Conrad W. Hewitt 

279 Kaanapali Drive 

Napa, California 94558 

(707) 259-1079 

Testimony on July 9, 1998 before the Federal Reserve Board, San Francisco, California 

Concerning the proposal by the National Bank Corporation, Charlotte, North 

Carolina, to merge with Bank America Corporation, San Francisco, California 

My name is Conrad W. Hewitt. For over the past three years, I served as the 

State Superintendent of Bar&sand the Commissioner ofFinancial Institutions for the 

State of California. My term ended this past June 3Oth, 1998. Prior to my position with 

the State of California, I was a Managing Partner in the firm of Ernst & Young. For over 

33 years, I specialized in financial institutions Consequently, I have been involved in 

many mergers and acquisitions of financial institutions~ 

During the past three years, in my capacity as State Superintendent of 

Banks and as Commissioner, I have approved a number of bank mergers and acquisitions. 

The largest acquisition was Wells Fargo acquiring First Interstate Bank The California 

State laws concerning the sale, merger and conversion of depository corporations are very 

similar to the federal agency’s laws, such as the Federal Reserve. 
As a regulator, I had several standards to consider under California banking law, 

before 1 could approve or deny such a transaction. Some of the elements of the law 

included: 

1. the transaction till not result in a monopoly 

2. Competition will not be lessened or be anti-competitive 

3. The convenience and needs of the community will be served 

4. The shareholder’s equity will be adequate and the financial condition 

of the combined banks will be satisfactory 

5. Directors and executive officers will be satisfactory 

6. The surviving entity will afford reasonable promise of successful 

operation and will be operated in a safe and sound manner 

In my opinion, this proposed merger meets all of the standard to be considered 

under the Bank Holding Company Act. 

I note that the proposed transaction does not result in the largest hank in the 

United States. Also, this merger will operate in only 25 of the 50 states. I publicly stated 

over three years ago, that there would be consolidation in the banking industry I had 

many reasons for this statement and I believe that this trend will continue. There is too 

much capacity in the banking industry, too many banks and too much competition from 

outside the banking industty Thus the need to consolidate. Even the largest US banks 
face tremendous competition from companies such as: Merrill Lynch, GE Capital, General 

Motors Acceptance Corporations, all mutual funds, such as Fidelity, T. Rowe Price, 

Household Finance and now the intemet Many of these companies are not subject to 

state and federal regulatory law, as the banks presently are. 

Other reasons for this merger are: 

1. The high cost of investment in technology helps drive the mergers and 

consolidations. The non-bank competitors have invested heavily in technology and banks 

must invest j&as much, ifnot more, in order to compete and survive. This investment 

requires a larger capital base, and one way to create this base is through consolidation. 

2. Our largest U.S. banks are still small compared tot the other banks in the world, 

which are comprised of the Japanese, German and French banks The U.S. is rapidly 

becoming a global player and world trader. Our banks must be large enough to provide 

the financing and capital necessary for our businesses to compete world-wide. 

3. Because there is very little overlap in this merger concerning the consumer, the 

consumer need and convenience should be satisfied. Branch banking has changed 

dramatically in the past five years because of ATM usage, banking by phone, computer 

banking and banking by mail. The consumer has dictated this shift in the delivery system 

of banks, The consumer has a wide choice and availability of financial institutions from 

which to chose. As I said earlier, the competition is fierce. This transaction should 
enhance the service and products available to the customers of the new bank. This is truly 

an interstate bank merger as contemplated by the federal Riegle-Neal Interstate Banking 

and Branching and Efficiency Act of 1994, which Congress passed, with the law 

becoming effective September 29,1994. As a result, the consumer will be the benefactor 

of one of the few, real interstate banks in our country 

Considering the other aspects of this proposed acquisition, both companies are 

financially strong, as indicated by their financial statements, capital and operating ratios 

and market capitalizations 

If this transaction is approved by the Federal Reserve Board and, in my opinion it 

should be, then a nationwide I?anchise will be created which has the potential to deliver 

financial service to millions upon millions of families and businesses, 

Thank you for allowing me to testify and I will be pleased to answer any questions 
, 

