But Americans had better not get too smug. The only reason our banks survived the Excessive Eighties is that Fed chairman Alan Greenspan bailed them out by cutting interest rates in 1000. That let big U.S. banks, many loaded to the eyeballs with bad debt, make enough profits to offset loan losses. But now, a mere five years after Citicorp and Chase Manhattan were in such desperate trouble, signs of wretched excess are once again emerging.
That’s because banks are trying to cope with an insoluble problem. To wit, banking isn’t a very good business anymore. The best corporate borrowers no longer need banks-they can sell commercial paper or raise cash on Wall Street-and the most affluent depositors can put their money in plenty of other places to get higher yields. If you’re a bank, then, how do you keep growing in a nongrowth business? You take more risks.
Consumer lending is one favorite way to grow. Banks are showering the world with credit-card applications, trying to steal market share from each other. Too often, that’s like offering cut-rate booze to alcoholics. Credit-card delinquencies shot up to 8.3 percent in June, a 30 percent rise from the start of the year. Some banks have tried to get into the mutual-fund business. Most notably: Mellon Bank Corp., which spent $1.6 billion to buy Dreyfus, which has been racked by turmoil since Mellon took over. Similarly, First Union Corp. of Charlotte, N.C, is having regulatory problems at its recently purchased Evergreen fund group. These are among the better-run bank companies. Imagine the problems mediocre banks would have.
Even more dangerous is the new appetite for big bank mergers. Blessed with sky-high stock prices, it makes sense for banks to use their shares as currency to buy competitors. In theory, you keep the assets and eliminate duplicative employees and overhead. But some of these deals make questionable sense. After all, what so-called economies of scale are to be realized when giant banks combine operations that don’t overlap? Take the long-rumored mating dance of those two behemoths, BankAmerica of San Francisco and Nationsbank of Charlotte, N.C. How would you run a megabehemoth with $400 billion in deposits, operations all over the place and two distinct corporate cultures? Beats me. Maybe they should call themselves NationsBankAmerica, adopt an NBA logo and hire Michael Jordan. Marketing by Nike. Swoooosh!
Japanese banks are proof that being bigger than almost anyone doesn’t make you better than almost anyone. Remember that five years ago, Japanese banks seemed destined to rule the world. Now, one of the biggest of them can’t even keep itself from getting kicked out of the United States. It doesn’t pay to get too arrogant.
