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While growing, banks lost ground

The banking revolution in America is as much about attitudes and assumptions as about size and structure. For centuries, Americans have distrusted banks. In the 1830s, Andrew Jackson denounced and destroyed the Second Bank of the United States, which existed "to make the rich richer." In the 1930s, banks were blamed for helping cause the Depression. The wonder, then, is that the latest wave of bank mergers _ the largest ever _ has inspired little more than a bewildered and, perhaps, irritated shrug from the public.

We've had mild grumbling about ATM fees but no outcry about dangerous financial power: precisely what would have happened a few decades ago. For the proposed marriages are huge. A combined Citicorp and Travelers would have assets of $700-billion; NationsBank and BankAmerica would total about $525-billion, and Banc One/First Chicago NBD would have assets of about $230-billion. Yet, federal agencies will probably approve all three.

As banks grow bigger, they seem less fearsome. Why? The answer is that banks have shrunk in power even as they have expanded in size. Traditionally, banking has been a simple business. Deposits come through one door; loans go out through another. Profits derive from the "spread" between interest rates on deposits and loans (minus overhead costs). If savers and borrowers cannot go elsewhere, banks are powerful. If there are other choices, banks are less powerful.

Consider this indicator of banks' eroded power: between 1990 and 1997, there were an estimated 14-billion credit-card solicitations; that's about 50 for every American. Banks are fighting to get people to borrow from them. Nor is there a scarcity of places for people to plant their money. Customers can write checks on money-market funds; stock-market mutual funds have exploded from 288 in 1980 to 2,626 in 1996. Similarly, big companies can raise or invest funds in many ways.

"We inhabit an age of superabundant credit and its purveyors," writes Ron Chernow in The Death of the Banker. A century ago, as Chernow shows, matters were different. Small depositors could choose from only one or several local banks; getting a loan meant winning the good graces of the neighborhood banker.

John Reed or Hugh McColl _ the heads of Citicorp and NationsBank _ are not household names. In 1900, J.P. Morgan was. He was "a fierce, swaggering buccaneer," writes Chernow. As head of J.P. Morgan & Co., he controlled _ through stock and positions on corporate boards _ a third of U.S. railroads and 70 percent of the steel industry. A railroad executive once cheerfully confessed his dependence on Morgan's capital: "If Mr. Morgan were to order me tomorrow to China or Siberia . . . I would go."

No banker today inspires such awe or fear. Time, technology and government restrictions weakened bank power. In the 1920s, auto companies popularized car loans. National credit cards originated in 1950. In 1933, the Glass-Steagall Act required banks and their investment houses to split. After World War II, pensions and the stock market competed for consumer savings. As a result, banks command a shrinking share of the nation's wealth: 20 percent of assets of financial institutions in 1997, down from 50 percent in 1950.

As for the present merger wave, it's being driven by three forces. The first is the dismantling of government restrictions intended to check bank power. Congress barred national banks from branching across state lines; many states barred within-state branching. The idea was to frustrate any single bank from dominating a state. In 1994, Congress permitted interstate branching; before that, many states had repealed their restrictions. This unleashed hundreds of mergers that otherwise would have occurred years ago. In 1984, there were 14,483 banks; in 1997, there were 9,166.

The second force is the prospect of cost savings. BankAmerica and NationsBank project $2-billion in annual savings from their merger. Some overlapping departments would vanish; perhaps 5,000 to 8,000 jobs out of 180,000 would be cut.

The largest force propelling these mergers, though, is a change in perceptions. The old Balkanized system of finance (where banks, brokers, insurers all had distinct identities) corresponds less and less with how savers and borrowers view the world. No one knows how customers want their choices delivered: whether by one or many sellers; whether from behind a desk or over the Internet. But if banks can't compete to see what works best, they will wither. Realizing this, Congress and government regulators are lifting restrictions.

This does not mean that these mergers will succeed or that the new world of finance will be problem-free. It won't. But it does signal that banks no longer incite the fear they once did. The upheaval is social and political as much as economic.

+ Robert J. Samuelson is a columnist for Newsweek. +

Washington Post Writers Group