TESTIMONY OF 

CRAIG COLLETTE 

AT THE HEARING OF THE FEDERAL RESERVE BANK OF 

SAN FRANCISCO ON 

PLANNED MERGER OF NATIONSBANK AND BANK OF AMERICA 

JULY IO,1998 

SAN FRANCISCO 

CRAIG COLLETTE 

PRESIDENT, 

MARATHON NATIONAL BANK, LOS ANGELES 

AND MEMBER, CALIFORNIA INDEPENDENT BANKERS 

BOARD OF DIRECTORS 
, 

Thank you for the opportunity of addressing this very important topic before the Federal Reserve Bank of 

San Francisco. My name is Craig Collette, and I a member of the Board of Directors of the California 

Independent Bankers and am President of Marathon National Bank, a $75 million asset bank located on the 

West side of Los Angeles. As an independent banker with 33 years of experience, I would like to give you my 

views on the impact of this gigantic merger of Nationsbank and Bank of America. 

I am speaking this morning on behalf of the California Independent Bankers which represents some 200 

banks throughout the state. 

Let me first address you as a concerned citizen of our state. When legislation was debated in 

Sacramento three years ago which enabled this kind of merger, the California Independent Bankers raised an 

important issue. What will the tax impact be of permitting out of state institutions to own large CA banks and 

shift their headquarlers out of state? Little attention was given this critical question. As a concerned taxpayer in 

this state, I would like to raise the issue again and I would like to see some estimates or projections of what this 

merger will mean to CA taxpayers when the headquarters of the combined institutions shifts to Charlotte, NC. 

All of CA’s three largest financial institutions are now owned by out of state entities. 

As a community bank president I have additional views. 

The US, with the passage of the Riegle-Neal bill, is moving from a diversified financial system to one 

characterized by a lopsided barbell with just a few very large banks at one end and a large number of 

independent banks at the other. To quote Hugh McCall, chief executive of Nationsbank, US banking will be “...a 

barbell-shaped industry with a dozen or half-dozen very large players on one end and four or five thousands 

boutiques on the other.” On this issue we agree. But, what are the implications of such a structure? 

Nationsbank and Bank of America’s merger at $60 billion is the largest between two American banks. The bank 

created by this merger will have 8.2% of the nations deposits--dangerously close to the 10% limit set by the 

Riegle-Neal bill. In a country of our size this is an enormous concentration of economic, financial and political 

power. An Ironically this very merger will weaken California’s voice in the US Congress. The interest of Hugh 

McCall will not parallel the interest of California. 

Unfortunately, this trend toward mega mergers will probably continue given the overvalued asset base 

our own stock market has created. The trend toward mega mergers, and this includes this merger, is not 

healthy for Main Street where I come from, it is very risky for Wail Street, and it is bad for the Federal Reserve 

and other regulators who will have to bail out these mega giants when they are mismanaged, over speculate or 

reach too far in risk taking. These banks are the new super sized “too big to fail” varieties. 

The evidence shows that increased concentration in the banking industry has not benefitted bank 

customers. The economies of scale that supposedly justify large bank mergers either do not materialize or are 

not passed on to customers. In addition, large interbank mergers reduce competition in ATM network markets 

as well as in credit card markets. Consider the following: 

A. Larger banks charge higher fees, According to Bank Rate Monitor, none of the top 50 banks in the 

U.S. offer the least expensive checking accounts. In fact, those offering the mast expensiu&~accQmts 

are banks involved in the latest mega mergers: Citibank and Nationsbank. The best deals are offered by 

smaller regional and community banks. And a 1997 study found a widening gap between large and small bank 

fees. 

0. A Federal Reserve study found the average fees charged by multi state banks are significantly higher 

than those charged by single-state banks, even accounting for location and other factors that might explain the 

differences. 

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C. Bank mergers have an adverse effect on consumer deposit pricing. A Boston Federal Reserve 

Bank study of 499 bank mergers found the combined banks lowered interest rates paid on deposits regardless 

of the amount of competition in the market. 

