Banking on change.

• Position: Interview of banking professor Robert A. Eisenbeis - Interview

BNC: What effect will the new interstate banking law have on the Big Three banks?

I would look for them to continue to expand, but probably on a very cautious basis. They will look for partners across the country in growth areas. Now where that's going to be is not at all clear. I think price, quality of the institution and compatibility of management teams are going to be very important factors. You can't generalize to say that all of those factors come together in Illinois and they don't come together in St. Louis. It's going to be very much bilateral bargaining situations.

BNC: Does expansion enable the big banks to achieve economies of scale?

It's clear from the research that, everything being equal, large banks do not have inherent cost advantages over smaller and medium-sized institutions. There has been little in the way of convincing evidence that there is an inherent advantage to size. But research also shows that there is a great range of cost structures for firms of the same size. Some are much more efficient in running their operations than others. If you are an efficient firm and you acquire an inefficient firm, then you can, through consolidation, significantly transfer a low-cost operation to another state.

Also, it is more efficient to run a branch network than it is to run a branch network in the form of a collection of holding-company subsidiaries. By merging with an acquired institution rather than running it as a separate entity, you can eliminate layers of management, boards of directors and all this sort of trapping that goes with running a separate institution.

BNC: To fuel growth, midtier banks have acquired mutual savings institutions, which convert to stock ownership at the acquisition. These banks have been criticized for giving generous deals to directors and managers at the expense of depositors. What is the future of merger/conversions?

I believe there are some getting more out of the transactions than they are entitled to under the present setup. But I don't believe that depositors have as much claim for the surplus as they say. I also think that taxpayers have a significant claim on those values, which they are not getting.

Many of these institutions were economically insolvent in the early '80s and would have gone out of business but for the existence of the taxpayer guarantee in the form of deposit insurance. By providing that guarantee, taxpayers allowed these institutions to borrow at rates that didn't...