The Battle of Big and Little

LIKE small-town America itself, the independent local bank has been fading away in many parts of the country, overcome by progress and competition from rich, efficient multibranch banking firms that are headquartered in big cities. In recent years, despite some Government constraints on bank expansions, the spread of large institutions to the suburbs and small towns has substantially quickened, investing major banks with ever more financial clout and raising howls from small bankers. As a result, the old arguments over how banking can best serve the economy and the public have burst into a controversy that will soon reach the Supreme Court and the Congress.

In the last quarter-century the number of U.S. banks has shrunk from 14,759 to 13,000. Today the top 100 largest hold 54% of all commercial deposits, up from 48% seven years ago. In California, where banks can open branches anywhere, eight companies own 2,469 of the state's 3,126 banks; the Bank of America alone has 1,001. Forbidden by state law to set up branches outside the city, leading New York banks like Chase Manhattan and First National City are buying up institutions in the state through their bank holding companies. In Missouri, bank holding companies are acquiring small banks at a rapid rate and now have more than 50% of deposits, v. 15% three years ago.

The decline in the economies of many urban areas is also pushing large city banks into the suburbs. "The profitability of the seven largest banks in New York City, excluding their international operations, is at best mediocre," says Edward G. Webb, a vice president of Manhattan's Irving Trust Co.

With scant evidence to back their argument, independent bankers charge that absentee-owned branch banks, left unchecked, will wipe them out, dominate the country's economy and put profit above personal service and the local community's needs. They contend that society is healthier when control of credit is as diffuse as possible. John Harris, president of Callaway Bank of Fulton, Mo., asks: "If you were a holding company bank and money was tight, who would you take care of first--your little guy from Boonville or your big corporate customer?" Adds Allen Stults, past president of the American Bankers Association: "Big banks may be more efficient, but is that all we want? After all, the most efficient form of government is a dictatorship."

The chiefs of big branch banks counter that in providing competition in small towns they not only improve the efficiency of community banks but also offer residents a wider array of services, like computerized checking and often cheaper loan rates. Small banks can also be autocratic monopolies. James M. Kemper Jr., chairman of Commerce Bancshares Inc. of Kansas City, Mo., recalls: "As we moved into areas dominated by one bank, we found that in two towns the independents refused to offer even savings-account services. Now the townsfolk have the opportunity to earn interest on their savings." The most serious argument against small banks is that they frequently do not have the capital to meet the needs of individual and corporate borrowers in suburbs and growing rural areas.

Landmark. The battle of the banks is causing headaches in Washington. Bennett Gellman, staff member of the House Banking and Currency Committee, explains: "There's no 'right' answer. The best policy is to lean toward independent units because they offer more competition. But you need some of the big banks down there, too, as a spur." Says an official of the Federal Reserve: "This problem of big banks and small banks is one we debate day by day in board meetings."

An important check on the big banks' expansion policies could come in the next few weeks, when the Supreme Court is due to rule on a landmark case involving an offer by the First National Bancorporation Inc. of Denver to buy the First National Bank of Greeley, Colo. The Justice Department is opposing the purchase. It argues that by buying an existing bank instead of starting one, the holding company offers customers no new choice and could eliminate "potential competition" at some later date. The lower courts have ruled that present antitrust legislation covers only actual competition, and found against Justice. If the Supreme Court upholds the earlier decisions, Representative Wright Patman of Texas, the scourge of big banks, intends to get at them in Congress. He plans a bill making the test of "potential competition" mandatory in all bank mergers that are subject to Government approval.

The need for balancing the large against the little will continue to be an issue that will disturb bankers and their Government regulators. The most promising trend, in the view of Willard Rappleye, editor of the influential American Banker, is the rise of medium-sized, highly profitable regional banks with assets of $1 billion or so. These institutions, especially in Tennessee, Missouri, North Carolina, Florida and Texas, have gained strong positions in their areas, largely through shrewd acquisitions by their holding companies of independent banks and mortgage companies. Unlike the $20 billion giants, the medium-sized regional banks are small enough to avoid antitrust litigation, yet big enough to provide sound management and a wide array of services for people who want to borrow, save or invest money.

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