D. Economies of scale? The evidence suggests that the optimal size for a bank in terms of economies of 

scale, profitability and efficiency is between $100 million and $1 billion, quite a bit smaller than the $300 to $600 

billion behemoths that will be created from the latest mergers. And a Harvard study showed that instances of 

improved operating results after a merger weredueptimarily M-ricing, not economies of scale, 

suggesting the use of increased market power to raise prices. Given sufficient market power, large banks could 

price smaller competitors out of the market with below market rate loans or above market rate deposits. 

E. Small business lending receives short shrift in a world of ever-larger banks. Generally, the 

percentage of small business lending is inversely proportional to bank size. And mergers involving small banks 

tend to increase small business lending while mergers of large banks tend to reduce it. 

F. Large interbank mergers will also have negative effects on competition in ATM network markets. 

ATM network mergers typically follow big bank mergers. And the current merger mania is paving the way for an 

oligopolistic ATM network market owned by a handful of the nation’s largest banks. Essentially, these banks 

control the pricing, policies and functionality of the nation’s ATM networks. Given this control, large banks could 

limit access for community banks and their customers by imposing anti-competitive and discriminatory pricing, 

membership requirements, operating rules or technological barriers. Access at a fair price to ATM and other 

electronic financial services networks is critical for community banks to insure their customers also have fairly 

and competitively priced access to these networks to transact their banking business. 

G. Large bank mergers are creating an oligopoly of credit card issuers led by Citicorp, Bane One and 

Nationsbank. Today, under the Visa or MasterCard joint venture umbrella, thousands of community banks are 

issuers of credit and debit cards, set their own pricing and terms, and have the national and worldwide 

acceptance essential for their card viability. Unfortunately, we believe that increasingly the large banks will 

promote their own brands to the detriment of the Visa or MasterCard brand. And as the Visa and Mastercard 

brand names are undermined or destroyed, this would be to the detriment of competition and to thousands of 

community financial institutions and their customers. We will be back in a tightly controlled card environment 

detrimental to both consumers and small merchants. 

In conclusion, as an independent bank president, I am fully aware that in the beginning, community 

banks will prosper from the fallout of customers from big bank mergers. After these giants consolidate however, 

there will no longer be a fair and equitable competitive environment for independent banks in the areas I have 

pointed out in my testimony. Bank customers and small business will suffer as a result. 

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,._ 1 

Expanded remarks of Craig Collette’s testimony before the Federal Reserve Bank of San 

Francisco on planned merger of NationsBank and Bank of America, July IO, 1998. 

Increased Financial Concentration Means Less Competition 

Effect on Prices, Small Business Lending and Economies of Scale 

We should examine empirically the economic impacts of recently-consummated 

interbank mergers. What have been their real effects, on access to banking services by 

consumers, and on convenience? What have been their observable effects on the level of fees 

and charges, and related phenomena such as minimum balance requirements? Have fees 

gone down and services expanded, as the proponents of these mergers would have us 

believe? Or, have fees to consumers gone up as large banks have become increasingly 

bureaucratized and oblivious to the needs of their customers? 

A. Laraer Banks Charae Hiaher Fees: 

In fact, the body of evidence shows that increased concentration has not benefitted bank 

customers, who correctly perceive an across-the-board increase in fees and charges. 

According to a March 1998 Checking Account Pricing Study of 350 banks nationwide conducted 

by Bank Rate Monitor, none of the top 50 banks in the U.S. offer the least expensive checking 

account. The best deals are offered by smaller regional and community banks. Ironically, the 

banks offering the most expensive checking accounts turned out to be none other than the 

1 
banks involved in the latest round of proposed megamergers: Citibank, San Francisco; Barnett 

Bank, Tampa (merging into NationsBank); NationsBank, Tampa; and NationsBank, Orlando. 

The Federal Reserve Board’s Annual Report to the Congress on Retail Fees and 

Services of Depository Institutions (June 1997) found that the average fees charged by 

multistate banks are significantly higher than those charged by single-state banks, even 

accounting for the role of locational and other factors that might explain differences in the level 

of fees charged. And a 1997 study by the US. Public Interest Research Group, Big Banks, 

Bigger Fees, found a widening fee gap between large and small banks as fees climbed at big 

banks, while dropping at small ones. In the previous two years, fees at large banks had risen 3 

percent, but fell 2 percent at small banks. 

