NEW YORK, OCT. 31 -- Weakened by increased competition and battered by real estate loans gone sour, some of the nation's biggest and most venerable banks -- among them Chase Manhattan, Chemical and Manufacturers Hanover -- are now fighting to survive as independent institutions.

According to numerous banking executives and analysts, mounting losses and falling stock prices will force most of the so-called money-center banks to shrink in size. A few, these experts say, will probably be forced to sell out to other banks or merge, although none is expected to fail outright.

The shrinking is already underway. Today, Citicorp announced it would cut 2,000 employees in its business lending division. Earlier this month, Chase Manhattan said it would let go 5,000 employees.

In addition, several banks have slashed their dividends to stockholders and have severely tightened lending to real estate developers, small businesses and promoters of high-risk ventures such as leveraged buyouts.

"We have not seen problems like this since the Great Crash {of 1929}. The banks have been in a state of denial for years. They're starting to face reality right now," said Thomas H. Hanley, a bank analyst and managing director at Salomon Brothers Inc., a leading investment bank here.

As the big banks respond to their own financial problems by pulling back on lending, they are likely to be a drag on the economy for months or years to come. Their increased reluctance to lend money, together with a similar retreat by many smaller banks, could help transform the current business slowdown into a full-scale recession by making money needed for growth too difficult to obtain, banking and industry experts say.

Money-center banks are large banks in major financial centers with substantial amounts of national and international business. They are among the nation's largest lenders.

"This means sclerosis for the economy for at least 18 months," said Neal M. Soss, chief economist at First Boston Corp., an investment bank here. The business slowdown will last until the banks are healthy enough themselves to take on risk again, Soss said.

While these forecasts may seem quite gloomy, some leading businessmen and banking experts believe that they are not pessimistic enough, given the scale of the big banks' troubles. The fear is that the banks' cutbacks in lending will trigger a downward spiral, in which the shortage of credit causes companies to reduce business activity, which worsens the general economic downturn and adds further to the banks' woes.

"My fear is that things will snowball. Financial markets are extremely fragile, and the reserve levels of the New York City banks are woefully inadequate," said the chairman of a leading corporation in the financial services sector who declined to be identified.

Salomon Brothers's Hanley, who has been consistently ranked as the nation's top bank analyst by Institutional Investor magazine, said that the recent pummeling of big banks on the stock market was an extremely negative signal for the economy as a whole.

"The decline in the bank stocks suggests that the economic downturn is going to be far steeper than people anticipate. These stocks typically have been right" in forecasting the economy, Hanley said.

None of the big New York banks is likely to collapse and be forced to close its doors, partly because the federal government would intervene to prop them up if a crisis developed, bankers and other experts say.

But even under the most optimistic of scenarios outlined by industry experts, one or more of the big banks would be swallowed up by competitors in mergers or acquisitions. That would reduce the number of big New York banks, but it would leave the survivors bigger and better equipped to compete with some of their giant rivals in Japan and Western Europe.

The three banks mentioned most often as candidates for merger are Chase Manhattan Corp., Chemical Banking Corp. and Manufacturers Hanover Corp.

"The real {banking} story over the next few years is how the merging takes place," said Thomas E. Jones, an executive vice president of Citicorp, holding company for Citibank, the nation's largest bank. He acknowledged that some leading banks were too weak to ride out a U.S. recession that many experts believe has already begun.

"There would be some non-survivors {among banks}. Non-survival would mean a wave of mergers," Jones said.

While the big banks' condition is universally described as poor, there is a wide range of opinions as to how bad the troubles could become.

Dan Brumbaugh, an economist who was one of the first in the 1980s to publicly call attention to the troubles in the savings and loan industry, said the banks' condition is so bad that the government is on the verge of having to salvage one or more money-center banks by forcing mergers with federal assistance, transactions that could cost taxpayers and bank stockholders billions of dollars.

"We have a banking crisis. The issue is how large it's going to be," said Brumbaugh, who was deputy chief economist of the Federal Home Loan Bank Board from 1983 to 1986. "The deterioration in the 1980s {in the banking industry} is unparalleled. There has been no period since the Depression that this has been allowed to happen. The people who are ultimately on the hook are the taxpayers," Brumbaugh said.

Taxpayers could be liable in the long run because the government is obliged to cover the shortfall between the value of assets and insured liabilities, if regulators find that a bank is insolvent, and arrange for another institution to acquire it.

Executives at leading banks dismissed such downbeat forecasts as alarmist. They said the largest New York banks are big enough to handle any difficulties.

