While commercial banks show considerable progress in making the field of consumer installment credit their own, they face vigorous and well-entrenched competition. At present, commercial banks in New York State accounts for less than one-third of direct consumer installment paper, as illustrated in the chart and in table 15. By far the greatest part of consumer credit is originated by the retailers themselves, who then turn much of this paper over to banks and other financial institutions in the secondary market. Licensed lenders, including finance companies, account for less than 7 percent of direct consumer installment credit and credit unions originate less than 3 percent.

The department has taken a great interest in fostering competition in consumer installment credit in New York State. In a recent case in an upstate community where collusion in rate setting was suspected, the department defended in court its efforts to keep interest rates of licensed lenders competitively low. The department's plea was upheld.

The department's philosophy is clearly stated in its brief:

"*** the petitioners *** have chosen a monopolistic maximum rate, which is contrary to the public interest, so that it is contrary to the convenience and advantage of the area to be served to deny the application of an applicant who has established a business policy of charging less than the maximum rate and who has stated an intention of continuing that practice, all as contemplated by law.

"the superintendent of banks and the banking department have given primary consideration to the end of securing for *** people of modest means *** the lowest possible rates upon loans as are consistent with the return of a fair profit * * *

TABLE 15.-Direct consumer installment credit outstanding, major sources in New
York State, Dec. 31, 1954

TABLE 1

T

شه

1 Estimate of paper originated by retail outlets.

2 Estimate based on study by New York State banking Department.

Sources:

Retail financing-Member Bank Call Report, Oct. 7, 1954; Federal Reserve Bulletin, February 1955;
Survey of Current Business, August 1954.

Commercial banks-Member Bank Call Report, Oct. 7, 1954; Special Questionnaire on Installment
Lending June 30, 1953 by New York State Banking Department.

Licensed lenders-Dec. 31, 1954 report.

Credit unions-Dec. 31, 1954 report and U. S. Department of Health, Education, and Welfare.

Further, the Department for several years, beginning in 1940, sponsored legislation to reduce rates charged by licensed lenders. Part of a recommendation just made in 1946, was adopted in 1949 when the legislature raised the loan limit from $300 to $500, but in the process limited the maximum rate on the excess to 2 percent per month.

Competition for real estate mortgages

Still another illustration of competition in the various fields of banking lies in real estate mortgages. Confining the discussion to properties located within New York State, the chart and table 16 indicate that savings banks furnished over one-half of all mortgage money outstanding at year end, while savings and loan associations supplied 17 percent and life insurance companies 15 percent. Commercial banks were fourth, accounting for less than 14 percent of such mortgages outstanding. Clearly, the banks faced formidable competition in the field of real estate lending.

REAL ESTATE MORTGAGES

HELD BY MAJOR FINANCIAL INSTITUTIONS

IN N.Y.STATE

ON PROPERTIES WITHIN THE STATE

DEC. 31, 1954

2

7

TABLE 16.-Mortgages held by major financial institutions in New York State, properties located within the State, Dec. 31, 1954

For commercial banks and savings and loan associations, these data represent total mortgage holdings since breakdown on location of property is not available. Holdings outside of New York State in these institutions are not very extensive.

Includes State banks, trust companies, industrial banks and private bankers.

3 Latest available date Oct. 7, 1954.

Latest data available on Sept. 30, 1954 call report.

Sources: Commercial banks, quarterly report and Federal Reserve Bank of New York; life insurance companies, Institute of Life Insurance, "The Tally," September 1954; savings and loan associations, Sav. ings and Loan Division and Federal Home Loan Bank of New York; savings banks, Sept. 30, 1954 report.

PART II

Yardsticks of the public interest in mergers

Each application for a merger submitted to the Department receives the closest scrutiny of the bank examiners, division heads and the superintendent's office. In the course of these investigations, a series of tests have been developed which a proposed merger must meet before being approved. These tests serve as an explicit guide to policy, and are in addition to such procedural and technical rules concerning a merger or acquisition of assets as the applicable State and Federal statutes may prescribe in each case.

From the standpoint of the Department's tests, mergers fall into two broad classes: those that tend to advance the public interest, and those that may injure it. Leaving complicating factors aside, one may state that mergers in the field of banking are beneficial when the factors listed below are dominant.

Mergers of benefit to the public

1. The bank being absorbed is one that has grown stagnant and has failed to continue providing the community with a full line of banking services. The location is taken over, or a more convenient location is being established, by a progressive successor institution.

For example, a stagnant bank is one that invests almost exclusively in relatively riskless Government bonds, refusing to make productive loans to local businesses and failing to support commercial and home building through mortgage loans. Such a bank also typically refuses to encourage savings accounts. Clearly, a merger with a more alert institution would be of benefit all around. 2. A variety of new services would be offered by the merging institution which the old absorbed bank was not in a position to make available to the public. An example would be a bank lacking a personal loan department or a trust department. A merger with an institution able to provide these services might widen the functions of the bank in the community.

3. In the absence of a merger, the absorbed institution would close its doors and liquidate.

One instance would be a distress situation with a bank's capital impaired through losses or through a serious defalcation. Another case would be that of a bank where aging owners neglected to provide for management succession, or where the major shareholders wanted to liquidate their investment but were unable to find a market for their stock at a fair price. A merger would keep the banking facilities alive.

4. Efficiency will be increased, costs reduced, and better service provided to the public as a result of the merger.

This case applies most clearly to banks in the smallest size category where institutions frequently are barely able to survive. Costs of operating such a bank as a branch of another institution may be materially lower and enable the new institution to offer better and wider service.

