United States. Congress. House. Committee on Small.

The effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 online

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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 1 of 21)
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THE EFFECTS OF BANK CONSOLIDATION ON
SMALL BUSINESS LENDING



Y 4.SM 1:104-66

The Effects of Dink Consolidation o...

JOINT HEARING






BEFORE THE

SUBCOMMITTEE ON TAXATION AND FINANCE

AND THE

SUBCOMMITTEE ON GOVERNMENT PROGRAMS

OF THE

COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION



BOSTON, MA, MARCH 4, 1996



Printed for the use of the Committee on Small Business

Serial No. 104-66




f £ s 2 D m ?



U.S. GOVERNMENT PRINTING OFFICE
23-344 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-053805-X



, THE EFFECTS OF BANK CONSOLIDATION ON
X SMALL BUSINESS LENDING



SM 1: 104-66

fects of Dank Consolidation o...

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON TAXATION AND FINANCE

AND THE

SUBCOMMITTEE ON GOVERNMENT PROGRAMS

OF THE

COMMITTEE ON SMALL BUSINESS
HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION



BOSTON, MA, MARCH 4, 1996



Printed for the use of the Committee on Small Business



Serial No. 104-66




F£ S 2 D 1997



U.S. GOVERNMENT PRINTING OFFICE
23-344 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office. Washington. DC 20402
ISBN 0-16-053805-X



COMMITTEE ON SMALL BUSINESS



JAN MEYERS, Kansas, Chair



JOEL HEFLEY, Colorado

WILLIAM H. ZELIFF, JR., New Hampshire

JAMES M. TALENT, Missouri

DONALD A. MANZULLO, Illinois

PETER G. TORKILDSEN, Massachusetts

ROSCOE G. BARTLETT, Maryland

LINDA SMITH, Washington

FRANK A. LOBIONDO, New Jersey

ZACH WAMP, Tennessee

SUE W. KELLY, New York

DICK CHRYSLER, Michigan

JAMES B. LONGLEY, JR., Maine

WALTER B. JONES, Jr., North Carolina

MATT SALMON, Arizona

VAN HILLEARY, Tennessee

MARK E. SOUDER, Indiana

SAM BROWNBACK, Kansas

STEVEN J. CHABOT, Ohio

SUE MYRICK, North Carolina

DAVID FUNDERBURK, North Carolina

JACK METCALF, Washington

STEVEN C. LaTOURETTE, Ohio



JOHN J. LaFALCE, New York
IKE SKELTON, Missouri
NORMAN SISISKY, Virginia
FLOYD H. FLAKE, New York
GLENN POSHARD, Illinois
EVA M. CLAYTON, North Carolina
MARTIN T. MEEHAN, Massachusetts
NYDIA M. VELAZQUEZ, New York
CLEO FIELDS, Louisiana
EARL F. HILLIARD, Alabama
DOUGLAS "PETE" PETERSON, Florida
BENNIE G. THOMPSON, Mississippi
CHAKA FATTAH, Pennsylvania
KEN BENTSEN, Texas
WILLIAM P. LUTHER, Minnesota
JOHN ELIAS BALDACCI, Maine



Jenifer Loon, Staff Director
JEANNE M. ROSLANOWICK, Minority Staff Director



Subcommittee on Taxation and Finance
LINDA SMITH, Washington, Chairwoman



MARTIN T. MEEHAN, Massachusetts
KEN BENTSEN, Texas
JOHN ELIAS BALDACCI, Maine
CLEO FIELDS, Lousiana



JACK METCALF, Washington
FRANK A. LOBIONDO, New Jersey
WALTER B. JONES, JR., North Carolina
MARK E. SOUDER, Indiana
SAM BROWNBACK, Kansas
ROSCOE G. BARTLETT, Maryland
STEVEN C. LATOURETTE, Ohio

LlGIA SALCEDO-McWlLUAMS, Subcommittee Staff Director



Subcommittee on Government Programs

PETER G. TORKILDSEN, Masschusetts, Chairman



GLENN POSHARD, Illinois

CLEO FIELDS, Louisiana

BENNIE G. THOMPSON, Mississippi



JOEL HEFLEY, Colorado

SUE MYRICK, North Carolina

SUE W. KELLY, New York

DICK CHRYSLER, Michigan

DAVID FUNDERBURK, North Carolina

STEVEN C. LaTOURETTE, Ohio

LAURIE RAINS, Subcommittee Staff Director



(II)



