Public Meeting Regarding NationsBank and BankAmerica - Panel 19
Friday, July 10, 1998
Transcript of Panel Nineteen
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19 MS. SMITH: We'll start with Mr. Hewett.
20 MR. HEWETT: Thank you. My name is Conrad W.
21 Hewett. For over the last three years I served as the
22 State Superintendent of Banks and Commissioner of
23 Financial Institutions for the State of California. My
24 term ended this past June 30th.
25 My prior to my position for the State of
26 California, I was a managing partner at Ernst & Young.
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1 For over 33 years I specialized in financial
2 institutions. Consequently, I have been involved in
3 many mergers and acquisitions of financial institutions.
4 During my past three years in my capacity as
5 State Superintendent of Banks and Commissioner, I have
6 approved a number of bank mergers and acquisitions. The
7 largest acquisition was Wells Fargo Bank acquiring first
8 Interstate Bank.
9 The California laws concerning the sale,
10 merger and conversion of depository corporation are very
11 similar to the federal agency laws such as the Federal
12 Reserve Bank.
13 As a regulator, I had several standards to
14 consider under California banking law before I could
15 approve or deny such a transaction. Some of the
16 elements of the law included:
17 One, the transaction would not result in a
18 monopoly;
19 two, competition would be not lessened or be
20 anti-competitive;
21 three, the convenience and needs of the
22 community will be served;
23 fourth, the shareholders equity will be
24 adequate, and the financial condition of the combined
25 banks will be satisfactory;
26 fifth, directors and executive officers will
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1 be satisfactory;
2 and, last, the surviving entity will afford
3 reasonable promise of successful operation and operate
4 in a safe and sound manner.
5 In my opinion, this proposed merger meets all
6 the standards to be considered under the Bank Holding
7 Company Act.
8 I note that the proposed transaction does not
9 result in the largest bank in the United States. Also,
10 this merger will operate in only 25 of our 50 states.
11 I publicly stated over three years ago that
12 there would be a large consolidation in the banking
13 industry. I had many reasons for this statement and I
14 believe that this trend will continue.
15 There is too much capacity in the banking
16 industry, too many banks and too much competition from
17 outside the banking industry, thus, the need to
18 consolidate.
19 Even our largest United States banks face
20 tremendous competition from companies such as Merrill
21 Lynch, GE Capital, General Motor Acceptance
22 Corporations, all of the mutual funds, such as Fidelity
23 and T. Rowe Price and the many consumer finance
24 companies such as Household Finance and now the
25 internet. Many of these companies are not subject to
26 the same state and federal regulatory laws such as the
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1 bank's presently are.
2 Other reasons I see for this merger are:
3 First, the high cost of investment in
4 technology helps drive these mergers and consolidations.
5 The non-bank competitors have invested heavily in
6 technology and banks must invest as heavily, if not
7 more, in order to compete and to survive. This
8 investment requires a very large capital base, and one
9 way to create this base is through consolidation;
10 secondly, our largest U.S. banks are still
11 small compared to the other banks in the world which
12 comprise mainly of the Japanese, German and French
13 banks.
14 as you know, the U.S. is rapidly becoming a
15 globally player and world trader. Our banks must be
16 large enough to provide the financing and capital
17 necessary for our businesses to compete worldwide;
18 third, because there is very little overlap
19 in this merger concerning the consumer, the consumer
20 need and convenience should be satisfied. Branch
21 banking has changed dramatically in the past five years
22 because of ATM usage, banking by phone, computer banking
23 and banking by mail. The consumer has dictated this
24 shift in the delivery system of banks. The consumer has
25 a wide choice in availability of financial institutions
26 from which to choose. As I said earlier, the
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1 competition is fierce. This transaction should enhance
2 the service and products available to the customers of
3 the new bank. This is truly an interstate bank merger
4 as contemplated by the federal Riegle-Neal Interstate
5 Banking and Branching and Efficiency Act of 1994, which
6 congress passed, and the law became effective September
7 29th, 1994. As I see, as a result, the consumer will be
8 the benefactor of one of the first truly interstate
9 banks in our country.
10 Concerning the other facts of this merger,
11 both companies are financially strong as indicated by
12 their financial statements, capital ratios, operating
13 ratios and market capitalization.
14 If this transaction is approved by the
15 Federal Reserve Board, in my opinion it should be, then
16 a nationwide franchise will be delivered which has the
17 potential to deliver financial service to millions upon
18 millions of families and businesses.
