Good for the Banks, Bad for the Rest of Us

In the latest demonstration of the survival of the fittest, Glendale Federal Bank and California Federal Bank are tying the knot. The obvious policy question is whether these mergers are good for consumers and the Southland economy. The answer lies in understanding the origins of merger mania.

Banks merge for two reasons: to reduce costs, which can be good, and to reduce competition, which is always bad.

The reduction in costs comes from traditional economies of scale. For example, where Cal Fed and Glendale have nearby branches, one branch will be closed. The same number of customers will be served with fewer personnel and lower rent. Total cost savings are estimated by the companies at about $130 million.

Will any of these savings be passed on to consumers? Probably not. Many studies show that as banks get bigger, they charge higher account fees and higher interest rates on loans while offering lower savings rates on deposits.

So where do the cost savings go? To bigger bank profits, which is why a bank’s stock price tends to rise after a merger.

So what about the broader Southland economy? In this latest merger, the area will lose more than 1,000 jobs. Moreover, the city of Glendale is going to lose an important engine of its local economy, namely, Glendale Federal’s corporate headquarters. Note that this will be the fifth corporate headquarters of a bank or thrift to vanish from Southern California since 1991, with hardly a whimper from local governments.

Which leads us to the other problem with mergers. They can significantly reduce competition. Of course, some economists may argue that with Wells Fargo and Bank of America and a few other banking behemoths still around, there’s plenty of competition left. And maybe they’re right. But as any market shrinks from a competition “among the many” to a competition “between the few,” it’s also true that the possibility of what economists call “tacit collusion” arises.

Think of it this way: The big banks may look around at one another’s territory and decide that they can make more profit guarding their home turf than trying to invade the territory of their rivals. Indeed, this collusive behavior is a phenomenon that economists observe all the time in many different industries, from supermarkets and cigarettes to airlines.

Given that the ongoing wave of bank mergers offers little benefit to consumers and is doing demonstrable harm to the region’s economy, the question is what, if anything, should our politicians be doing?

For one thing, both the city and county governments of Los Angeles, along with all their related agencies, do a lot of banking. So why not use some of this monopsony power (a situation in which there is only one buyer for a particular commodity or service) to persuade one or two banks to keep (or move) a corporate headquarters here in exchange for the government’s business?

For another, it’s not as though these bank mergers are unpredictable. In fact, you could see the Cal Fed-Glendale Fed merger coming down the lane like a Shaquille O’Neal slam-dunk. Why not anticipate the next merger? That could well be when a big out-of-state bank gobbles up H.F. Ahmanson & Co., one of the largest remaining L.A.-based thrifts.

So why not have an emissary from the City Council or the Board of Supervisors go talk with bank executives at Ahmanson to see if there is a way to keep their business here, if and when the merger comes. Anything would be better than the current inertia at City Hall.