C. Bank Meraers have an Adverse Effect on Consumer DeDosit Pricina: 

A recent paper by two economists (Simons and Stavins) at the Federal Reserve Bank of 

Boston questions whether antitrust enforcement has been sufficiently vigorous since mergers 

have an adverse effect on consumer deposit pricing. Their study of 499 bank mergers found 

the combined banks lowered interest rates paid on deposits regardless of the amount of 

competition in the market. In short, there is reason to believe that the vaunted “efficiencies” to 

be realized by interbank mergers are not in fact being passed along to the consumers. If not to 

consumers, then to whom? 

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D. Economies of Scale? 

Equally important, we question whether interbank mergers really present the 

opportunities of increased efficiency that their proponents claim. One recent study indicates 

that, except below a relatively low threshold in terms of combined assets, bank mergers do not 

in fact result in the realization of increased efficiency through economies of scale-a common 

economic rationale for horizontal mergers in any industry. Several other studies (including 

those conducted by the Harvard Business School and the Federal Reserve Bank of Atlanta) 

found no significant cost savings or profit improvement (measured as return on assets or gross 

operating income) as a result of mergers. Ironically, in the Harvard Business School study of 

New England bank mergers, instances of improved operating results (such as improvement in 

net interest margin) was due primarily to higher repricing rather than economies of scale, which 

strongly suggests the use of market power to raise prices, and again raises antitrust concerns. 

Given sufficient market power, large banks could price smaller competitors out of the market 

with below market rate loans or above market rate deposits. 

We suspect that economies of scale may actually become negative once a merged 

banking entity exceeds some critical mass, because the increased costs of management and 

bureaucratization will at some point overwhelm any theoretical economies of scale. The 

evidence suggests that the optimal size for a bank in terms of economies of scale, profitability 

and efficiency is between $100 million and $1 billion. An analysis of the largest 100 banks in 

the May 1998 issue of USBanker shows that as a general rule the largest banks have poorer 

asset quality, lower profitability, less efficiency and weaker capitalization than the smaller banks 

on the list. 
E. Small Business Lendina Receives a Short Shrift in a World of Ever Laraer Banks 

The effect of interbank mergers on small business lending is also of concern, as small 

business lending receives short shrift in a banking world of ever larger entities. Generally, the 

percentage of small business lending is inversely proportional to bank size. According to 

another Federal Reserve Bank of Boston analysis (Peek and Rosengren), banks under $100 

million involved in bank mergers on average had 16 to 19 percent of their loan portfolios in 

small business loans, while banks over 51 billion involved in bank mergers had on average 6 

percent of their loan portfolios in small business loans. And interestingly, small bank acquirers 

tend to increase small business lending while large acquirers tend to reduce it. Peek and 

Rosengren note that several recent studies have found small business lending is also growing 

faster at small banks than large, and that large acquirers are less likely to expand in this sector. 

They found that banks with less than 5100 million or more than $3 billion of assets each had 

asset growth of about 24 percent from June 1993 to June 1996, yet growth in small business 

lending (loans under 51 million) was 42 percent at the small banks but only 3 percent at the 

large banks. 

In sum, the recent trends favoring consolidation in the banking industry are coupled with 

widely-held suspicions that (I) realized efficiencies are overstated or non-existent, and/or (ii) the 

benefits of such efficiencies as may be realized are not being shared with bank customers, and 

(iii) increased market power is used to raise prices. 

4 
Effect on ATM Network and Credit Card Markets 

F. ATM Network Markets: 

A key concern in large interbank mergers, and one that does not get the attention it 

warrants, is the effect on ATM networks. Market concentrations resulting from bank mergers 

and acquisitions have potential anti-competitive implications for ATM network markets 

(specifically control of ATM switches). 