19 Thank you.
20 MS. SMITH: Thank you. Mr. Collette.
21 MR. COLLETTE: Is it on?
22 MS. SMITH: Yes, if you just bring it a
23 little closer.
24 MR. COLLETTE: Thank you. I appreciate the
25 opportunity of expressing -- addressing this very
26 important topic before the Federal Reserve.
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1 My name is Craig Collette. I am a member of
2 the Board of Directors of the California Independent
3 Bankers and president of a small bank in Southern
4 California called Marathon National Bank, it's a $75
5 million institution.
6 As an independent banker with 33 years of
7 experience, I would like to give you my views on the
8 impact of this gigantic merger between NationsBank and
9 Bank of America. I am speaking this morning also on
10 behalf the California Independent Bankers, which
11 represents some 200 banks throughout our state.
12 Let me first address you, though, as a
13 concerned citizen of the State of California. When
14 legislation was debated in Sacramento three years ago,
15 this legislation enabled this kind of merger, and the
16 California Independent Bankers raised an important
17 issue: What will the tax impact be when we permit out-
18 of-state institutions to own California banks and their
19 headquarters are moved out of state? Little attention
20 was given to this critical question. As a concerned
21 taxpayer in the state, I would like to raise this issue
22 again.
23 I would recommend that those that are
24 reviewing this application for merger derive estimates
25 and projections of what this merger will mean to
26 California taxpayers when the headquarters of the
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1 combined institutions shift to Charlotte, North
2 Carolina.
3 Matter of fact, all of California's three
4 largest financial institutions are now or about to be
5 moved out of state or the headquarters moved out of
6 state from these entities.
7 Now, as an independent bank president, I have
8 additional views. The United States, with the passage
9 of the Riegle-Neal bill, is moving from a diversified
10 financial system to one characterized by a lopsided
11 barbell with just a very few large banks at one end and
12 a large number of independent banks at the other.
13 To quote Hugh McColl, Chief Executive of
14 NationsBank, U.S. banking will be quote "...a
15 barbell-shaped industry with a dozen or a half dozen
16 very large players at one end and four or five thousand
17 boutiques on the other," unquote. On this issue we
18 agree, but what are the implications of such a
19 structure? I feel strongly that increased financial
20 concentration means less competition.
21 NationsBank and Bank of America's merger at
22 60 billion is the largest between two American banks.
23 The bank created by this merger will have 8.2 percent of
24 the Nations deposits. Dangerously close to the ten
25 percent limit set by the Riegle-Neal bill.
26 Unfortunately, this trend towards
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1 mega-mergers will probably continue given the overvalued
2 asset base our own stock market has created. The trend
3 toward mega-mergers, this includes this merger, is not
4 healthy for Main Street, where I come from, is very
5 risky for Wall Street and it is bad for the Federal
6 Reserve and other regulators who will have the
7 responsibility to examine and possibly to even bail out
8 these mega-giants when they are mismanaged, over
9 speculate or reach too far in risky ventures. These
10 banks are the new super-sized, too-big-to-fail
11 varieties.
12 The evidence shows that increased the
13 concentration in the banking industry has not benefited
14 bank customers. The economies of scale that supposedly
15 justify large bank mergers either do not materialize or
16 are not passed on to the customers. In addition, large
17 interbank mergers reduce competition in ATM network
18 markets as well as credit card markets.
19 Consider five points:
20 First, larger banks charge higher fees.
21 According to Bank Rate Monitor, none of the top 50 banks
22 in the U.S. offer the least expensive checking accounts.
23 In fact, those offering the most expensive checking
24 accounts are banks involved in the latest mega mergers,
25 Citibank and NationsBank. The best deals are offered by
26 smaller regional and community banks. In a 1997 study
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1 found a widening gap between large and small bank fees;
2 the Federal Reserve study found the average
3 fees charged by multi-state banks are significantly
4 higher than those charged by single state banks, even
5 accounting for location and other factors that might
6 explain the differences;
7 two, banks mergers have an adverse effect on
8 consumer pricing. A Boston Federal Bank study of 499
9 bank mergers found the combined banks lowered interest
10 rates paid on deposits regardless of the amount of
11 competition in the market;
12 three, economies of scale. It is
13 interesting, the evidence suggests that the optimal size
14 of a bank in terms of economies of scale, profitability
15 and efficiency is between $100 and $1 billion, quite a
16 bit smaller than the 300 to 600 billion loss that will
17 be created from the latest mergers. A Harvard study
18 showed that instances of improved operating results
19 after a merger were due primarily to higher repricing,
20 not economies of scale, suggesting the use of increased
21 market power to raise prices. Given sufficient market
22 power, large banks can price smaller competitors out of
23 the market with below market rate loans or above market
24 rate deposits;
25 four, large interbank mergers also have
26 negative effects on competitive ATM network markets;
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1 and, five, large bank mergers are creating an
