Mergers Are the Rage, but Economists Are Skeptical

RECENT mergers by some of the nation's biggest banks, such as those of Manufacturers Hanover with Chemical Bank and Security Pacific with BankAmerica, are part of a long-term trend that many observers say will make the industry more efficient and profitable.

But some economists who have studied mergers of the 1980s say that efficiency is not necessarily the result.

Larry Wall and Aruna Srinivasan, researchers at the Federal Reserve Bank of Atlanta, studied combinations where both banks started with more than $100 million in assets.

After four years, "the average merger did not generate cost savings," Mr. Wall says. Several other studies have reached similar conclusions.

But mergers within the same market, where banks can close overlapping branches or consolidate back-office tasks, showed some cost savings, Wall found. He adds that for smaller banks - which were intentionally left out of his study - there are proven economies of scale to be gained in a merger. But researchers say economies of scale typically have already been achieved when a bank reaches $100 million in size.

In fact, John Boyd and Stanley Graham of the Federal Reserve Bank of Minnesota note that profitability is lower for banks with $1 billion or more in assets than for mid-size banks.

It remains to be seen whether the mergers of the 1990s will do better than those of the '80s. David Humphrey of Florida State University, Tallahassee, says 1980s mergers often focused on geographical expansion, where many now are aimed at cutting costs. Geographical expansion, which is still a priority for many banks, can help reduce exposure to a regional downturn, such as in the real-estate collapse in California.

If mergers don't necessarily make for more efficiency, why are they happening? One possible factor: Executive pay depends more on the size of a bank than how profitable it is, Mr. Boyd notes.

Gary Gorton, a finance professor at the Wharton School in Philadelphia, says the industry would perform better if disciplined by the threat of takeovers by nonbank firms, a practice currently banned.