CONTENTS



Page

Hearing held on March 4, 1996 1

WITNESSES
Monday, March 4, 1996

Allan, Virginia, President, North Suburban Chamber of Commerce 29

Aloise, David A., New England Director of Small Business Banking, Bank

of Boston 9

Gallagher, Christopher C, Esquire, Gallagher, Callahan and Gartrell 4

Gould, John, President and CEO, Associated Industries of Massachusetts 31

Hamill, John P., President, Fleet Bank of Massachusetts 6

Morison, T. Lincoln, Jr., President, First National Savings Bank of Ipswich .... 11
Plotkin, Joyce, Executive Director, Massachusetts Software Council, on Behalf

of David A. Blohm, President, Virtual Entertainment, Inc 36

Romano, Frank C, Jr., President and CEO, Elder Living Concepts, Inc 33

Scofield, Julie, Executive Director, Smaller Business Association of New Eng-
land 27

Zafris, James G., Jr., President, Danvers Savings Bank 13

APPENDIX

Opening statements:

Smith, Hon. Linda, including written statement from the Washington

Bankers Association 47

Torkildsen, Hon. Peter G 50

Meehan, Hon. Marty 53

Prepared statements:

Allan, Virginia 55

Aloise, David A 60

Blohm, David A 64

Gallagher, Christopher C 68

Gould, John 79

Hamill, John P 85

Morison, T. Lincoln, Jr 93

Romano, Frank C, Jr 101

Scofield, Julie 155

Zafris, James G., Jr 163

Additional material:

Statement from Hon. John F. Kerry 167

Questions from Subcommittees for Federal Reserve Bank of Boston 169

Responses from Federal Reserve Bank of Boston, including attachment,

Small Business Credit Availability: How Important is Size of Lender? ... 171

Questions from Subcommittees for Federal Reserve Bank of New York 215

Responses from Federal Reserve Bank of New York 217

Additional questions from Subcommittees for Mr. Aloise 220

Responses from Mr. Aloise including attachment from Massachusetts

Business Development Corporation 221

Additional questions from Subcommittees for Mr. Gallagher 236

Responses from Mr. Gallagher, including article from American Banker ... 237

Additional questions from Subcommittees for Mr. Hamill 242

Responses from Mr. Hamill 243

Additional questions from Subcommittees for Mr. Morison 247

Responses from Mr. Morison 248

Additional questions from Subcommittees for Mr. Zarfis 250

Responses from Mr. Zarfis 251

(III)



THE EFFECTS OF BANK CONSOLIDATION ON
SMALL BUSINESS LENDING



MONDAY, MARCH 4, 1996

House of Representatives,
Subcommittee on Taxation and Finance,
Joint with Subcommittee on Government Programs,

Committee on Small Business,

Washington, DC.

The Subcommittees met, pursuant to notice, at 11 a.m., in the
GSA Auditorium, Thomas O'Neill Building, Boston, MA, Hon.
Linda Smith and Hon. Peter Torkildsen (Chairpersons of the Sub-
committees) presiding.

Chairwoman Smith. Good morning. We're going to begin the
hearing this morning. The hearing will come to order. It's a pleas-
ure to welcome you, our witnesses and guests, this morning. It
sounds like our sound system is not working. Can you hear us in
the back? The hearing will come to order here in Boston.

Practically right after I was sworn into office and became the
chair of this Small Business Subcommittee on Finance and Tax-
ation, the two gentlemen to either side of me, Mr. Meehan and Mr.
Torkildsen, said, "You need to come to Boston. We need to hear
about the issue of capital for small businesses and about the bank
merger issue." They persisted until we gave them a hearing.

Now, that's not a very diplomatic way of saying it, but that's how
it happens in Congress. You have two very forceful Members who
have said, "This is an issue that needs to be addressed and heard
in our district, and we need to bring the Congressional Committee
here." Their dedication to this issue is what will allow it to come
before Congress. It has not become a big issue yet in other parts
of the Nation. My area has not had a problem. When we had the
consolidations, 30 other banks were formed in communities to re-
place the market. Within a very short period of time, community
banks picked up the small business finance slack quite well in a
competitive manner. But I still hear that you are having this issue
before you.

We will have a series of hearings on small business access to cap-
ital. This is just one of those. Yet we will be going back to the main
Committee and to Congress with our findings on the availability of
capital.

Now, with that, I'm going to basically give the Subcommittee to
Mr. Torkildsen and Mr. Meehan, Mr. Torkildsen being the Chair
of the Small Business Subcommittee on Government Programs,
and Mr. Meehan being the Ranking Minority Member on the Sub-
committee on Taxation and Finance. They both have more experi-

(1)



ence than I do, but I am also in their territory. With that, I will
turn to Mr. Torkildsen to begin introducing the witnesses, and we'll
begin the hearing.