2 oligopoly of credit card issuers led by Citibank, Bank
3 One and NationsBank.
4 It is also indicated by the Rand Research
5 organization that when the pending mergers are
6 consummated the top ten credit card issuers will control
7 72 percent of the credit card market.
8 In conclusion, as an independent bank
9 president, I am fully aware that in the beginning
10 community banks will prosper from the fallout of
11 customers from big bank mergers. After these giants
12 consolidate, however, there will be no longer a fair and
13 equitable competitive environment in independent banks
14 in the areas that I have pointed out in my testimony.
15 Bank customers and small businesses will suffer as a
16 result.
17 Thank you very much.
18 MS. SMITH: Thank you. Kurmel.
19 MR. KURMEL: My name is Larry Kurmel. I am
20 Executive Director of the California Bankers
21 Association. I'll just make a few points. I've offered
22 some testimony on some things that you can have for the
23 records,
24 Much has been made over the increased
25 dominance of the banking marketplace resulting from BofA
26 and NationsBank merger. Our view to the contrary is the
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1 merger will do no more harm to the banking industry in
2 California, in fact, it will create market
3 opportunities. I base that on statements with
4 interviews with community bankers throughout this state
5 and the western United States. Obviously Craig Collette
6 was not among them.
7 But there is a very different view, as
8 evidence, there were ten new bank charters in California
9 in the last year. In Nevada, which concluded in 1997
10 with 21 community bank charters, now has 31 community
11 bank charters. I understand that's soon to be 32 or 33.
12 Frankly, there is more threat to the
13 community banking business by unrestrained tax-exempt
14 from credit unions than it will from the combined merger
15 of BankAmerica and NationsBank, which has very little
16 overlap in their marketplace, as you are all aware.
17 BankAmerica has long been a leader within the
18 ranks of the industry in California. And the California
19 Banks Association, in particular, a past Chairman or
20 president of our organization is Don Mulane, the current
21 President of the California Bankers Association is Vice
22 Chairman of the Bank of America, Kathy Burke.
23 The question we had is the commitment of
24 NationsBank to the continued leadership role
25 demonstrated by BankAmerica in California. And Hugh
26 McColl was a keynote speaker at our convention in May to
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1 personally provide that assurance and provide the
2 assurance of his commitment to assuring healthy
3 competition between large banks and community banks in
4 the State of California.
5 Much has been made about combining and what
6 happens with people and that sort of thing. I should
7 note the combined employee base of the two organizations
8 is about 200,000 people. That's larger than the City of
9 Fresno. Out of that they anticipate somewhere around
10 2,000 to 2,500 jobs will actually be lost. In relative
11 terms, according to any business study I've seen, that's
12 a relatively insignificant amount.
13 Let me talk a little bit, there is a lot of
14 speculation about what do the commitments of these banks
15 mean. Let me focus for a moment, if I may, just on the
16 $250 billion commitment. I don't know about you, but
17 that's a big number to me.
18 I started my career as a housing expert in
19 the Department of Housing and Community Development in
20 the State of California. I was a deputy secretary to
21 the Business Transportation Housing Agency in
22 California.
23 MS. SMITH: Would you move your mike a little
24 to the left?
25 MR. KURMEL: Sure. Better?
26 MS. SMITH: Yes.
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1 MR. KURMEL: I am reluctant to move to the
2 left too much, but I appreciate it.
3 I was a deputy secretary to the Business
4 Housing Transportation Agency under then Governor Jerry
5 Brown and was part of the creation of the California
6 Housing Finance Agency.
7 Bank of America was one of the instrumental
8 entitles in providing a consortium of banks to provide
9 low and very low multi-family housing financing in the
10 State of California. The consortium today, which
11 includes, I believe, over 60 banks, mostly community
12 banks, has opportunities for investment in CRA
13 activities they would not have had on their own.
