Darwin & the Banking Industry

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Darwin & the Banking Industry

When the evolutionary dust clears, we can expect to see fewer but stronger financial institutions, according to analysts who've applied Darwin's laws to the American banking system. "America doesn't need 12,000 to 14,000 depositary institutions," says Joseph Labriola, managing director of Fitch Investors Service Inc., a New York-based financial rating agency. Adds Christopher Mahoney, associate director at Moody's Investor Service: "Ten years from now, we'll have half as many holding companies and half as many banks employing about two-thirds the number employed today."

Such consolidation will change the face of banking. For starters, fewer banks could dent the reckless competition that has led to minuscule margins, allowing profitability to return to banking. The banking industry "will be more efficient, better regulated, more profitable, and portfolios will be better diversified both by geography and by industry," predicts Mahoney.

Survival-of-the-fittest capitalism probably means that some weak members of the banking species will disappear from the face of the earth. However, many will evolve either through targeting markets and products that will make them more profitable - or by merging with partners.

Because the economics of consolidation are so compelling, observers across the board predict a wave of mergers within the banking community by the mid-1990s. Controversy arises only when considering specific questions: Will mega-mergers as well as smaller acquisitions occur? Will national banks develop through large interstate acquisitions? Will players new to the banking community enter the fray? Finally, what will reduced banking competition mean for customers?

THE ECONOMICS OF MERGERS

While banks should not be lumped into the same disastrous scenario followed by the thrift industry, banking has moved from a profitable to a sluggish business in the past decade. …