nection with this fact, the Department checked the postwar growth of individual commercial banks in New York City and found that the smaller banks on the average grew as fast, and sometimes faster, than the larger banks. This raises the question whether size alone gives necessarily a competitive advantage under all circumstances. Some of the smaller and medium-sized banks in the city have expressed the belief that more modest size assures them a greater flexibility in management and a greater responsiveness in negotiating with certain classes of customers. Some institutions have taken space in newspapers to profess their independence and to declare proudly that they feel no urge to merge. Decisions as to the most economic and advantageous size, however, are essentially management decisions. The Department believes that there is a place in banking for both large and small institutions, and that competition is invigorated by their existence side by side. State supervisors and banking concentration It is sometimes intimated that such concentration of banking as exists in the United States today can be laid at the door of the State supervisory authorities. It is further suggested that an effective remedy for the situation would be to give greater and even overriding powers to the Federal authorities. The Department tested this theory, which imputes laxity to the State, against the facts of concentration in the 16 cities compared above. These results are shown in the chart below, identical with that preceding, except that the shadings of the vertical bars distinguish State chartered from national banks. Examination of this chart made it at once clear that such problems of concentration as existed in various parts of the country did not come principally, let alone wholly, within the jurisdiction of State supervisors. The Department wants to emphasize the point that concentration is a question that conspicuously cuts across lines of supervisory authority. This fact is the premise for the Department's sponsorship of a definite interagency understanding between the national and State supervisory authorities. If such an agreement can be worked out on an interagency level, it will furnish an effective weapon in dealing with problems of undue banking concentration wherever they may arise. Historical background of concentration Concern over the recent mergers has been aroused by a widely held belief that banking concentration in New York City during the postwar period has been KANSAS CITY ST. LOUIS BALTIMORE PHILADELPHIA WASHINGTON, D.C. NEW YORK CITY* After Chase-Manhattan Merger PROVIDENCE PITTSBURGH MINNEAPOLIS CLEVELAND BOSTON growing by leaps and bounds. It is feared that these mergers may be changing the fundamental and competitive character of Manhattan's banking structure. The historical record sheds a different light on these misgivings. It reveals that concentration in New York City, for reasons already discussed, is not a new incident but that the city has been living with a relatively high level of deposit concentration for a long period of time. For the last 20 years prior to the mergers, without hardly any change, well over one-half of total deposits were accounted for by the 4 largest banks. As already illustrated in the intercity comparison above, the recent mergers raised the ratio to about 60 percent. The most important contributing factors to concentration in Manhattan banking have been 2 historical episodes: the speculative combinations undertaken during the boom period of the 1920's, and the shotgun mergers consummated during the depression. Going back as far as 1900, the record shows that at the turn of the century 21 percent of deposits were accounted for by the 4 largest institutions in New York City. By 1915 the ratio had increased to 30 percent, a level which was broadly maintained until 1923. Then the big surge began. From the 31 percent shown in 1923 the ratio rose sharply to over 45 percent by the end of 1929, and again to almost 54 percent by the end of 1935. In the next 20 years the ratio seasawed about the 1935 level. It rose to 56 percent in 1940, then dropped to 53 percent by the end of the war, and further down to 52 percent just before Korea. Immediately prior to the mergers the 4 largest banks had 53 percent of all deposits, and, as already seen, the ratio stands at about 61 percent today. Whether in the absence of further mergers it will remain there, rise further or fall to lower levels once more is difficult to predict beforehand. All these possibilities must be considered. But, to summarize, an historical review of banking concentration in New York City indicates that a relatively high degree of concentration has been a concomitant of Manhattan's central role in the banking world. TABLE 3.