14 CCRC in California, in its ten years of
15 existence, has done more multi-family, low and very
16 low-income housing financing than has the California
17 Housing Finance Agency in its 20 years of operation.
18 So, when it comes to commitment, you have to look at the
19 record, it seems to me.
20 I testified in this very room about the
21 Security Pacific and BankAmerica merger. At that time a
22 ten-year commitment was made by the bank of the
23 surviving organization to CRA lending. They met that
24 requirement, met that threshold within three years and
25 went on to fully exceed that. Last year they started --
26 established I believe it was $140 billion target and
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1 they were moving briskly towards fulfilling that public
2 obligation they had created for themselves, I might add.
3 I would add one note of caution. In my
4 experience in housing and economic development, I am
5 very cautious of throwing too much money at a problem.
6 For one reason, you don't want to throw out or denigrate
7 the experience or exercise of experience of other
8 players in that market.
9 For example, Mayor Corbin might note, that
10 the largest community bank in Richmond is the Mechanics
11 Bank of Richmond, an organization that had been there
12 for over 90 years who had a substantial commitment to
13 financing and improvement in that community.
14 You don't want BankAmerica/NationsBank
15 commitment to go in there and blow through the ability
16 of Mechanics Bank to participate in the restructuring
17 and rebuilding of its communities.
18 So, in my view, you have to be real careful
19 about being too specific with this large batch of
20 dollars for fear of disrupting those processes that are
21 already in place. But, if you are looking at the track
22 record of both NationsBank and BankAmerica as exercised
23 through people like Don Mulane who have chaired the
24 Community Bank of Bank of America, they have met every
25 public goal they have established for themselves and
26 exceeded that performance. The same has been true in
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1 NationsBank in those market areas where it has been
2 performing.
3 So I would just urge some caution playing
4 with $350 billion dollars. You don't want to end up
5 tantamount to offering a drunk a bottle of Tokay. Thank
6 you.
7 MS. SMITH: Thank you. Mr. Koppe.
8 MR. KOPPE: Thank you, and good morning. My
9 name is Bruce Koppe. I am Executive Director of the
10 Washington Bankers Association, located in Seattle,
11 Washington.
12 The Washington Bankers Association represents
13 substantially all of the commercial banks in our state,
14 almost all of which fit the generally accepted
15 definition of community bank.
16 Prior to assuming my present position, I
17 spent over ten years as General Counsel to Rainier
18 National Bank in Seattle, later Security Pacific Bank
19 Washington. Where my duties included responsibility for
20 community affairs and social policy.
21 My time in Washington includes the period
22 covering Bank of America's acquisition of Sea First Bank
23 in which Bank of America had a significant interest and
24 the relatively recent conversion of Sea First into
25 branches of Bank of America.
26 During all of these periods and events, I
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1 have had significant contact with the Sea First/Bank of
2 America Corporation in collaborative community affairs
3 projects, as a representative of both donor and donee
4 groups, as a competitor and in promotion of collective
5 efforts on behalf of the banking industry in our state
6 working with and through the bankers association.
7 My purpose today is to support the merger
8 application and record of Bank of America, particularly
9 its Sea First operation in the State of Washington.
10 Sea First has been and continues to be a
11 leader in the community especially in community
12 reinvestment.
13 I don't intend to recite specific
14 accomplishments because those are known to the Federal
15 Reserve through the Sea First/Bank of America CRA exams
16 which for several years have resulted in ratings of
17 outstanding. Rather, I want to emphasize what I believe
18 are important indicators of future conduct.
19 Much of the controversy surrounding mergers
20 of institutions involves an attempt to determine what
21 the future holds for the communities to be served. The
22 best indicators of that are how the institutions have
23 behaved in the past. And, in order to help determine
24 that, my presentation focuses on four specific points.
25 First, when bank of America acquired Sea
26 First Bank in the early 1980s, there was a great deal of
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1 apprehension in Washington State the control of the
2 entity would shift to San Francisco and that Sea First
3 community involvement would suffer. That did not happen
4 much to the credit of both parent and subsidiary.
5 More recently, when Sea First's operations
6 were converted to branches of Bank of America, albeit
7 operating under the Sea First name, the same
8 apprehensions were expressed. In fact, the apprehension
9 began when the BofA Sea First organization began
10 functionalizing its operation sometime prior to
11 conversion to branches.