"By no way, shape or form are the problems of that scale" of the Great Depression, Citibank's Jones said. "Each money-center bank has problems somewhere at any one time, but no one problem is enough to overwhelm it," he said.

Bankers also complain that it is unfair to blame them for cutting back lending in an economic downturn because their job is to be prudent about making loans in a difficult environment.

"Given the problems with the savings and loans, you'd think that banks would be hailed for being more conservative. People should be happy if banks are more careful and don't have to be bailed out later with taxpayers' dollars," said a lending officer at Manufacturers Hanover.

The financial vulnerability of the big New York banks was evident in a survey last month by SNL Securities L.P., a bank research firm based in Charlottesville, Va. Of the nation's banks with assets of more than $5 billion, four New York banks were among the five with the lowest reserves set aside to cover possible losses from high-risk loans.

The four -- Citibank, Manufacturers Hanover, Chemical and Chase Manhattan -- had reserve coverage of between 11 percent and 16 percent of high-risk assets, which was much lower than the 35 percent average for all big banks. The big bank with the least protection against losses -- with coverage of 6 percent -- was Bank of New England, which is widely expected within the industry to be forced to merge with another bank because of its financial troubles.

The immediate cause of the big banks' difficulties is the turndown in commercial real estate, a major area of their business. The number of troubled real estate loans has mounted suddenly in the past year, and it has added to the burden of bad loans left over from soured corporate buyout deals and strapped Third World borrowers.

For 10 leading money-center banks, the total of nonperforming real estate loans -- those that are in default or no longer paying interest -- jumped to $7.8 billion at the end of June, from $4.5 billion just nine months earlier, according to Salomon Brothers. Jones of Citibank called real estate "the area where there is correctly concern -- it's hard to tell when you've reached bottom."

In addition, the current economic slowdown could create problems for the big banks in the credit card business, one of their most profitable lines.

"First, we had problems with Third World debt, then we had agriculture, today we have commercial real estate, and tomorrow it's going to be credit cards, or something else. Potentially, the situation is much worse than it's ever been before," said Diogo Teixeira, a Boston-based partner at the accounting and professional services firm of Ernst & Young.

To some extent, these troubles are the result of a normal, cyclical economic downturn. But they have been aggravated by two long-term, structural problems in the banking industry: the gradual erosion of what once was the banks' basic business, lending to America's biggest corporations, and intense competition that has eroded profits and encouraged risky lending.

Starting in the 1970s, big U.S. companies began cutting out the middleman, the money-center banks, by borrowing directly from the financial markets. They trimmed their interest costs by issuing commercial paper, or other corporate IOUs, directly to investors. Now it is unclear where banks can drum up new business as the sectors where they thrived in the past -- foreign lending, merger and acquisition deals and commercial real estate -- have turned against them.

In addition, it is widely thought that the level of competition among banks has risen to destructive levels, largely because of competition from other lenders such as the huge financing subsidiaries of non-banking institutions like General Electric Co. and Ford Motor Co.

The expansion of foreign banks in the United States in the past decade -- especially of giant Japanese banks whose strong balance sheets makes them formidable competitors -- also has added substantially to the level of competition.

"You're dealing with an industry that's bloated, in branches, people and assets. It's got to contract," Hanley said.

The troubles afflicting the banking industry recently gripped Wall Street, where the stocks of bank holding companies have fallen dramatically in recent weeks. For many of the largest New York banks, their stock price is now less than half of book value. While many factors influence a stock price, such a sharp decline indicates that the financial markets believe that the assets on the banks' balance sheets are worth less than half of what the banks claim.

In another sign of the markets' worries about the big banks' health, both Citicorp and Chase Manhattan have had to pay sharply higher interest rates to borrow money on the open market this autumn.

"Sophisticated investors, who obviously are in the best position to know, have been voting with their feet," said Robert Litan, a banking expert at the Brookings Institution in Washington.

Litan said that the fact that the banks are having to pay such high interest rates shows that the financial markets "believe that there's probably more bad news yet to be recognized, more loan losses yet to be booked."



Citicorp................$235.4 billion

Chase Manhattan.........$108.5 billion

Chemical Banking........ $74.1 billion

J.P. Morgan............. $60.7 billion

Manufacturers Hanover... $60.1 billion

Bankers Trust........... $57.3 billion

Bank of New York........ $50.0 billion

Republic N.Y. Corp. .... $25.8 billion

SOURCE: Salomon Brothers Inc.