-Deposits held by four largest banks in New York City, 1900-1954 From 1900-1915, the data include all national banks, State banks and trust companies with head offices in Manhattan; from 1920 on, all member banks in Manhattan. Before giving effect to the mergers cited below in footnote 3. After taking account of mergers of Chemical-Corn Exchange, Chase-Manhattan-Bronx County Trust Bankers Trust-Public National, and National City-First National. Sources: New York State Banking Department, Comptroller of the Currency, Federal Reserve Bank of New York, Federal Reserve Bulletins and New York Clearinghouse. Diversification of banking services There was a time when major commercial banks in New York City could specialize in large corporate and personal accounts, turning away borrowers and depositors of more modest means to seek accommodation elsewhere. In part, this policy stimulated the tremendous growth experienced by such institutions as savings banks, savings and loan associations and licensed lenders. In effect, as will be pointed out below, the restrictive attitude of old-time bankers created their own competition. Now, the time for narrow specialization in large accounts only has almost passed. While all large banking institutions in the city continue their "wholesale" credit business, the more alert institutions have come to realize the advantages of diversification, and have embraced retail banking. Progressive management has taken cognizance of the redistribution of income that has occurred, and of the increasing wealth of the middle-income groups from whom the bulk of new bank customers are derived. Experience in New York City demonstrated that those banks that catered to Main Street kept better pace with the growth of the country than those institutions which, through default or by preference of management, clung to their rolltop desk traditions. History of personal loan departments Prior to 1936, commercial banks in New York State were not in a position to participate in direct consumer instalment lending because the maximum interest rate of 6 percent made it unprofitable for them to engage in this type of lending. In that year, however, the banking law was changed, permitting commercial banks to operate personal loan departments and charge as much as 12 percent effective interest on instalment loans, Since that time growth has been impressive. When the law was passed, only 41 State-chartered banks applied for permission to expand into retail banking. Today, 123 commercial banks with over 400 offices operate such departments. The number of loans granted rose from 16,000 to more than 370,000 in 1952, the last year when special reports for personal loan departments were required. The amount of such loans outstanding expanded from $3 million to $126 million in the same period. The event of consumer credit has transformed banking and brought it closer to the people. Advertisements in the newspapers and commercials on the radio and television attest vividly to the new retail consciousness of modern banking. Branches and retail banking The race for retail banking and the establishment of the necessary branch locations has not been equal. Some institutions were historically favored, having been in a position to profit, as it turned out, from the wave of mergers and liquidations in the thirties, when the protection of depositors of the weaker banks frequently required amalgamation with a stronger institution. Certain banks acquired virtually a citywide branch system in this fashion, as early as the beginning of World War II. Other large institutions, arriving at the retail scene later and adding branches more slowly, found themselves at a disadvantage in proper coverage of the broad consumer market. Particularly, the injunction in the New York State law against "overbanking," adopted as part of the reform legislation of the thirties, prevented the kind of proliferation of banking offices that would have been necessary to create a citywide branch system for every large commercial bank in Manhattan that wanted such a network. Not until the injudicious, pell-mell chartering of banks under the "free banking" era produced its harvest of failures in the thirties, did the idea impress itself, in banking as in other regulated industries, that competition is not the sole but only one of the criteria of the public interest. Consumer-minded banks, as a result of these developments, continued using the merger route as one means of acquiring branch outlets, otherwise difficult as well as costly to establish as new entities. But not until recently did largescale attempts of acquiring or rounding out branch systems thrust themselves into the foreground of public attention as they have this year. In summary, retail competition in New York City has prominently featured the more forward-looking and generally larger institutions which have pioneered in more and better services for the average customer. They have taken a keen interest in special programs to aid small businesses, in helping the returning veteran to set up shop, and in enlisting the participation of corre spondent banks in home modernization loans. These banks have blazed trails in consumer credit, special checking accounts, savings accounts, and in broad extensions of branch facilities to communities and areas which could not sup port their own individual banks. Distribution of branches It may be helpful at this point to consider the distribution of banking offices in New York City before and after the four mergers. The facts are shown in the accompanying chart and in table 4. Clearly, Manufacturers Trust Co., both before the consolidations and afterwards, ranked first as a branch bank in New York City. It operated 112 offices or 20 percent of the 556 commercial bank outlets in the 5 boroughs. This institution was not involved in the four most recent large mergers. TABLE 4.