Deregulation and structural change in the U.S. commercial banking industry

CONCLUSION

In the early 1980s, the U.S. banking industry began unprecedented regulatory and structural change from a dual banking system with banks chartered at the state and the national levels, but prohibited from operating across state lines even for those banks with national charters. Several regulatory and legislative decisions opened the door to across-state banking operations, first by bank holding companies and then by banks themselves. The Interstate Banking and Branching Efficiency Act of 1994 permitted banks to acquire banks in other states.

We examine the changes in the structure of the banking industry using the Report on Condition and Income (Call Report) and merger data recently posted on the web by the Federal Reserve Bank of Chicago. Several general conclusions follow from our analysis. First, consolidation in the banking industry has begun and the pace of consolidation has increased in recent years. That pace, however, seems slower than expected, reflecting the larger than anticipated number of new entries.

Second, the major part of consolidation within the banking industry, with some notable exceptions, has been within states and not between states. Even after the recent passage of the Interstate Banking and Branching Efficiency Act of 1994, still about 70 percent of the merger activity between banks occurs within states. Of course, as the consolidation process continues, eventually the opportunities for intrastate mergers will exhaust themselves and by necessity the action will shift to the interstate level. Some few individual bank organizations, prompted probably by the entrepreneurial instincts of their chief executive officers, have already pursued aggressive strategies of interstate mergers and acquisitions. Those few banks have made major movements up in the rankings of largest banks based on total assets.

Interestingly, fixed- and random-effects regressions that explain the rate of merger activity within a state show that the merger rate increases with more permissive interstate branching and banking regulation. The merger rate does not respond significantly to our measure of intrastate branching and banking regulation.34 So even though most merger activity remains within state boundaries, the rate of merger activity is affected by the permissiveness of interstate branching and banking regulation. Those findings may suggest that banks merge within a state in an attempt to reduce the possibility of a takeover (merger) by an out-of-state bank.

Third, some groups raise concerns about the potential concentration of power amongst a few megabanks. The facts belie this concern to some extent. For example, the percent of total bank assets controlled by the top 5, 10, 20, 50, and 100 banks in the United States declined from 1976 through about 1990, depending on the top bank category considered. Their share of total assets has risen in recent years, but that movement does not yet seem like a serious issue.

Such concerns about concentration of power generate a bit more support at the state level. The top 5 bank concentration ratio averages about 45 percent until 1983 and then rises gradually to 62 percent in 1998. And the average top 10 concentration ratio averages about 56 percent until 1983, then rises to 71 percent in 1998. At what point, however, do increases in concentration become relevant for policymakers?