SOCIAL TOPICS (Archive): COMMUNITY REINVESTMENT ACT

Published, June 1999

       The Internet home page of the largest U.S. bank is a window to 21st century financial services: online banking, online trading, a mortgage payment calculator, and more. These new developments are partly the result of corporate and technological innovation. However, the ongoing consolidation of the banking industry creates the scales of efficiency necessary to offer such services. The key question for socially responsive investors and society is, “What are the benefits and costs of bank mega-mergers?”

       At year-end 1997, there were about 11,100 banks in the United States — 40 percent fewer than in 1975. Consolidation is more pronounced among larger banks. The 100 largest U.S. banks increased their share of domestic bank assets held from 51 percent in 1980 to 74.6 percent in 1997.

       Why are banks merging? Aside from U.S. regulations that now permit interstate banking and nationwide branching, industry sources cite a variety of merger drivers: competitive pressures, technological advances, the ability to diversify product offerings, market globalization, and increased efficiency. These forces also exist globally.

       The mega-mergers of the 1990s provide upsides and downsides to bank stakeholders.

       Consumers. Bigger banks can offer more products and services to consumers, but this convenience may have a price. Recent reports by U.S. Public Interest Research Group (PIRG) show that consumers pay more in ATM and checking fees at larger banks. PIRG notes the average ATM surcharge in early 1999 for big banks was $1.42 versus $1.30 for small banks and $0.98 for credit unions.

       Distressed Communities. A stronger job market and low interest rates in the 1990s have boosted mortgage lending — the lifeblood of community development. According to the Federal Reserve (Fed), lending to low-income and minority borrowers has risen at a faster rate than lending to all borrowers. A February 1999 study concluded that bank consolidation in metropolitan areas has not adversely or disproportionately affected mortgage lending to lower-income and minority customers. In general, increased lending by independent mortgage companies and others offset reductions in lending by merged banks.

       Small businesses. Small businesses employ half of the workforce and account for half of private-sector output. A January 1999 Fed study shows no negative impact of bank mergers, thus far, on small business lending. The small banks that make most of the loans tend to be acquired by other small banks, not larger banks. Non-bank lenders generally pick up any slack, but borrowers may face increased costs.

       Employees. Employment in the U.S. financial services industry, including banks, brokerage firms and insurance companies, has climbed 38.4 percent from 1980 to 1997, outpacing overall private sector job growth. Nevertheless, individual bank mergers have led to significant job losses. For example, BankAmerica announced that 18,000 jobs would be cut due to its merger with NationsBank.

       Regardless of national trends, each local market and individual merger is unique. Thus, it is important for bank stakeholders to evaluate each merger’s likely impacts. Companies may find themselves under more public scrutiny during merger periods and be more responsive to stakeholder concerns in order to avoid negative publicity.

       Regulators. The Fed, the Department of Justice, and others generally must review large U.S. bank mergers. Federal guidelines prohibit excess local market concentration. However, the Fed approved all but three of 2,400-plus bank mergers proposed in 1996 and 1997. Banks often agree preemptively to divestitures that satisfy regulators’ concerns. However, the watchdog group Consumers Union has criticized regulators’ blanket allowance of mergers that slightly increase concentration, even in highly concentrated markets.

       Community Groups. In theory, regulators preclude bank mergers if a merging entity has a poor community reinvestment record. While such concerns have halted few mergers, community groups have gained concessions from banks to boost lending, keep branches open or provide development funds. For example, in proposing to acquire Home Savings of America, Washington Mutual involved Californian community groups in developing a $120 billion community investment package.

       Socially Responsive Investors. Beyond traditional financial analysis, Walden/USTC evaluates the impact of merging banks on customers, employees, communities, and the natural environment. This impact is determined largely by the culture of the acquiring partner. Also, as Julie Tanner of the National Wildlife Federation told us, “Mergers present an opportunity for shareholders to raise issues with the company because it is a time when organizational charts are being restructured and policies and guidelines are being formed.” We present two examples.

       BankAmerica and NationsBank merged during the fall of 1998 to form the nation’s largest bank. An evaluation of the combination by the community reinvestment research organization CANICCOR concluded that both banks were below average in lending to African American borrowers, and that BankAmerica was above average and NationsBank below average on lending to low-moderate income communities. In January 1999, the merged bank agreed with CANICCOR and concerned investors to penetrate, within three years, low-to-moderate income and minority home mortgage lending markets at a level equivalent to its overall penetration rate. Two positive affects on the “old” NationsBank employees are an extension of BankAmerica’s employee stock ownership program and of domestic partner benefits to all employees. Walden/USTC remains concerned about the merged entity’s commitment to diversity.

       Formed by a merger in 1998, HypoVereinsbank is the second largest bank in Germany, and a Walden/USTC international portfolio holding. The German environmental group Euronature informed us that the new bank’s environmental department is proactive in engaging key employees on a range of environmental matters. HypoVereinsbank remains a signatory to the UNEP Financial Institutions’ Initiative on the Environment, which was established to foster constructive dialogue about the links between economic development, environmental protection, and sustainable development. Nevertheless, we perceive deficiencies in the bank’s financial and environmental risk assessment of projects like India’s Maheshwar Dam, which has significant ecological and humanitarian implications. A German shareholder group represented our mutual concerns at the bank’s recent annual meeting. HypoVereinsbank believes the dam project meets its own, and the World Bank’s, environmental standards. Hypo has agreed to meet with Walden/USTC to discuss further our mutual concerns.

       The U.S. Congress is considering a bill that would formalize a recent trend in mergers between financial service firms, such as banks and insurance companies. As industry mergers intensify, investors and other stakeholders must demand that the financial supermarkets of the 21st century remain committed to competitive prices, empowered employees, strong communities, and a healthy environment.