Slowing a Steamroller

Article excerpt

Booming consolidation drives, aggravates 1990s banking issues

Banking underwent a sea change in the 1990s. One might even say the industry experienced more change in those 10 years than in the previous 150, thanks to an explosion in computer advances and a gangbusters economy from the country's longest peacetime economic expansion.

During the decade, Internet use by the general public skyrocketed. In 1996, more than 45 million people (30 million in the United States) were surfing more than 100,000 Web sites, a number increasing by the day. By 1998, 67 million people were venturing online. That number would reach 142 million by 2000.

People weren't merely viewing information online-although an increasing number were using the Internet as their primary news outlet-they were shopping virtually as well. Armed with a computer and a credit card, consumer purchases began to rise, from clothing and groceries to medicine and even music.

Community bankers were also caught in a whirlwind of change. In the 90s megamergers reached new heights. The separation of commerce and banking debate was reignited with Wal-Mart's attempt to own a bank. The Y2K bug scare kick started technology systems review. And an Asian financial disaster that spilled over into the United States sent American agriculture into crisis.

This was big-time stuff, including massive deregulation at an unprecedented scale. And ICBA (then named the Independent Bankers Association of America) and its members were in the thick of it all. Community bankers entered a modern world where they debated industry issues with the emerging and newly glamorized heavyweights- international financial services conglomerates. That community bankers were even at these discussion tables was testament to the dogged perseverance of a gritty trade association and its unflappable members.

The one constant for community bankers was that they were frequently at odds with-and in the crosshairs of-the big banks. How community banks would be able to stem the tide against the ever-larger banking institutions that wanted a more deregulated industry to the potential detriment of Main Street America became the theme of the decade.

A Defining Moment

By 1990, community bankers were told three factors would change the industry: continued consolidation, a battle for consumers between banks and nonbanks, and product diversification that would determine how banking services would be bought and sold. Certainly these issues did come to the surface, but the demise of the community bank once again was overrated.

Arguably a watershed event early in the decade (1991) that was front and center on ICBA's docket was damaging legislation pitting Main Street against Wall Street. President George H.W. Bush, fresh off the first Gulf War, had made sweeping financial reform legislation one of his top domestic priorities. His administration proposed a bill that would, in one giant step, have repealed the McFadden Act (which gave states control over branching of banks, including national banks, within their borders), and the Douglas Amendment (prohibiting banks from acquiring more than 5 percent of the shares of a bank outside the company's home state, unless authorized by applicable state law). The Bush administration's bill would also have repealed the Glass-Steagall Act, the Depression-era law that forbade mergers of banks, insurance companies and securities firms. For good measure, the president threw in a proposal that would have drastically cut back deposit insurance coverage levels.

As merger fever spread across the banking industry, the very largest firms insisted that repealing all these laws would allow them to compete globally. In the wake of the S&L debacle, global financial experts had been whispering about the possible decline of the U.S. banking system. Indeed, in 1970 the 10 largest banks in the world were all American, but by June 1991, not one U. …