A banking hub no more

With the sale of FleetBoston Financial Corp. to Bank of America Corp., it has come to this in less than a decade: the elimination of all of the region's major homegrown banks.

Assuming the deal goes through, Banknorth Group, a midsize bank based in Portland, Maine, will be the largest bank left with a primary headquarters in New England. Banknorth has $25 billion in assets; Fleet's assets total $196 billion.

"Banking has consolidated just like every other industry," said Arnold Danielson, a bank merger specialist in Rockville, Md.

As the 1990s began, New England had five good-sized banks. But starting in 1991, with Fleet's acquisition of the failed Bank of New England, the big fish had eaten the smaller ones. In 1995, Fleet bought Shawmut National; in 1996, Bank of Boston bought BayBanks Inc.; and in 1999, Fleet bought BankBoston.

The region's two biggest remaining banks, Citizens Financial Group and Sovereign Bancorp, have their home bases elsewhere.

Much the same process has taken place across the country. In the past 10 years, the United States has seen the number of banks shrink from just over 11,000 to slightly fewer than 8,000.

"We started with far too many banks, by any stretch of the imagination," said Nicholas Perna, a Connecticut economist who worked at banks that have since been acquired.

The proliferation of banks grew out of a fear of financial concentration. The theory was that if the money was spread out, power would be, too. But over the past 15 years, attitudes have changed, and so have the laws that blocked bank consolidation. Barriers to mergers within states fell first; interstate barriers fell next. More recently, the rules that blocked marriages of investment banks and regular banks have been liberalized.

Other economic forces contributed to consolidation. Banking is a relatively slow-growth industry. Typically it expands as fast as the economy as a whole. For a variety of reasons, including regulatory restrictions, banks missed out on some of the hottest pieces of the finance business, such as investment banking and mutual funds.

Mergers don't make banks grow faster, but they do allow banks to cut costs and make bigger profits. Fleet made a living that way. Over the past 20 years Fleet bought dozens of banks, eliminated staff and back offices, and increased profits along the way. Wall Street helped drive consolidation along by putting pressure on banks of all sizes to boost their stock prices. In many cases, the only way to do that was by selling out to a larger competitor.

The merger boom hasn't eliminated small banks. Many still exist, and occasionally new ones spring up.

"Each one of these mergers creates new opportunities for us," said Mark Thompson, chief executive of Boston Private Bank. With $1.5 billion in bank assets, and still more in its money management arm, Boston Private has found a niche in providing customized service to well-to-do clients. Other small banks have attracted customers by promising a level of personal service that large banks are hard pressed to match.

Christopher Gallagher, a Concord, N.H., lawyer who handles bank deals, said both very large banks and very small banks have survived. What has disappeared are the institutions in the middle. "The middle-sized bank has gone the way of the medium-sized supermarket or the medium-sized department store," he said. "They were too big to be small, and too small to be big." Charles Stein can be reached at stein@globe.com.