12 Again, those apprehensions have proved
13 groundless. In each case we have seen no diminution in
14 the Sea First commitment to all aspects of community
15 affairs and community service.
16 Moreover, I understand that the head of the
17 Bank of America presence in the State of Washington,
18 Mr. John Renlove has been given broad authority and
19 autonomy over community activities. Certainly that's
20 been borne out by the company's performance to date, a
21 continuation of its broad and significant involvement in
22 all aspects of community development, philanthropy and
23 service to its customers.
24 As Sea First/Bank of America has gone through
25 each of these transitions its past performance has
26 accurately predicted its future performance.
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1 Second, banking customers are extremely
2 sensitive to mergers and acquisitions even among our
3 smaller community banks, but particularly with respect
4 to the large bank mergers. This has been demonstrated
5 most notably in the key bank acquisition of Puget Sound
6 Bank and Wells Fargo's acquisition of First Interstate
7 Bank in our state. Each acquisition has seen some
8 outpouring of customers to local community banks known
9 for excellence of personal service.
10 Sea First has a great reputation for customer
11 service as well as an aware management team. They know
12 as well as anyone that to dilute their community
13 activities and service at this time or any time in the
14 future would be the height of folly. As stated earlier,
15 their record through similar events has demonstrated not
16 only their awareness of that fact but their continued
17 commitment to their customers and their communities
18 generally.
19 Third, I think it's important to know at
20 least in our state that our community banks do not see
21 the merger of BofA and NationsBank as a threat. If
22 anything, it's an opportunity to gain customers. I'm
23 not saying anything that BofA isn't keenly aware of and
24 I don't think Sea First/BofA will let that challenge go
25 unanswered.
26 Finally, I've worked with Sea First on
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1 community outreach including fairly extensive activity
2 over the past year, much of which was very innovative.
3 The organization has willingly committed its time and
4 resources and continues to do so. I can attest
5 personally to their commitment.
6 In summary, the Sea First/Bank of America
7 record of community support and customer service in the
8 State of Washington has been first rate and has not been
9 diminished through corporate change.
10 We believe their past performance totally
11 supports the presentation application. We also believe
12 that their past performance through periods of
13 significant corporate change is a reliable predictor of
14 what will happen in the future. In our view,
15 speculation and conclusions to the contrary are not only
16 totally unwarranted, but very unfair.
17 Thank you.
18 MS. SMITH: Thank you, questions.
19 MR. FRIERSON: I have two questions. First
20 for Mr. Hewett, as a former state banking supervisor and
21 decision-maker, I would be interested in your views on
22 the comments that we have heard at this public meeting
23 and in the comment period that a bank with a
24 headquarters on the east coast would be less successful
25 in understanding the credit needs of California
26 communities.
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1 MR. HEWETT: That's a good question. I do
2 believe that California is such a tremendous economic
3 market, not only in the United States but in this world,
4 that if there is any void of consumer availability to do
5 banking of any kind, that the bank from the east coast
6 or from the southeast will come into this state and
7 establish a headquarters if that means that will help
8 that particular institution financially in the future
9 and so forth.
10 I don't see any -- in today's age of
11 technology, wherever it's headquartered, could be
12 headquartered in Hawaii and still operate in California
13 and still provide services to the consumer and still be
14 competitive. I don't see that as a real significant
15 issue in terms of where the headquarters -- the
16 headquarters are usually only made up of a few, in this
17 case probably only a few hundred people. It's not the
18 headquarters, it's the service that's provided to the
19 customer by the representative of that bank, wherever
20 that community may be.
21 MR. FRIERSON: And a question for
22 Mr. Collette. Does your bank operate an ATM network?
23 MR. COLLETTE: We don't have our own ATMs.
24 We utilize networks provided by larger institutions.
25 MR. FRIERSON. Could you give us your bank's
26 experience with the competitive impact of the
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1 consolidation of ATM networks, specifically how it
2 affects your clients:
3 MR. COLLETTE: Yes. On a pricing basis, we
4 have had experience where we have been -- where our
5 customers have been charged for the use of another
6 institution's ATM, even though we were a member of the
7 network. And that did do some harm to the customer base
8 of our institution.
9 MR. FRIERSON: Thank you. I don't have any
10 more questions.
11 MS. SMITH: There are no other questions,
12 then we thank you very much for coming this morning.