[Chairwoman Smith's statement may be found in the appendix.]

Chairman Torkildsen. Just for the record, you can see the turn-
over of Congress is pretty hard with the Ranking Minority Mem-
ber, with myself and Petter as the Chair. There has been heavy
turnover in Washington. With us combined, Congressman Meehan
and myself, we have only been in for two terms each.

I want to thank Chairwoman Smith and welcome her to Massa-
chusetts. It's a long flight from the West Coast, but we appreciate
you making time to be here to call this hearing. I am honored to
Co-chair this hearing here in Massachusetts and also extend my
thanks to all of the witnesses today.

While banks have historically been a primary source of capital
for small business, bank lending to small business over the past
few decades appears to be declining. This hearing is being held to
determine how the trend toward bank consolidation has affected
small business access to credit.

In the late 1980's, there were many bank failures in New Eng-
land which resulted in bank consolidations. The FDIC did not pro-
vide banking services at failed banks, thus creating a dispropor-
tionate impact on small business. Restructuring and consolidation
are words spoken often while New England progresses through
enormous change in the structure of business. These changes affect
the economy, especially employment levels, in a number of indus-
tries all the way from banking through tourism.

In 1993, for example, industries dominated by small firms posted
a net gain of 1.06 million jobs, while industries dominated by large
firms lost 200,000 jobs. Small business represents 53 percent of the
private work force and 100 percent of sole proprietors in New Eng-
land. As small business plays a greater role in our economy, the
primary question to ask today is whether small business has access
to capital needed to expand and flourish.

It is important to note that just this past month, the Federal Re-
serve Bank of New York released a study on the availability of
credit to small business. The study states that small business is a
very profitable sector of the economy and that the trend toward
bank consolidation has not affected small business lending and ac-
cess to capital.

In contrast, the Federal Reserve Bank of Boston did a similar
study released in January 1995, finding that there may, in fact, be
an effect on small business access to capital. The Boston study
dealt more clearly with issues of regulation and the burdens it
places on small business. I'm interested in hearing any insights
from any of our witnesses regarding the two studies and whether
or not they can both be accurate in their assessment.

I look forward to the expertise of our witnesses from both the
small business and banking communities on these issues. With
that, I would like to yield to my colleague, friend, and Ranking Mi-
nority Member, Congressman Meehan, for any opening statement
he may make.

[Chairman Torkildsen's statement may be found in the appen-
dix.]



Mr. Meehan. Thank you very much, Congressman Torkildsen,
and good morning. I would thank all of you for joining us here this
morning. I want to thank the Chairs, Congressman Peter
Torkildsen and Congresswoman Linda Smith, for joining us here
today. I've worked very closely with both Members in a bipartisan
way on a number of issues, not the least of which is this issue of
small business.

This morning's hearing, as Peter said, would focus on the impact
of bank consolidation on small business lending. It is a particularly
relevant subject, given the recent wave of mergers in the New Eng-
land region. The first panel is comprised of banking experts and
representatives, including larger banks like Fleet and Bank of Bos-
ton, as well as traditional and community leaders.

Chris Gallagher has traveled down from New Hampshire to
serve as an expert witness in this panel, since he testified at the
1991 Senate hearings on the credit crunch. The second panel is
comprised of representatives of the small business community in
Massachusetts, including the Executive Director of the Smaller
Business Association of New England, Julie Scofield, and the Presi-
dent of Associated Industries of Massachusetts, John Gould.

In the past decade, the Massachusetts economy has undergone
considerable changes. A financial crisis was precipitated by a dra-
matic fall in real estate values. As a result, many financial institu-
tions failed. The shrinking defense and computer hardware indus-
tries added to the recession, while local and State governments
were faced with decreasing revenues compounding already high
levels of unemployment.

Today, Massachusetts and New England are still struggling to
recover. Massachusetts has made some important progress to its
recovery, but economic renewal is difficult. Small businesses and
start up companies continue to be the best source of our job growth
and economic stability.

To be sure, the smaller firms represent the future of the New
England economy. Like all companies, small businesses depend
upon capital availability to startup and remain competitive in to-
day's competitive market. With the recent bank acquisition in New
England and nationwide, I'm concerned that the capital needs of
small businesses will be disregarded in favor of lending of larger
companies.

