TESTIMONY OF
ANDREW C. HOVE, JR.
ACTING CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
MERGERS IN THE FINANCIAL SERVICES INDUSTRY
BEFORE THE
COMMITTEE ON BANKING AND FINANCIAL SERVICES
UNITED STATES HOUSE OF REPRESENTATIVES
10:00 A.M.
APRIL 29, 1998
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING
Mr. Chairman and members of the Committee, I appreciate the opportunity to present
the views of the Federal Deposit Insurance Corporation on the effect of mergers in the
financial services industry. Recently announced proposed mergers are of two distinct
types. One type consolidates already large banks and savings associations into still
larger banks and savings associations.
The other type unites depository institutions, insurance companies, securities firms and
other financial services providers in a single financial conglomerate. While these
recently announced mergers are noteworthy due to their size, they exemplify long-
standing trends in the financial services industry.
My testimony will first discuss the background behind recent merger activity and the
FDIC's role as deposit insurer. I will then review the implications of these mergers for
the deposit insurance funds. Next, my testimony will explore the effect on bank
supervision and competition in the financial services market, including the role of
community banks. Finally, I will discuss the possible effect on small business and
consumers.
Background
Consolidation in the Banking Industry
Large mergers within the banking industry continue a long-term trend begun in the
1980s and accelerated by passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994. Strong earnings during the 1990s have enabled banks and thrifts
to build their capital to the highest levels in more than 50 years. As a percentage of total
assets, banks' equity capital rose from 6.45 percent at the end of 1990 to 8.33 percent
at year-end 1997, during which time thrifts' average equity ratio climbed from 5.36
percent to 8.71 percent. Many institutions have used their capital to fund acquisitions,
contributing to the ongoing consolidation in the banking and thrift industries. While the
number of insured depository institutions has declined by more than one-third since
1985, primarily as the result of holding companies consolidating their operations, the
ANDREW C. HOVE, JR.
ACTING CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
MERGERS IN THE FINANCIAL SERVICES INDUSTRY
BEFORE THE
COMMITTEE ON BANKING AND FINANCIAL SERVICES
UNITED STATES HOUSE OF REPRESENTATIVES
10:00 A.M.
APRIL 29, 1998
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING
Mr. Chairman and members of the Committee, I appreciate the opportunity to present
the views of the Federal Deposit Insurance Corporation on the effect of mergers in the
financial services industry. Recently announced proposed mergers are of two distinct
types. One type consolidates already large banks and savings associations into still
larger banks and savings associations.
The other type unites depository institutions, insurance companies, securities firms and
other financial services providers in a single financial conglomerate. While these
recently announced mergers are noteworthy due to their size, they exemplify long-
standing trends in the financial services industry.
My testimony will first discuss the background behind recent merger activity and the
FDIC's role as deposit insurer. I will then review the implications of these mergers for
the deposit insurance funds. Next, my testimony will explore the effect on bank
supervision and competition in the financial services market, including the role of
community banks. Finally, I will discuss the possible effect on small business and
consumers.
Background
Consolidation in the Banking Industry
Large mergers within the banking industry continue a long-term trend begun in the
1980s and accelerated by passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994. Strong earnings during the 1990s have enabled banks and thrifts
to build their capital to the highest levels in more than 50 years. As a percentage of total
assets, banks' equity capital rose from 6.45 percent at the end of 1990 to 8.33 percent
at year-end 1997, during which time thrifts' average equity ratio climbed from 5.36
percent to 8.71 percent. Many institutions have used their capital to fund acquisitions,
contributing to the ongoing consolidation in the banking and thrift industries. While the
number of insured depository institutions has declined by more than one-third since
1985, primarily as the result of holding companies consolidating their operations, the
number of offices serving the public has remained relatively constant, above 80,000.
Mergers of banks, both interstate and intrastate, have resulted in a larger share of
industry assets being held by a smaller number of organizations. While 41 banking
companies held 25 percent of total domestic deposits in 1984, it took only 11 companies
to account for the 25 percent share by the end of 1997. If these figures were adjusted to
reflect the large mergers recently announced, just 7 banking companies would hold 25
percent of domestic deposits.