5. The capital position, and hence the safety of depositors in the absorbed bank would be improved, without impairing the soundness of the merging institution. An example would be the takeover of a bank that has slipped into a weak capital position over the years because of poor management and an excess of substandard assets.

6. The raising ol loan limits would permit the merging bank to accommodate business better, and put it in a more competitive position with other lenders. This case has already been discussed above.

Mergers injurious to the public interest

Few merger propositions come solely under any single one of the Department's battery of tests. However, mergers may prominently feature one of the following elements, and thus be deemed injurious to the public interest. Such merger applications call for disapproval.

1. The capital position of the consolidated institution would be weakened because of an excessive cash payout to the stockholders of the absorbed bank. An example would be a plan by the merging bank to pay an unusually large premium out of capital to the owners of the institution to be acquired.

2. The purpose, or the result, of the merger would be a substantial lessening of competition in the banking business of the community or trade area.

An example would be the merger between two important banks situated within an area of effective bank competition, merely for the sake of size or for the sole control of commercial banking facilities.

3. The public's choice of banking facilities would be reduced to an important extent, without major countervailing benefits.

An example would be a proposed merger between two institutions having a considerable number of branch locations in common. The combination of the two banks would lead to a widespread closing of overlapping offices, thus eliminating competition between them.

4. The only worthwhile benefits would accrue to the speculative interests that brought the merger about.

A case would be an amalgamation arranged solely by and for the benefit of speculators purchasing bank stocks at a discount. The purpose of these investors in banks would be to liquidate their victims as separate entities, thereby profiting on the difference between book value and market price of their share holdings.

Effect of postwar mergers on facilities

The experience of the Department during the postwar years has been that few if any bank mergers resulted in a diminution of service. The postwar years witnessed a net increase of 142 State-chartered and 33 nationally chartered commercial banking offices, a gain of 13 percent. Population has in the meantime increased by only about 10 percent.

During the years 1946 through 1954, there were 95 mergers involving State banks before the Department. Nassau, Suffolk, and Westchester Counties accounted for 26 mergers, or 27 percent of the total, Buffalo and Rochester for 24, or 25 percent, and New York City for 17 or 18 percent. The rest of the mergers were spread over other areas of the State.

It is interesting to note that 71 mergers, or three-quarters of the total took place between banks in different communities. These banks were not in direct competition with each other to any appreciable extent.

Of the 24 mergers between banks in the same locality, 17 were in New York City where competition is of the keenest, as has already been shown. There remain seven instances of banks merging in the same community, involving possibly a certain lessening of competition, but other factors favorable to the public interest led the Department to approve the mergers.

Mergers and bank capital

The Department has long been strongly opposed to mergers that result in a weakening of the capital structure of the banking system. In all merger proposals coming up for approval the effect on capital is given the closest scrutiny, and it is well understood that no merger that might materially reduce the safety of depository funds has any chance of approval.

On the subject of speculative mergers, the department has taken a determined and adverse stand, attacking such mergers publicly in strong language. In a speech of January 21, 1952, former Superintendent Lyon castigated "speculative capital that swoops down on its prey, strikes and, quickly profiteering, is on its way again." The continuing policy of the department on speculative mergers is summed up in another statement contained in the same speech that "banks were not chartered to create opportunities for windfall profits."

PART III

Application of the Department's yardsticks

It remains to apply the yardsticks that have been developed by the Department to the two outstanding merger proposals that were approved in the spring of 1955. While the broad economic principles and the business background for the decision to approve these consolidations is fully set out in the first part of the statement, it would seem useful to add specific detail to illustrate matters that were relevant in each of these two cases and made each application unique.

THE CHASE MANHATTAN MERGER

The following were the dominant considerations at the time of approving the merger of the Chase National Bank and the Bank of Manhattan Co.

1. The merger would create a new fifth citywide branch banking system to compete with the four such systems in operation. In number of offices, the new Chase Manhattan would rank third among branch banks.

2. No substantial lessening of competition would occur among existing banking offices. Chase branches were almost all located in the densely populated Borough of Manhattan while branches of the Bank of Manhattan were concentrated in Queens, with a lesser number dispersed through Manhattan, Brooklyn, and the Bronx.

3. The new maximum loan limit would be materially raised above the present limits of either bank alone. A subsidiary consideration was that the capital base under New York State law would increase the Chase's lending power considerably, even apart from the merger of the Manhattan.

4. Operating efficiency was likely to be improved as a result of the merger. Data indicated that Chase was a more efficient institution than either the Bank of Manhattan or the average of the larger banks chartered by New York State.

5. In type of business done and customers served, the two banks would largely complement each other. The Chase typically served larger borrowers than did the Manhattan.

Detailed information

3

1. Branches.-The Chase listed 29 banking offices and Bank of Manhattan, with Bronx County's offices included, operated 67. Thus, before the merger, Chase ranked a poor fifth among city branch banking systems and Manhattan ranked fourth, either with or without Bronx County. The merger would raise the new institution to third place, with a maximum number of 96 offices. Thus, the Chase Manhattan would lie between Chemical Corn's 98 offices and National

On

Strictly speaking, Chase would have 28 offices on the date of the proposed merger. March 14, 1955, a branch at 335 Broadway was closed and consolidated with the office at 40 Worth Street, but sometime in September a new branch is expected to be opened at Madison Avenue and East 68th Street.