Small business loans are labor-intensive and less profitable. Ac-
cording to a recent study that Congressman Torkildsen referred to
by Peggy Gilligan of the Federal Reserve Bank of Boston, the eight
largest banks in New England reported a 5 percent decline in. loans
of less than $1 million, compared to an 11 percent increase in larg-
er loans.

To date, mid- and smaller-sized banks appear to be trying to fill
the gap as their smaller loans increase relative to larger loans dur-
ing this same period. However, the trend in banking consolidation
is considerable. In Massachusetts alone, three banks, Fleet, Bank
of Boston, and Citizens, control close to half of the total market
share. Pending regulatory reforms in Congress and the inevitable
development of new technology will no doubt foster more bank con-
solidations in the future.



We are here today to thoroughly evaluate the issues that affect
current and future capital availability for small firms. Business is
the business of making money, regardless of whether you're a large
bank or a corner grocery store, and there's nothing wrong with
that.

But what concerns me and many of us here today are the grow-
ing trend toward bank consolidations, coupled with the recently re-
ported declines in larger banks lending to small businesses. I look
forward to hearing from all of you and all of the witnesses today.
Thank you.

[Mr. Meehan's statement may be found in the appendix.]

Chairwoman Smith. Mr. Meehan, Would you please introduce
the first witness?

Mr. Meehan. The first witness is Chris Gallagher. He's our ex-
pert witness, and he provided key testimony, as I indicated earlier,
to the 1991 Senate hearing on the credit crunch. He traveled from
New Hampshire to be here today, and we welcome him. He's a
partner in the firm of Gallagher, Callahan, and Gattrell. Mr. Galla-
gher?

TESTIMONY OF CHRISTOPHER C. GALLAGHER, ESQUIRE,
GALLAGHER, CALLAHAN AND GARTRELL

Mr. Gallagher. Thank you, sir, and good morning to each of
you. Particularly, I would like to thank you for inviting me to par-
ticipate on this distinguished panel. I would like to extend my grat-
itude for enabling us to give our views in such a convenient man-
ner. We very much appreciate your interest in this area of critical
concern to our region's economic well-being.

The purpose of this hearing on the vital connection between
small business and strong regional banking sector is well chosen.
This region's economy is cased upon small business, as you have
pointed out. Sound banking is the life's blood of small business
growth and development.

Plus, the region's economy is tied directly to the continued
strength and competitive viability of its banking sector. Those of us
who live and work in New England have learned the hard way just
how vital this connection can be. members of the New England
Congressional Delegation have an instructive and important tale to
tell their colleagues in Congress. The lessons of our credit crunch
were painfully learned. Nevertheless, they have taught everyone
that banking is not an isolated function in our area's economy.

Future banking cannot be left to the sole oversight of individual
Congressional Committees and arcane regulations. The health of
our banking sector bears directly on the health of our entire econ-
omy. Measures that create barriers to safe, sound, efficient, and ef-
fective banking have a direct impact on the viability of small busi-
ness.

Conversely, measures that make banking less competitive or
weaken players in our area hurt our region. Banking is one of our
region's vital organs, the health of which is a matter of concern to
anyone whose job it is to worry about our region's capacity to pro-
vide jobs, progress, and prosperity.

Numerous studies, as well as the casual empiricism of common
sense, continually remind us that small business and banking are



now tied together in a partnership that could even be described as
one of codependency. It is a constructive codependency, much as
mountain climbers tied together as they work to conquer a hill are
connected in a way that adds to the ability of each to do his job.
Nevertheless, as we well know here in New England, a slip or fall
by one partner can radically affect the other.

As you will note from my written remarks and other submis-
sions, the process of capital intermediation is now immersed in the
Darwinian struggle between high-cost banking structures estab-
lished over 60 years ago and market mechanisms.

Banks measure, assess, and assume risk, while market
intermediaries often leave risk with individual investors by packag-
ing risks that are sufficiently predictable to be priced and offered
for their direct investment. Obviously, the latter of these methods
is far more efficient. But we cannot allow market mechanisms to
prevail completely. They may prevail.

A basic home mortgage provides a good example. Reasonable pre-
dictability of risk coupled with the Government-sponsored and sup-
ported secondary market mechanisms provided by Fanny Mae and
Freddie Mac have driven banks out of all but the most nonconform-
ing or unique credits in the home mortgage market. In fact, the
only remaining reliable profit center for banks today may be me-
dium and small business credit and services.

Needless to say, even this market itself is now under siege from
more efficient nonbanking competition that includes every kind of
financial service provided, from insurance companies to Merrill
Lynch. Why does it matter whether the bank mechanism for cap-
ital intermediation survives?

