Sunday, October 2, 2005

The Federal Reserve is considering a rule that is likely to encourage further consolidation in the financial industry. It would allow banks to take on more debt to finance acquisitions.

At the current rate, the number of banks is likely to fall soon to half as many as operated 20 years ago. There were 7,630 commercial banks in the United States at the end of last year, according to the Federal Deposit Insurance Corp., the government’s banking regulator. In 1984, there were 14,496 banks.

However, fewer banks is not anything consumers need to worry about, according to some banking industry officials. “It’s a good thing, because banks are getting strong,” FDIC spokesman David Barr said.

Under the Federal Reserve’s proposal, banks with assets up to $500 million could use debt to finance as much as 75 percent of the purchase price of another financial institution. Currently, only banks with assets up to $150 million can carry so much debt for an acquisition.

The Fed is trying to make more funding available to small banks to allow them to grow through acquisitions, Fed officials said in congressional testimony.

The proposal is in the public comment stage and could become final within months if regulators do not modify it.

In a recent example of the industry’s consolidations, Wachovia Corp. last month said it would buy auto-loan financier Westcorp for $3.91 billion.

“Together, we’ll have more to offer clients and a broader financial base on which to grow,” said Westcorp Chairman Ernest S. Rady.

Wachovia, with $459.5 billion, is ranked fourth in total assets among commercial banks.

Wachovia, Bank of America, JP Morgan Chase and Citibank control more than one-third of the nation’s $8.7 trillion in banking industry assets.

“They have a lot of liquidity,” Mr. Barr said. “The banking industry is extremely healthy in the U.S.”

With interest rates low — though climbing — and banks earning record first-quarter revenue of $34.2 billion this year, big banks are using their excess cash to capture a larger share of the market.

Large banks say consumers will benefit by receiving more services at cheaper rates.

Community banks say consolidations mean bigger banks will not serve small and medium-sized businesses as well.

“The answer is, it depends,” said Stephen Brobeck, executive director of the Consumer Federation of America.

For auto loans, intense competition means consumers have little difficulty finding reasonable rates on loans.

For checking accounts, big banks that close their least profitable branches in low- to moderate-income communities leave consumers with fewer options to avoid exorbitant rates.

“The question is not how many banks and credit unions there are,” Mr. Brobeck said. “The question is, do consumers have competitive options for each product they want to purchase.”

The biggest deal so far this year was Bank of America’s $35 billion acquisition of credit card issuer MBNA.

Local consolidations this year include the $211 million sale of Community Bank of Northern Virginia to Mercantile Bank in May; the $311 million sale of Columbia Bancorp in Ellicott City, Md., to Lancaster, Pa., company Fulton Financial in July; and the planned $5 billion purchase of Hibernia Bank by McLean credit card issuer Capital One Financial Corp.

David Danielson, president of Rockville banking consulting firm Danielson Associates, said banks might hurt themselves if the consolidations go too far.

“They’re trying to acquire market share, and they’re hoping for efficiencies,” Mr. Danielson said. “If you’re already efficient, how much more efficient can you become? It could be difficult for banks to increase profits going forward.”

In addition, their fortunes come largely from the real estate boom, which is slowing, he said.

Community banks say the big bank mergers and acquisitions are unwittingly benefiting their smaller competitors, who serve niche markets for local businesses.

“Most of our community bankers would tell you they dance in the streets every time they hear about another big bank acquisition,” said Bob Schmermund, spokesman for America’s Community Bankers, a trade association for community banks. “Our bankers tell us that when these mergers get announced, it creates great opportunities for the middle market.”

Sandy Spring Bank in Olney and Virginia Commerce Bank in Arlington both are prospering in part because residents prefer banks they perceive as members of their local community, Mr. Schmermund said.

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