Financial Conglomerates
Financial conglomerates already exist. Non-bank banks and some industrial banks are
owned by non-financial companies; national banks can sell insurance under certain
geographic restrictions; bank holding companies and some banks are permitted to
operate securities subsidiaries, subject to certain limits; and the thrift charter, via the
unitary thrift holding company, has been an entry vehicle to the banking industry for
financial service providers and non-financial firms.
Competitive pressures will continue to lead to financial conglomerates like the proposed
merger of Citicorp and The Travelers Group. As the FDIC has testified several times,
the existing prohibitions that prevent banks from affiliating with other financial service
providers no longer achieve their goals and should be modernized.
Effect on the Deposit Insurance System
In the midst of these mergers and consolidations, the mission of the FDIC as deposit
insurer remains central to the maintenance of financial stability. Throughout its history,
the FDIC has played a critical role in assuring stability and public confidence in the
nation's financial system, and in preserving liquidity in the national payments system.
Deposit insurance has provided the secure foundation that has allowed the banking and
financial system to weather storms that have created great instability in other nations.
While I am confident that the deposit insurance system will continue to assure - as it has
in the past - that no insured depositor will ever suffer a loss, we must continue to
monitor industry developments carefully.
The FDIC has been studying the challenges to the deposit insurance funds presented
by financial conglomerates and industry consolidation. To facilitate a thorough
discussion of the role and nature of federal deposit insurance, the FDIC sponsored a
symposium held on January 29, 1998. The symposium provided a forum for exploring
the complex issues associated with maintaining an effective deposit insurance system.
Since the symposium addressed many issues of concern to this Committee, the FDIC
will forward a copy of the proceedings as soon as they are published.
The symposium addressed the issues related to deposit insurance and financial
modernization, in light of the recent rapid pace of banking evolution and the prospect of
newly permissible activities for banking organizations; the various deposit insurance
reform proposals that would curtain the role of the federal government in protecting
Mergers of banks, both interstate and intrastate, have resulted in a larger share of
industry assets being held by a smaller number of organizations. While 41 banking
companies held 25 percent of total domestic deposits in 1984, it took only 11 companies
to account for the 25 percent share by the end of 1997. If these figures were adjusted to
reflect the large mergers recently announced, just 7 banking companies would hold 25
percent of domestic deposits.
Financial Conglomerates
Financial conglomerates already exist. Non-bank banks and some industrial banks are
owned by non-financial companies; national banks can sell insurance under certain
geographic restrictions; bank holding companies and some banks are permitted to
operate securities subsidiaries, subject to certain limits; and the thrift charter, via the
unitary thrift holding company, has been an entry vehicle to the banking industry for
financial service providers and non-financial firms.
Competitive pressures will continue to lead to financial conglomerates like the proposed
merger of Citicorp and The Travelers Group. As the FDIC has testified several times,
the existing prohibitions that prevent banks from affiliating with other financial service
providers no longer achieve their goals and should be modernized.
Effect on the Deposit Insurance System
In the midst of these mergers and consolidations, the mission of the FDIC as deposit
insurer remains central to the maintenance of financial stability. Throughout its history,
the FDIC has played a critical role in assuring stability and public confidence in the
nation's financial system, and in preserving liquidity in the national payments system.
Deposit insurance has provided the secure foundation that has allowed the banking and
financial system to weather storms that have created great instability in other nations.
While I am confident that the deposit insurance system will continue to assure - as it has
in the past - that no insured depositor will ever suffer a loss, we must continue to
monitor industry developments carefully.
The FDIC has been studying the challenges to the deposit insurance funds presented
by financial conglomerates and industry consolidation. To facilitate a thorough
discussion of the role and nature of federal deposit insurance, the FDIC sponsored a
symposium held on January 29, 1998. The symposium provided a forum for exploring
the complex issues associated with maintaining an effective deposit insurance system.
Since the symposium addressed many issues of concern to this Committee, the FDIC
will forward a copy of the proceedings as soon as they are published.
The symposium addressed the issues related to deposit insurance and financial
modernization, in light of the recent rapid pace of banking evolution and the prospect of
newly permissible activities for banking organizations; the various deposit insurance
reform proposals that would curtain the role of the federal government in protecting