-Distribution of the 556 banking offices in New York City, Dec. 31, 1954 Limited offices are excluded. Since banks were merged before Dec. 31, 1954, figures are based on Oct. 7, 1954 data. The Corn Exchange Bank Trust Co., prior to the 4 big mergers, had the second largest branch system, with 79 offices, or 14 percent of the citywide total. The merger into the Chemical Bank gave the combined institution 98 offices, or 17 percent of total outlets. Previously the Chemical Bank with almost 3 times the assets of the Corn Exchange, had only 19 offices, or 3 percent of the total in New York City. The Chase National Bank, at the time it merged, had only 29 offices, or 5 percent of the city total. Most of the offices were located in Manhattan. The merger of the Chase into the Bank of Manhattan, after the latter had acquired the business and branches of the Bronx County Trust Co., gave the new institu tion 96 outlets, or 17 percent of the total in New York City. In other words, the combined Chase-Manhattan was now in the same league as regards branch competition as Manufacturers Trust and Chemical-Corn. The case of the National City Bank was different, since its merger with the First National added only 1 office to the 71 offices existing previously. This gave the combined institution 72 offices, or 13 percent of the total in the 5 boroughs. Clearly, branch considerations could not have been paramount in this merger. Bankers Trust Co., with regard to branch outlets, was in a similar position as the Chemical Bank, which it resembled in size of assets. Although having 4 times the amount of resources of Public National Bank at its command, its branches numbered only 17 and were mostly acquired after the war. Public National, on the other hand, with only 1.7 percent of the city's banking assets, had established 25 offices. The merger between Bankers Trust and Public National brought the number of offices of the combined institution to 42, or 7 percent of the citywide total. By virtue of these amalgamations, there are at present 5 branch banks in New York City which are able to compete on a citywide basis, as against only 4 such networks previously. The other 49 banking institutions, accounting for 10 percent of total assets, share 136 offices, or about one-quarter of the total in New York City between them. Ioan limits Among the important factors in several of these mergers was the question of loan limits. Commercial-bank lending has come under stiff competitive pressure from nonbank lenders such as insurance companies, investment bankers, and even pension trusts. These lenders have strengthened their competitive power because they have kept better pace in size and loan limits with the growth of the large corporations than have commercial banks. For some time it has been apparent that in the strong rivalry for the larger medium-term loans between the New York City banks and the large insurance companies, the latter have an edge because of their more generous lending limits. Further, investment bankers have an extremely active and successful, particularly in times of low interest rates, in persuading large corporations to meet their financial needs through the issue of long-term bonds or debentures. At times of buoyant stock prices investment bankers have brought a great number of corporations to market to issue new equities. In practice, all these financial operations constituted an alternative to, or means of repayment of, bank loans. Loan limits of banks chartered by New York State are based on their capital, surplus, and undivided profits. Under present statutes, no bank can lend more than 10 percent of the total of such capital accounts to any one nongovernmental borrower on an unsecured basis. While the number of banks can get together and pool resources to accommodate one large borrower, the method is cumbersome and may not suit the preferences of the prospective client. There is little doubt that the arising of loan limits of the Chase Manhattan Bank by 42 percent, or from $35 million to $50 million, will sharpen competition in the national credit market. Loan limits and industrial growth Between 1939 and 1954, the loan limits of the Chase National had been growing by about 75 percent, prior to the merger with the Bank of Manhattan. To set the growth of these lending limits into perspective, table 5 lists the expansion in assets of a sample of large, well-known corporations. Parenthetically, in making a selection of firms it was difficult to find any with a rate of growth not in excess of that shown by the lending limits of New York City banks. A recognized authority on the subject of big business estimated in a recent study that the 100 largest industrial corporations expanded their assets by 160 percent between 1929 and 1948. In the same period the maximum loan limit of banks in New York City rose by only about 70 percent. This further serves to document the lag in the ability of New York City banks to finance large corporate enterprises, their long-standing specialty. The potential borrowing needs of such customers, as indicated by growth in total assets, generally has left loan limits far behind. 1 A. D. H. Kaplan, Big Enterprise in a Competitive System, Brookings Institution (1954). |