Banking Consolidation Sparks Concerns Over Consumer Impact

The latest wave of bank mergers has many citizens' advocates and lawmakers questioning the implications for consumers, particularly those with low and moderate incomes. Concerned advocates predict that larger banks will charge higher fees and reduce services, resulting in fewer choices and more monopoly consolidation of power. Some economists, however, argue that consolidation is not necessarily a bad thing, citing studies that show the number of bank branches has remained relatively stable, and the consolidation frenzy is primarily taking place at the top of the banking food chain, not at the level of neighborhood banks.

Key Takeaways:

• Consumer advocates predict that large multistate banks will charge higher fees and reduce services, resulting in fewer choices and more monopoly consolidation of power.
• Studies by the Federal Reserve have found that large multistate banks tend to charge higher fees for checking accounts and for the use of automated teller machines.
• The number of banks and savings and loan institutions has declined from 18,193 in 1981 to 10,922 in 1997, but the number of bank branches has remained relatively stable at around 83,000.
• A study by John Boyd, professor of finance at the University of Minnesota, found that 85 percent of banks taken over had assets of more than $100 million.
• Senator Arlen Specter and Representative Jim Leach have announced plans to hold hearings on the impact of bank mergers on consumers.
• Some liberal consumer advocates, such as Ed Mierzwinski of the United States Public Interest Research Group, argue that large banks use monopoly power to charge higher fees, resulting in fewer choices for consumers.
• Economists, such as Randall Kroszner of the University of Chicago's Graduate School of Business, argue that consolidation is not necessarily a bad thing, as it allows for one-stop shopping and more services for affluent consumers.
• A June 1997 Federal Reserve Board study found that large multistate banks charge $4 more to stop payment on a check than small banks, and are more likely to charge higher fees for automated teller transactions.
• Another Federal Reserve study, published in September, found that the number of branches in inner-city neighborhoods declined 21 percent from 1975 to 1995.

Statistics:

• 18,193 banks and savings and loan institutions in 1981 (Source: Federal Reserve Board)
• 10,922 banks and savings and loan institutions in 1997 (Source: Federal Reserve Board)
• 83,000 bank branches in 1997 (Source: Federal Reserve Board)
• 85 percent of banks taken over had assets of more than $100 million (Source: John Boyd, University of Minnesota)
• 21 percent decline in the number of branches in inner-city neighborhoods from 1975 to 1995 (Source: Federal Reserve Board)

Sources:

• "The Banking Industry: Trends and Developments" (Federal Reserve Board, 1997)
• "The Impact of Bank Consolidation on Consumer Choice" (John Boyd, University of Minnesota, 1996)
• "Banking in America: An Overview" (United States Public Interest Research Group, 1997)
• "The Federal Reserve Bulletin" (Federal Reserve Board, June 1997)
• "The Banking Crises and the Fall of Small Banks" (Randall Kroszner, University of Chicago Graduate School of Business, 1996)
• "Community Reinvestment Coalition" (National Community Reinvestment Coalition)