Bank Notes

Nature rewards efficiency. So does business. It won't take too many years to discover whether the latest, continent-spanning and global American bank mergers are efficient enough to enjoy such rewards.

Logic says they will be. Economies of scale are obvious: Two can live more cheaply as one in marketing, purchasing, administration, total number of branches and employees - if they know what they're doing.

Beyond that simple equation, three questions immediately arise:

1. Who benefits from the efficiency reward? The banking public? Stockholders? Both?

2. What are the economic risks - and what can be done to prevent them?

3. Do customers want just a bank, or a one-stop supermarket for financial products and planning?

First, the benefits. Some critics are already charging that giant institutions with remote headquarters will hand the banking public both more impersonal service and higher fees. That could happen. But probability favors an opposite result.

Why? In the current stiffer antitrust atmosphere at the Justice Department, no merger will be allowed to leave any region of the US shorn of actively competing banks. Such competition should force the newly merged giants to deliver some of the benefits of economies of scale back to customers. That means highly competitive fees, loan costs, and interest paid on deposits. Otherwise the existing bank in the next block will gain customers from the perhaps-renamed branch emerging from the megamerger. And clearly the aggressive top management that drove the merger will be riding herd on branch managers to produce competitive rates and prompt, friendly service to woo new customers and keep old ones.

So, if well managed, consolidation should benefit both customers and stockholders. And employees losing jobs will do so in a boom market for financial service professionals.

Second, risks. The third world petro-dollar loans of the '70s, savings and loan crisis of the '80s, and current East Asian crisis remind us that banks can make bad loans. And bigger banks can make more and larger ones. Then add a complicating factor. One-stop financial supermarkets - the kind that Citicorp and Travelers are promising the world - could see their reserves threatened by a stock market plunge or a Hurricane Hugo insurance payments rush, as well as loan problems.

The scenario needn't be as dire as it sounds. The primary remedies will require: (1) Carefully designed deposit insurance to cover added risks caused by huge size and varied loan, mutual fund, and insurance products. (2) Full "transparency," so regulatory agencies know what's going on at all times. That will require coordination among federal and state agencies, and among their bank, securities, and insurance examiner personnel.

As the president of the Federal Reserve Bank of Minneapolis wrote recently, Congress needs to keep pace with these mergers by revising deposit insurance laws. One aspect would be holding to a firm ceiling of $100,000 on the amount of reimbursement for any one deposit. That forces big depositors to diversify and/or pay attention to a bank's soundness. Another aspect requires making sure that insurance premiums are calibrated to conform to the risk in each type and size of bank.

Third, financial supermarkets. Do you want to go to one place for a mortgage, business loan, checking account, savings account, CD, stock or bond mutual fund, auto, home, and life insurance - plus advice on any or all of the above?

Whew! Big question. Neither the consumer, nor Messrs. John Reed (Citicorp) and Sanford Weill (Travelers) knows the answer for sure. But in lashing those huge firms together into the future Citigroup (110-nation spread) they are making a well-educated guess that millions of people do want such a one-stop market so they can get advice on a balanced financial program and plan life financial goals.

The immense success of Schwab, Fidelity, and other giants in creating supermarkets that trade hundreds of different mutual funds in one place indicates that Reed and Weill are onto something. Especially since customers can both see a human adviser and later keep track by phone and Net.

But there's the catch! The Internet is a web reaching more households each week. And we suspect that, as many Americans become more sophisticated, they may use it to find individual financial planners with top reputations. That would lead, as in the retail shopping world, to www-dot-shopping-around for best savings rates, mortgages, mutual funds, brokerage rates, and insurance.

We suspect that in the brave new world of the 21st century there will be room for financial supermarkets and specialized boutiques. Room for continent-wide banks and local, specialized banks as well. Nature rewards efficiency, but also adroit specialization.