VIEWPOINTS : Mergers Could Give U.S. Banks Global Clout
The recent announcement of merger talks between Wells Fargo and Security Pacific banks came as something of a surprise to many, given the solid reputations and performance of these two institutions. Nobody would disagree with the need for mergers among the financially troubled banks and thrifts across the country, but the possibility of a marriage between two of California’s largest banks raises questions about the value of such a deal, given that the state is already home to some of the nation’s largest and strongest banks.
The fact is that even America’s largest banks are smaller and weaker than their leading international rivals. America’s top four banks are smaller than those of any of the top five financial nations (the United States, Japan, Germany, France, Britain). The combined national market share of the top four U.S. banks is only 7%, compared to 20% to 40% for the top four banks in other leading economies.
As long as the foremost U.S. banks avoid mergers, the sheer size of the leading foreign banks will continue to give them important strategic advantages over their U.S. competitors. In addition to enjoying greater economies of scale, foreign banks can afford to compete directly in the United States and wait out periods of lower profitability because their U.S. operations are only a part of their total business. During economic slowdowns such as the one we are now facing, they can actually take advantage of domestic banks’ restrictions on lending to gain market share.
With very little public questioning or apparent concern, Japanese banks have been quietly enlarging their presence in what has long been America’s largest and most competitive banking market. In five years, the share of California banking assets held by Japanese banks has tripled to more than 12%.
Banking may be starting to go the same way as automobiles, home electronics and many other industries in which foreign companies are displacing domestic competitors. Is this something to be concerned about, or in an increasingly global economy does it make no difference whether the leading banks operating in California are owned by shareholders in Osaka or Beverly Hills?
In the auto sector, Japanese ownership of manufacturing plants in the United States has actually brought advantages to the U.S. economy. Jobs have been created as imported Hondas and Toyotas have been replaced by domestically produced versions of the same brands. Even some export capabilities have been added by the Japanese transplants. In addition, Japanese manufacturing know-how and competition have helped raise the standards of domestic manufacturers in terms of both quality and productivity.
But the same advantages do not apply to banking. Japanese ownership of banking operations in the United States will not create jobs by replacing imports, since imports of banking services are not significant, nor are they ever likely to be. So any rise in employment in foreign-owned banks will be matched by a fall in the number employed in domestic banks.
Nor does the U.S. banking system need the know-how of Japanese or European banks. American banks have consistently led the world in the development of new financial instruments and financial services. They have also been at the forefront with new delivery systems, such as automated teller machines (ATMs) and 24-hour banking by telephone.
The problems that the nation’s leading banks have encountered have been largely the result of a hostile system of regulations that has restricted diversification between commercial and investment banking services, and between different geographic markets within the country. At the same time, they have had to compete with new non-bank competitors and a savings and loan system subsidized by insurance premiums well below the proper level for the riskiness of their assets. This led banks to take on high levels of risky Third World and real estate debt to maintain short-term growth and profitability.
However, the most important reason for concern about the increasing share of foreign-owned banks in California goes beyond the considerations of jobs and economic efficiency. In many foreign countries, banks are not the independent corporate entities that they are in this country.
Leading German banks hold huge stakes in German industry, exerting direct influence on firms’ strategy and operations. In Japan, banks are closely tied to much of Japanese industry through a system of cross-shareholdings. Furthermore, they have shown themselves to be extremely responsive to the needs and interests of the Japanese government. This was illustrated at the start of the Gulf War, when Japanese banks were asked to channel more funds into the United States to help support the economy during the war effort.
Of course, foreign influence on banks is fine as long as the interests of the United States and the foreign country are in line. But what if they are not? Can we be sure that the interests of the United States and Japan will always be so in tune? How much more difficult would it be for U.S. trade negotiators if, in 10 years’ time, Japanese banks had the capability to seriously slow down the American economy in the event of a breakdown in talks?
Americans should be concerned about the risingshare of the banking market being taken by foreign-owned institutions. We should do everything possible to strengthen domestic banks, including encouraging them to join forces against a set of international competitors with advantages of greater scale and diversification.
The Wells Fargo-Security Pacific deal is just one of a number of possible mergers that have been talked about between major California banks. Regardless of the outcome of this latest proposed deal, mergers such as this should be welcomed by both shareholders and members of the public. As some of the nation’s largest financial institutions, California banks should be leading others in positioning themselves to build the scale and diversification to be competitive with the world’s leading banks.
