Sunday, January 11, 2004

A side-effect of bank mergers The growing number of bank mergers is making it difficult for businesses of all kinds to get credit lines for conducting operations. That's the conclusion of a Wall Street Journal article ("Fewer Banks Mean Costlier Credit Lines", 3/14/2001). According to that report: "The merger boom has resulted in a shortage of lenders big enough to join the polls of 'syndicated' loans to big borrowers, according to corporate-finance executives. This is reducing the supply of a crucial service for corporate America." And it's not just high-risk companies feeling the pinch. Big companies like Coca-Cola, Kmart, and Albertson's have found it harder to arrange financing, to say nothing of small businesses. Credit lines are essentially big corporate credit cards, a pre-arranged loan to cover the cycles of the bond market and cash flow for companies. Often credit lines are not used; they are there for insurance purposes. With the number of banks willing to risk such deals down under fifty and shrinking each month, banks have started charging higher rates on the credit lines they do offer and have been unwilling to extend as long a credit line. In fact, mergers between borrowers and mergers between lenders have both led to smaller lines of credit as the risk burden now seems more concentrated than ever before. One example from the article: In 1996, Bank of America and NationsBank were both co-arrangers of a credit line for Atlanta-Based Coca-Cola Enterprises, an affiliate of the beverage maker, according to people familiar with the deal. In exchange for that coveted title and the arrangers' fees, the two banks committed to the credit line. Then the two banks merged in 1998. When Coca-Cola Enterprises asked for a new credit line in November, 2000, the merged bank contributed merely half of what the two had contributed before the merger. Coca-Cola Enterprises had to scale back its plans. Few entities mean less risk-taking, higher fees, and less creativity. Some of the caution is due to the bubble bursting, of course. But with less competition and the more convergence in the industry, even low-risk looks like too much risk. Some major US bank mergers in the past 15 years Current Bank Banks in 1990, since merged J.P. Morgan Chase J.P. Morgan, Chase Manhattan, Manufacturers Hanover, Chemical Bank Bank of America Bank of America, Continetal Bank, Security Pacific, NationsBank, Barnett Fleet (soon to be a part of Bank of America) Fleett, Bay Bank, Bank Boston, Shawmut Wachovia Wachovia, First Union, Signet, Core States Wells Fargo Wells Fargo, First Interstate, Norwest, National Bancorp of Alaska, First Security Corp., 1st Choice Bank, First Commerce Bancshares, Brenton Banks 11:49:13 AM

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