New England. And a few thousand more banks would serve local areas or a single region, with traditional banking services or banking specialties, he says.
Moreover, many savings and loan associations will become banks or be taken over by bank holding companies, he predicts.
Dr. Brimmer, now a Washington bank consultant, does not expect many industrial companies to enter the banking business. Exceptions could be such companies as General Motors Corporation, General Electric Company, and Ford Motor Company, which already have major financing operations. In general, industrial firms ``will want to stick to what they know best,'' he says.
Guenther does see some benefits from fewer banks. Banks could diversify further their loans and other investments out of a single region. This geographic spread should alleviate such regional problems as the nonperforming real estate loans troubling New England banks today and Texas banks in the 1980s. Banks would add to competition by ``de novo'' branching across state lines, not just taking over banks in other states through holding companies. Bigger banks could take on larger loans safely.
But both Guenther and Brimmer see the need for alert enforcement of antitrust laws to assure that bank consolidation does not go too far. During the 1980s, Reagan antitrust officials were nearly dormant. Guenther, for example, wouldn't want to see one of the nation's biggest industrial companies take over one of its biggest banks. Nor would he want Citicorp to merge with Bank of America.
Foreign banks do provide increasing competition in the domestic banking market. However, Guenther does want an antitrust ``watchdog'' and thus is pleased that the Bush Justice Department shows some signs of life.