If market Darwinism has moved banks to the list of endangered
species, so what? Who cares? The answer is clear when you per-
ceive the codependency connection between banking and small
business. Banks do it better. The commercial banking structure
provides a process of assuming risk, of sharing in the planned suc-
cess of ventures that cannot provide information adequate to ac-
commodate the predictability and reliability needs of their more ef-
ficient nonbank competitors.

Banks offer experience and business judgment that cannot be
measured and priced in securities markets. Small businesses need
value added investment of institutions whose structure enables
them to play this vital role. Small business still needs banks, be-
cause small business often needs the informational add-on of
banks' judgment, flexibility, and support-
But if banks hope to survive, much less compete, they must func-
tion more efficiently. They must retool and reinvest in all areas, in-
cluding their processes, operations, and new technologies. These in-
vestments of time, effort, and money must also be matched by
structural configurations appropriate to their cost and functional
objectives.

Accordingly, an appropriate size is neither large nor small.
Smaller size may enhance the nimbleness and flexibility required
to do relationship banking, while a larger size can offer economies
of scale that will accommodate the process of providing price-sen-
sitive products and services. Size is simply a matter of structural



efficiency. Banks must be allowed to seek the size that suits their
business plan.

The 1995 consolidations involving Fleet and Bank of Boston have
virtually eliminated our region's second tier of larger banks. Aided
by the decimation caused during the credit crunch, the natural evo-
lution of banking structures has moved more quickly here than
elsewhere in the country.

Again, you have a tale to tell your colleagues on the Hill. This
time, however, the story is very positive. As I have stated in my
prepared remarks, using Concord, New Hampshire, as an example,
one can see from the 1995 third quarter call report data, which is
our most recent, that both Fleet and Concord Savings Bank have
increased their commercial and industrial loans by 27 percent from
the previous year's third quarter.

In the same quarter, Primary Bank and First New Hampshire
had similarly high percentage rises to their business lending. All
of these banks moved into the lending market. These banks are dif-
ferent sized, but compete head on, and do so to the benefit of their
customers and their entire communities.

Size plays a role in product offerings and services. It has thus
far been beneficial to the New England banking markets and thus
beneficial to small business. If size promotes efficiency, then sizing
as a process is good for small business. We have undergone signifi-
cant structural changes in New England banking. These changes
which I believe, are mostly concluded, will prove to be good for our
region's economy.

Congress and the States should not impose inefficiencies of any
kind on sizing unless and until it becomes absolutely clear that
anticompetitive concentration of market power or problems with
safety and soundness require it to do so. But for now and for the
foreseeable future, the unimpeded sizing of banking structures to
obtain their most efficient delivery of products and services, par-
ticularly products and services for small business that are so criti-
cal to our economy, is both sound and beneficial public policy.

Thank you, and I would be happy to answer questions.

[Mr. Gallagher's statement may be found in the appendix.!

Chairwoman Smith. Thank you, Mr. Gallagher. We'll wait on the
questions until all of the panelists have spoken.

Mr. Torkildsen, would you like to introduce the next witness?

Chairman Torkildsen. Yes. Our next witness is John Hamill,
President of Fleet Bank of Massachusetts, and a long-time activist
in the New England banking community. Mr. Hamill.

Before you proceed, if I could just mention to all the witnesses,
if you would please summarize your statements, ideally using
something less than 5 minutes. Your written statement will be in-
cluded in the record in its entirety, and that will allow us more
time for questions. Thank you.

Mr. Hamill?

TESTIMONY OF JOHN P. HAMILL, PRESIDENT, FLEET BANK OF

MASSACHUSETTS

Mr. Hamill. Thank you, Congressman Torkildsen, Chairwoman
Smith, Congressman Meehan. Thank you very much for giving us



this opportunity to testify before you. My name is John Hamill. I'm
President of Fleet Bank of Massachusetts.

Fleet is a bank that is growing since consolidation that has be-
come the largest bank in New England as a result of that consoli-
dation. We believe our success is and will be dependent upon our
understanding of what is needed by our customers and our commu-
nities.

We strongly believe, as you do, that the New England and New
York economies — indeed, the country's economy — are fueled by
small business. As a result, we have invested major capital and
human resources to meet the needs of the more than 1 million
small companies throughout our market areas. It's not just talk,
because Fleet, in fact, is the third largest small business lender in
the United States of America, notwithstanding the fact that we do


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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 1 of 21)