Are Bigger Banks Bad For Small Business?

Our man tests the waters in a place where mergers and consolidations are already a fact of life

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THE OLD SIGNS HAVE JUST COME down from the 23 branch offices of the Syracuse Savings Bank, the oldest and most venerable financial institution in this upstate New York city of 643,000 souls. Since 1849, the bank has been a pillar of the Syracuse business establishment. But from now on, Syracuse Savings will be part of Norstar Bancorp Inc., the "Beast of the East," as it is known in the banking community -- an $11-billion regional powerhouse based in Albany. And starting next month, Norstar itself is slated to lose its independence when it joins forces with Providence-based Fleet Financial Group to form a superregional bank with $25 billion in assets.

Welcome to the brave new world of bigbank banking. Thanks to computer technology, government deregulation, bank failures, and competition from other financial institutions, consolidation is the name of the game in banking these days. By one estimate, the number of U.S. banks could drop from about 15,000 to 5,000 by the end of this century. And the prospect raises some profound and disturbing questions for American business owners and Washington policymakers.

The common fear is that big banks and small business just don't mix very well. Loan authority becomes centralized in faraway headquarters where decisions are made by number-crunching young M.B.A.s who know nothing about you, your business, or your community. And as part of the culture of large institutions, loan officers rotate from place to place and job to job, so that just when you think you've got one trained, another takes his place.

"Lending to small business is very tough," explains Oklahoma banker Bob McCormick, "because the most important part of the underwriting process is the evaluation of management. It is subjective, it is personal, and it takes time and effort by an experienced person. But with consolidation, I think you'll see that kind of personal touch go by the boards."

McCormick is president of Stillwater National Bank & Trust Co. (see "Smart Money," January 1986) and a past president of the Independent Bankers Association of America. Over the years, he has made something of a crusade against what he calls, ominniously, the "evils of bank consolidation." And he thinks the federal government should stop it before it threatens the very sector of the U.S. economy that lately has been producing all the new jobs and most of the new products.

"One reason small companies do so well in the United States is that we have thousands of small banks for them to work with," McCormick says. "And if those small banks disappear and you have to go into Bank of America, say, to find your loan, you are hurting."

Only time will tell if his gloomy predictions prove valid. In many areas, the first round of bank consolidation has only just begun. But it may be possible to take a glimpse further into the future in a place like Syracuse, where the proximity of New York City's megabanks has already made bank consolidation a small-business reality.

It has been more than a decade since New York State ushered in the era of bank deregulation. In 1976 the state legislature, over the objections of independent bankers and business owners, abolished the banking districts that had made it difficult for the Manhattan megabanks to move upstate. Cities such as Syracuse seemed easy pickings for the likes of Citibank, Chase Manhattan, Chemical Bank, and Manufacturers Hanover. Local bankers braced themselves for the invasion.

"Those big banks came up thinking they were going to blow away the locals," says a Syracuse banker who lived through it. "They thought everyone would want to do business with them because of their size. And it was almost the reverse reaction. The people here were comfortable with their banks, they felt loyalty to them, and they didn't switch."

Manhattan bankers may be callous, but they aren't stupid, and before long most found themselves paring back their Syracuse plans. Chase, however, came up with a different strategy: if you can't beat 'em, buy 'em. Faced with lackluster performance in Syracuse under its own name, in 1984 Chase Manhattan Corp. purchased the Rochester-based Lincoln First Banks Inc., with its 25 or so branches in the Syracuse area alone. In deference to local sensibilities, the new operation was called Chase Lincoln First Bank, and bank officers were told to continue to answer to a regional headquarters in Rochester.

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