ATM networks are joint ventures between competing banks. ATM networks are selfregulated, private sector entities, owned and controlled in the majority of cases by large banks, 

that set their own pricing and related operating rules subject only to the constraints imposed by 

the antitrust laws. Given the structure of ATM networks, certain anti-competitive aspects are 

inherent. For community banks, these anti-competitive aspects are more pronounced as they 

generally have little influence over network fees, bylaws or operating rules. Access at a fair 

price to ATM and other electronic financial services networks is critical for community banks to 

insure their customers also have fairly and competitively priced access to these networks to 

transact their banking business. 

Big bank mergers affect ATM networks in two ways. First, ATM network mergers 

typically follow. For example, NationsBank and First Union acquisitions in the South prompted 

the merger of the Honor and Most ATM networks (NationsBank owns 30 percent, the largest 

single share, of the Honor network). NationsBank’s purchase of Boatmen’s Bancshares of 

Missouri prompted Honor’s acquisition of the BankMate network in St. Louis formerly owned by 

5 
Mastercard and three smaller networks. Currently, First Chicago owns 30 percent of the Cash 

Station network and 25 percent of Magic Line. Bane One owns 20 percent of Electronic 

Payment Systems, Inc. which operates the MAC network. The pending Bane One/First 

Chicago merger could result in mergers of all of these networks. (Interestingly, EPSlMAC 

entered into a consent decree with the Department of Justice in 1994 agreeing to cease certain 

anti-competitive practices that caused over 1,000 banks, particularly small banks, thrifts and 

credit unions, to pay higher, noncompetitive prices for ATM transaction processing.) 

In the short term, the industry’s merger mania is rapidly paving the way for an 

oligopolistic ATM network market owned by a handful of the nation’s largest banks. Essentially, 

these banks control the pricing, policies and functionality of the nation’s ATM networks. Given 

this control, large banks could limit access for community banks and their customers by 

imposing anti-competitive and discriminatory pricing, membership requirements, operating rules 

or technological barriers. Since network policies directly affect the ability of community banks 

and other small financial institutions to offer competitive ATM services for their customers, they 

must be allowed to participate fairly in the governance of ATM networks in order to protect 

these interests. 

We note that under current law, the Federal Reserve has the authority to approve or veto 

ATM network mergers or mergers of other payments processing entities owned by banks. In 

the past, the IBAA has urged the Federal Reserve to consider the electronic banking markets 

when determining whether a proposed bank merger/acquisition passes antitrust tests. We have 

urged the Federal Reserve to ensure that its competitive impact analysis evaluates: 1) the 

market power of a network brand, 2) fees, 3) routing rules, 4) third-party processing 

requirements, and 5) other factors that could be used to disadvantage community banks. 

6 
The second way big bank mergers can effect ATM networks is that, over the long term, 

large banks could transfer their transaction processing from regional ATM networks to their inhouse operations. BankAmerica Corp. is currently the largest ATM owner, and its merger 

partner NationsBank is second. Together they control more than 15,000 machines--a number 

that is comparable to multibank shared networks such as Pulse or NYCE. The Bane One/First 

Chicago merger will result in the nation’s second largest ATM owner with almost 10,000 

machines. (By contrast, all community banks combined own fewer ATMs than 

NationsBanWBank of America.) Excess capacity could be created in existing regional electronic 

networks as large banks pull transactions out of the network as a consequence of mergers. If 

this excess capacity is not shifted to smaller financial institutions, the consumer of electronic 

payment services will have less and less choice. And the customers of community banks, 

savings and loan associations and credit unions could be forced out of electronic commerce by 

pricing and other decisions of the fewer and fewer network owners. 

G. Credit Card Markets: 

We have a major anti-competitive concern in the credit card area. Large bank mergers 

could create an oligopoly of credit card issuers led by Citicorp, Bane One and NationsBank. 

Citibank is currently the largest issuer of credit cards with 65 million cards outstanding. Bane 

One/First Chicago combined will hold the number two spot with 53 million cards. 

