Muscling Up to the Big Guys

By Anastasia Toufexis

Few struggles in American industry are fiercer than the one now being waged between the Davids and Goliaths of the banking world. As such giants as Citicorp, Chase Manhattan and Bank of America press their campaign for unlimited interstate banking, smaller lenders are fighting back. Last week the Supreme Court dealt the big guys a major blow. In an 8-to-0 vote, the court ruled that local institutions can form regional networks that shut out larger rivals based in other states.

The decision upheld the so-called New England Compact, which allows mergers across state lines by banks in the region. With the court's verdict, Bank of Boston (1984 assets: $22.1 billion), New England's No. 1 lender, will now acquire Colonial Bancorp of Waterbury, Conn. (assets $1.5 billion), and RIHT Financial Corp. (assets $2.3 billion) of Providence for about $200 million. Said a disappointed Hans Angermueller, vice chairman of Citicorp (assets $150.1 billion), which led the legal fight against the regional pact: "Banking is the only industry that still enjoys local protection."

Fourteen states, mainly in the Northeast and South, have laws allowing regional banks to join forces. Specifically locked out of the agreements are New York and California, home to the biggest U.S. banks. The court action seems certain to spur new mergers between regional institutions. In the South, the decision immediately cleared the way for Citizens & Southern (assets $8 billion), Georgia's largest bank-holding company, to acquire Landmark Banking Corp. (assets $3.8 billion). Harry Keefe Jr., chairman of the Wall Street brokerage firm of Keefe, Bruyette & Woods, predicts that the pace of acquisitions will accelerate. "There are only 22 institutions with assets of $20 billion or more," he notes. "That figure should double in the next five years."

The focus of the big banks' drive to enter new territory will now shift to Congress. The large financial companies are pinning their hopes on a bill that will open regional arrangements to all banks in five years. It sets July 1, 1990, as a trigger date, after which the barriers against outsiders will be dropped. The legislation was approved last week by the House Banking Committee. Said William Dabaghi, general counsel to the Coalition for Regional Banking and Economic Development, which represents medium-size lenders: "Unfortunately, our opponents did their homework and managed to convince a number of the swing voters on the committee to go along with the trigger."

But not all the news from Capitol Hill was good for the major financial institutions. In a separate action, the House panel voted to close a legal loophole that has allowed banks to expand across state lines by setting up so- called limited-service branches. Such facilities either make commercial loans or accept deposits, but not both. Thus they evade statutes that bar interstate banking.

These restricted operations were attacked last month by a federal court in Atlanta. The court decided that they are in effect banks and therefore subject to the same regulations as banks. If upheld, the decision will prevent the establishment of new limited-service banks and could jeopardize those that already exist.

The big banks, meanwhile, continue to be welcome in a number of states that seek the additional business. Chase Manhattan last week opened 22 new Ohio branches acquired from six troubled savings and loan associations. They will be part of the Chase Bank of Ohio, a new subsidiary of the third largest U.S. bankholding company.

With reporting by Christopher Redman/Washington and Frederick Ungeheuer/New York