IS BIGGER BADDER?

By John Greenwald

JOHN HAMILTON HAS LEARNED TO HIS sorrow that bank mergers like last week's $10 billion union of Chemical Banking Corp. and Chase Manhattan can enrich investors but hurt depositors. Hamilton fled his own bank in Washington last year after the giant First Union Corp. of Charlotte, North Carolina, acquired it and raised the minimum balance for no-fee checking from $250 to $500. "We couldn't meet that every month," says Hamilton, president of a nonprofit community-development group, who shifted his money to his wife's credit union. Unlike most consumers, Hamilton isn't watching the trend passively. His organization, Community First Inc., is trying to start two local banks to serve areas neglected by the behemoths.

Deals like the one between Chase and Chemical have aggravated concerns about the impact of bank-merger mania on employees and customers. The new giant, which will take the better-known Chase Manhattan name even though Chemical is larger, will hold nearly $300 billion in assets and eclipse its New York City neighbor Citicorp as the largest U.S. banking company. Enthusiastic investors boosted the price of both Chase and Chemical stock more than 10% in a day, expecting the increased efficiency of the combined banks to send profits zooming. But to pare annual expenses by $1.5 billion within three years, the new bank will eliminate 12,000 jobs out of a total of 75,000 and close about 100 of its 626 branches.

The merger trend, which has reduced the number of U.S. commercial banks from 12,345 in 1990 to 10,450 last year, has gathered momentum as banks have joined forces to cut overlapping costs, enter new markets and meet domestic and foreign competition. Major deals valued at some $30 billion have been unveiled so far this year, and the pace shows no sign of slowing. The consolidations have helped boost bank profits to a record level in each of the past three years, $44.8 billion in 1994. But it's mostly stockholders who have benefited. "I don't see the savings being passed on to bank customers," says Barry Rubens, president of California Research Corp., a bank-consulting firm. Indeed, between 1990 and 1994 the fees banks charge consumers rose more than 34%, according to Alex Sheshunoff, a bank analyst in Austin, Texas.

The increases cover all sides of consumer banking. For example, a recent--and controversial--study of 271 banks by the U.S. Public Interest Research Group found that from 1993 to 1995 the average annual cost of maintaining an interest-bearing checking account rose 11%, to $219, and the cost of regular checking climbed 10%, to $202. (The American Bankers Association has attacked the study as based on false assumptions about how people manage their accounts.) In California the Wells Fargo Bank charges customers $5 for the privilege of using a human teller.

Another issue is that consolidation tempts banks to close branches in unprofitable, low-income districts. Last week Chemical Bank, which has been progressive in serving poor neighborhoods, vowed not to close branches in low-and-moderate-income areas where customers would have to go more than three blocks to find another one. Under the Community Reinvest ment Act, banks must submit their plans for serving poor neighborhoods to government scrutiny before a merger is approved.

Yet even as the number of banks dwindles, new options for customers are opening up. "Electronic banking will make the current wave of mergers seem like a small sideshow," bank analyst Sheshunoff says. Within five years, he predicts, some customers will routinely "surf the Internet for higher yields on deposits and lower interest on loans."

Also, aggressive small lenders are wooing dis gruntled customers away from the sometimes clumsy giants. California's Glendale Federal has taken aim at Bank of America, which merged with Security Pacific in 1992 in a $4 billion deal. Draped over the en trance of Glendale Federal branches are banners with a red circle and slash mark above the Bank of America logo and the slogan you deserve better. That and everything from free checking to discount airline coupons are designed to lure people like Juliet Kaz, a Security Pacific customer who complains of long lines and new charges since the takeover. But like many depositors, she says, "I'm lazy, and it's a hassle to change checking accounts," even though a Glendale Federal branch is just across the street.

The existence of alternatives has led regulators to conclude that most bank mergers pose no real threat to a commu nity's financial health. "The absolute size of a deal is not what matters to us," says a Justice Department official. "We look at the areas where the banks operate and ask if enough competition will remain." If not, Justice will challenge parts of the deal.

But customers must do their part. "Banking is no different than any other service," notes Bert Ely, a bank consultant in Alexandria, Virginia. "You have to shop around, find good deals and be ready to switch if necessary." Bigger does not have to be badder as long as consumers put their money where it works best.

--Reported by Tamala M. Edwards/Washington, Deborah Fowler/ Houston, Barbara Rudolph/New York and Tara Weingarten/Los Angeles

With reporting by TAMALA M. EDWARDS/WASHINGTON, DEBORAH FOWLER/HOUSTON, BARBARA RUDOLPH/NEW YORK AND TARA WEINGARTEN/LOS ANGELES