NationsBankIBank of America combined will have 24 million cards outstanding. Once the 

pending mergers are consummated, the top ten credit card issuers will control 72 oercent of the 

credit card market. according to Robert McKinley of RAM Research in Frederick, Md. 
Under today’s rules of the game, by using the Visa or Mastercard umbrella, thousands of 

community banks are issuers of credit and debit cards and set their own pricing and terms. 

Thousands of community banks and their credit and debit card customers can tie into the Visa 

and Mastercard brands, which confers on the cards the national and worldwide acceptance 

essential for the cards’ viability. Like ATM Networks, the two card associations, Visa and 

Mastercard are joint ventures and all competing member banks enjoy the strength of two 

brands that are recognized and accepted around the world. 

We have already heard the ad “Don’t think Visa, think Citibank Visa” (i.e., its not just a 

Visa Card, it’s a Citibank Visa Card). It is our concern that down the road the ad you hear from 

Citibank or Bane One will jettison the Visa or Mastercard brand name in favor of a credit card or 

debit product that they exclusively own and control. And with the destruction of the Visa or 

Mastercard brand names, combined with large banks’ long-term goal to destroy the FDIC 

symbol now on every bank door, enormous financial concentration to their benefit and to the 

detriment of thousands of community financial institutions and their customers will have been 

achieved. And then the consumer will suffer because we will be back in the brave new world 

where every credit card issuer charges a $35 annual fee and a 19.6 percent interest rate 

regardless of market interest rate fluctuations. And the taxpayer will suffer when the inevitable 

occurs, and a large financial conglomerate Titanic goes down. 

At best, the card brands will be systematically weakened to the detriment of smaller 

issuers forcing them out of the business because they will not have the marketing budgets to 

compensate. Historically, Visa and Mastercard have offered baseline marketing and 

enhancement packages that virtually any size member bank could take advantage of. 

Increasingly the large issuers will not be willing to support such product parity preferring instead 

8 
. 

to use their considerable influence to assure their own cards stand out. This in turn, will hinder 

cooperative brand advertising serving to obscure the message to consumers that other Visa 

and Mastercard offers are available, not just a “Citibank Visa.” 

Consumers will not only be disadvantaged by choice limits and higher pricing, some will 

find themselves “de-marketed” from the card product entirely. With increased consolidation and 

less competition, large issuers will begin to look for other ways to improve profits. For example, 

some issuers are already “de-marketing” by eliminating value-added enhancements, changing 

terms, assessing inactive fees and using other disincentives to discourage transactors, those 

consumers who pay off their balance each month to avoid finance charges. In addition to 

simply not offering the card product or raising annual fees, the grace period will be reduced or 

eliminated as the large card issuers focus on the more profitable revolvers, i.e. those who 

maintain a balance from month to month and pay finance charges, in a sort of reverse 

discrimination. In Canada today, where only a few large banks exist, most cards carry a high 

annual fee, $25 to $39, and reduced grace periods, from no grace period to just over 17 to 21 

days (Office of Consumer Affairs of Industry Canada, Feb. 1998). Revolvers on the other hand 

will be held captive with higher annual percentage rates (APRs) applied using the highest 

possible compounded calculation methods and no grace periods along with higher late fees, 

over-limit fees and risk-based pricing. 

Small merchants will also be affected. Already, the core interchange rates that form the 

basis for merchant pricing favor large merchants which are generally contracted with large 

banks. Just a few years ago, most of the large banks had bailed out of the merchant business 

leaving it fragmented and primarily in the hands of non-banks and small community banks. 

Now the big banks are back with a vengeance and have the clout to win market share. In 

9 
today’s electronic world and with linkages to other commercial services, it will become 

increasingly difficult for smaller players to compete. With large card bases, the mega banks can 

also offer special, targeted promotions that will further tie merchants and consumers forcing out 

the smaller players, primarily community banks. Once the competition is eliminated, merchants, 

especially small businesses, will have little choice but to pay whatever rates are charged. 

The California Independent Bankers (CIB) represents some 200 independent financial 

institutions throughout California and is politically active on behalf of its members in Sacramento 

and Washington DC. It is the California Affiliate of the Independent Bankers Association of 

America which has over 5,500 independent bank members nationwide. 

### 

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