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Merger Mania Means Customer Trouble

Merger Mania Means Customer Trouble

(July 2, 1999)

Merger Mania Means Customer Trouble

Banking customers, especially those in low-income areas, typically pay more for banking services after large banks merge into mega-banks, according to a new book by Economist Gary Dymski, an associate professor at the University of California, Riverside.

"The primary beneficiary of mergers is Wall Street, not Main Street," Dymski said.

"The Bank Merger Wave: The Economic Causes and Social Consequences of Financial Consolidation," published by M.E. Sharpe in New York, compares specific cities all over the U.S. and shows that banks that dominate their markets also charge the highest fees, provide the lowest rates of interests and are least likely to loan money to applicants.

Also, the book shows that minority communities remain underserved by banks, especially large nationwide banks that close branches in low-income areas in order to focus resources in upscale communities.

"There is more and more competition to open branches in the Temeculas and Murrietas of the world," Dymski said, referring to two upscale communities in Riverside County. That leaves low-income communities with check-cashing storefronts that charge much more for the limited services they offer.

Also, Dymski's book shows that race and ethnicity continue to play a role in whether home loans are approved or denied, even for applicants with identical incomes and debts. Dymski studied 16 different geographic areas and five different kinds of lending institutions, including large merging banks, smaller instate banks, savings and loan associations and mortgage companies.

He found that in most markets minority applicants are denied home mortgage credit at higher rates than white applicants with the same income and debt-to-income ratios. African Americans, on average, were 27 percent less likely to receive loans than economically similar whites.

However, that was not the case everywhere. In nine of the 16 city clusters studied, there was at least one kind of lending institution that showed no disadvantage for African-American applicants even when other lender types did.

In two groups of California cities, Hispanics were 22 percent less likely to receive loans than similar non-minority applicants. But in metropolitan Los Angeles, that trend reversed itself. Hispanic applicants had no disadvantage, and in fact sometimes received an advantage over whites with the same financial history.

Dymski said that current banking practices and the evolution of the mega-bank threatens to deepen inequality in society, without necessarily improving economic efficiency. "Economies of scale in banking operations are completely exhausted by the time banks reach the size of $5 to $10 billion in assets," he said. "Today's mergers are creating institutions with assets in the hundreds of billions of dollars." Dymski said that bank mergers have become a fact of daily modern life because they boost stock-market values and regulators have not been inclined to stop them. In the decade between 1982 and 1992, for instance, federal regulators received 211 applications for bank mergers that would result in concentrating power in fewer banks. They approved 205 of those.

In 1992, BankAmerica Corp. merged with Security Pacific Bank. On April 6, 1998, Citicorp and Travelers Group announced a $74 billion merger. On April 13, 1998, NationsBank merged with BankAmerica Corp. In the past year, Bankers Trust merged with Deutschebank; and Zion National merged with First Security of Utah.

In his book, Dymski advises federal regulators to demand more from merging banks than stock market boosts. "They should be obliged to show that they will provide countervailing real benefits to the consumers and communities that otherwise will lose from mergers," he said.

Dymski is on the editorial boards of the International Review of Applied Economics and Geoforum, and is coeditor of Transforming the U.S. Financial System with Gerald Epstein and Robert Pollin. He and Pollin also co-edited New Directions in Monetary Macroeconomics.

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