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
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
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. …