Nation's Banking Industry Undergoing Vast Changes / `Grand Names' in Trouble

Article excerpt

NEW YORK - The American banking system, the heart of the nation's economy, is undergoing more wrenching changes than at any t ime since the Great Depression.

Some of the most venerable names in banking - Continental Illinois Bank and Trust Co. of Chicago, Seafirst and Girard Bank - have been taken over either by government or by stronger institutions. Other grand names - like BankAmerica, Interfirst of Dallas and other Texas banks - are in deep trouble. And lesser-known players are clamoring for the top spots.

After four years of an economic recovery, the banking industry should be in better shape. But it is caught in a turmoil that seems to know no bounds. Just last Monday, the First National Bank and Trust Co. of Oklahoma City, one of that state's biggest banks and a major energy lender, failed.

Tuesday, two of New York's biggest banks, Citicorp and the Manufacturers Hanover Corp., posted lower quarterly earnings. In Texas, the Interfirst reported a huge loss for the quarter, and in California, so did BankAmerica - once the world's largest bank.

""This cycle is more extreme than we've seen in the past,'' said Lawrence W. Cohn, bank analyst at Merrill Lynch, Pierce Fenner & Smith. ""There had always been one or two banks that looked like major organizations as they entered a recession and came out much smaller players. In this cycle, we've got a substantial number that are coming out badly - virtually all the big banks in Texas, Continental Illinois is a shadow of its former self, and BankAmerica will be a major player, but no longer a dominant No. 2.''

Banking's basic problem, many say, is that modern technology has made it so efficient that the field is now overcrowded.

In what J. Richard Fredericks, of Montgomery Securities, calls ""Darwinian banking,'' only the fittest will survive. And with the shakeout now underway, the winners and the losers are beginning to emerge.

Although experts disagree on exactly what will happen, all recognize that the shape of American banking will be far different from what anyone would have predicted only a few years ago.

Behind today's woes are the bad loans made years ago by bankers betting on economic sectors - energy, commercial real estate and agriculture - that later went into a tailspin.

To be sure, bad loans, which eat away at a bank's profits, follow recessions. But this time around, the tumult is even greater because another powerful force - financial deregulation - is also roiling the industry, accelerating competition as the barriers to interstate banking break down. Complicating the situation even more is America's Swiss-cheese economy: strong in some areas but with gaping holes elsewhere.

If the general economy remains sluggish - or falls into a recession, as some economists are predicting - the loan losses could soar, throwing more banks into serious trouble and further weakening avulnerable economy. Though depositors would be protected by the government, bank executives have much to fear.

""Obviously we have a problem that extends throughout the system,'' said Sam Nakagama, partner in Nakagama & Wallace, a New York economic consulting firm. Added Arthur Soter, a bank analyst at Morgan Stanley & Co. ""My feeling is that 1986 will be a very bad year, with peak loan losses.''

Soter agrees. He said that loan losses usually begin declining one year after a recovery begins, but instead, they have been rising - and worse, they are likely to soar this year. …