Five large banks now control 82% of the global custody business and more than half of the master trust business of big U.S. pension funds, dominating a field that once was scattered over numerous large and regional banks, a survey of the 200 largest U.S. pension funds found.
Eighty-two percent of the biggest pension funds with global custodians have selected Mellon Trust, Pittsburgh; State Street Bank & Trust Co., North Quincy, Mass.; Northern Trust Co., Chicago; Bankers Trust Co., New York; or Chase Manhattan Bank, Brooklyn, N.Y., for those services.
As recently as 1990, these banks had only 39% of the global custody business among the largest 200.
Ninety-one percent of the big pension funds surveyed have selected one of only four banks for master custodial services. They are Mellon, State Street, Bankers Trust and Bank of New York.
And 56% of big pension funds reporting have selected only one of four banks - Mellon, Northern, State Street and Bankers Trust - for master trust services.
The movement of trust and custody business from most other banks is unlikely to be stopped, said Stephen Nesbitt, a senior vice president with the consulting firm Wilshire Associates, Santa Monica, Calif. Wilshire has completed a separate study on trust and custody services.
The dependence of even big pension funds on only a few banks in the master trust category is especially surprising. Pension funds traditionally have relied on their regional banks for master trust services even when they have other banks with international offices for global custody services. Corporations used to stay with regional banks for master trust because of their financial ties, primarily lines of credit, with them.
But custody and master trust business is "eroding very rapidly" for regional banks, said Mr. Nesbitt.
The erosion has been so rapid that while a few banks have been increasing their trust and custody business at the rate of 30% internationally and 25% domestically each year, most others have had growth rates of between zero and 10%, he said.
The contraction of trust and custody business to a few banks has meant low costs and top quality work, said Mr. Nesbitt. But fewer banks also could mean higher prices at some point as the threat of competition ends.
Because of the huge costs involved in trust and custody, most U.S. banks no longer can afford to effectively compete. As the top U.S. trust and custody banks consolidate their gains, they could become more menacing competition to European banks, which have been major global custodians for longer periods.
The Pensions & Investments survey findings run contrary to customer satisfaction surveys that sometimes give highest customer preferences to relatively smaller master trust and custody banks. Regardless of what respondents say in those surveys, large pension funds are picking the same few banks over again and again. None of the banks grabbing most of the business is small.
Mellon Trust and State Street each provide global custody services for 27 of the U.S.' biggest pension funds.
Mellon provides global custody services for pension funds like the $11.3 billion U S WEST Inc. fund, Englewood, Colo.; $11 billion Eastman Kodak Co. fund, Rochester, N.Y.; $3.8 billion TRW Inc. fund, Cleveland; and $3.5 billion Honeywell Inc. fund, Minneapolis.
State Street provides global custody for pension funds like the $80 billion California Public Employees' Retirement System, Sacramento; $50 billion California State Teachers' Retirement System, Sacramento; and $38 billion Florida State Board of Administration, Tallahassee.
Bank of America, San Francisco, is one of the biggest banks in the world. But only three of the 121 biggest pension funds reporting global custody choices listed Bank of America as their global custodian. The three are the $13.3 billion Pacific Telesis, $2.9 billion Los Angeles Water and Power and $2.9 billion Hanson Industries pension funds.
None of the big pension funds reporting their custodians listed Marine Midland Bank, Wilmington Bank, Chemical Bank or dozens of other banks that offer such services as a global custodian.
The darlings of big pension funds for global custody, Mellon Trust and State Street Bank & Trust, each have 22.5% of the global custody contracts for big pension funds surveyed. The other global custody banks popular with large pension funds are Northern Trust with 16% of the global custody contracts; Bankers Trust, with 14%; and Chase Manhattan, with 7%.
Popular for master trust services with the big U.S. pension funds are Mellon Trust, with 16% of the master trust contracts ; State Street, with 15%; Bankers Trust, with 14%; and Northern, with 11%.
The top master custody banks for big U.S. pension funds are Mellon Trust, with 26% of the master custody contracts; State Street, with 25%; Bankers Trust, with 18%; Northern, with 16%; and Bank of New York, with 6%.
There has been a "tremendous concentration" in the custody and master trust business said Wilshire's Mr. Nesbitt. In most things connected with pension funds, like the number of accounts a money manager manages, small is beautiful, he said.
But in master trust and custody, pension funds need banks with the best processing networks, global ties to international securities markets, educated personnel and the best computer programming. That requires a "huge capital investment unlike other functions in the industry of money management and consulting," said Mr. Nesbitt.
The emphasis on high technology comes in part because of the complexity of the securities business. "Substantial upgrading of systems performance" has been needed particularly on the fixed-income side, he said.
Custody banks are dealing with "derivatives, CMOs, futures, high yield bonds, and the complexity of the record keeping and price reporting. It's not been a slam dunk (for the banks). CMOs have really been a killer for some banks," said Mr. Nesbitt.
Besides the complexity, credit ties no longer exist between corporations and regional banks like they once did, said Mr. Nesbitt. Debt financing has become very competitive, he said.
So far, the funneling of trust and custody business to a few banks is producing favorable results. But, he said, if there is another takeover like that of Mellon Trust and Boston Co., the chosen banks could enforce "oligoptic pricing."
One of the other global custodians that is drawing new business is Morgan Stanley Global Securities Services Inc., Brooklyn, N.Y., listed as global custodian by five big pension funds. The five are the Oregon Public Employes' Retirement System, Salem, Ore.; Alabama Retirement Systems, Montgomery; Exxon Corp., New York; and American Airlines Inc., Fort Worth, Texas.
Bill Quinn, president of AMR Investment Services, the investment management subsidiary of American Airlines, said Morgan Stanley began operating as the pension fund's global custodian this month. Morgan Stanley, Mr. Quinn said, has the resources, international network, people, processing systems and analytical capabilities to be an excellent global custodian. Morgan Stanley covers securities markets from Argentina to Zimbabwe. AMR also chose Morgan Stanley because they see it as a strategic partner, he added.
Some pension funds reported changes in their global custody lineup for the year ended Sept. 30. The $61 billion New York State and Local switched from State Street Bank & Trust to Chase; the $29.2 billion Ford Motor Co. fund switched to Morgan Stanley from Comerica; the $16.6 billion Bell Atlantic Corp. fund switched to Mellon from State Street; the $16.5 billion Los Angeles County Employees' Retirement Association switched to Mellon from Chase; the $13 billion Tennessee Consolidated fund switched to Mellon from Chase; and the $8.8 billion USX fund switched to Morgan Guaranty from J.P. Morgan.