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

While national bank concentration provides interesting information, concentration on a state-by-state basis also proves useful.25 We calculate the percent of total assets held by the top 5 and top 10 banks in each state (not reported, available from authors). The average concentration across all states hovers around 45 percent for the top 5 banks from 1976 to 1983. It then rises gradually to 50 percent in 1990 and then 62 percent in 1998. For the top 10 banks, the average concentration hovers around 56 percent from 1976 to 1983. It then rises gradually to 61 percent in 1990 and to 71 percent in 1998. In sum, state-level concentration began rising in 1983 and continued through 1998.26

Table 6 reports states ranked by top 5 concentration in assets in 1978, 1983, 1988, 1993, and 1998. The median states in each year include Mississippi (36), Pennsylvania (40), Connecticut (47), Massachusetts (53), and New Jersey (63).27 The median lies below the mean in 1978 (45), 1983 (46), 1988 (49), and 1993 (54) and lies above the mean in only 1998 (62).

While the rankings possess some stability, movements do occur. The correlation between the 1978 and 1983 rankings equals 0.96; between 1983 and 1988, 0.90; between 1988 and 1993, 0.93; and between 1993 and 1998, 0.82. Thus, more movement occurred in the last five years. Moreover, the longer the time between observations, the lower the correlation. For example, the correlation between the 1978 and 1998 rankings equals 0.63. In addition, we calculated the average ranking and its standard deviation for each state in 1978, 1983, 1988, 1993, and 1998. For example, Illinois ranked 22, on average, with a standard deviation of 13. Illinois moved from a rank of 36 in 1978 to 7 in 1993 before moving back to 12 in 1998. Those states with standard deviations above 10, indicating significant movement within the rankings, include Alabama, Delaware, Idaho, Illinois, Louisiana, New Hampshire, and Wyoming.

Deregulation and Bank Concentration

We now consider how deregulation affected bank concentration using the same set of independent variables-to capture changes in intrastate (bch/bn) and interstate (dr, dnr, and dnn) branching and banking regulation and to capture changes in the state's economy (unem)-in fixed- and random-effects regressions. Two concentration measures (discussed above) are the percentage of state bank assets held by the top 5 (top5) and top 10 (top10) banks in each state. The third concentration measure (not discussed above) is the Herfindahl-Hirschman index (hhi) of bank assets in each state. That index equals the sum of the squared percentage market shares and ranges from 0 to 10,000. Banking markets with a Herfindahl-Hirschman index over 2,000 receive scrutiny by the Department of Justice.

Table 7 reports the fixed- and random-effects results on bank concentration and deregulation. First, more permissive intrastate branching and banking regulation associates significantly with higher concentration across all three concentration measures. Second, more permissive interstate branching and banking regulation also significantly associates with higher concentration. The unemployment rate does not exhibit significant effects, although the sign is consistently negative such that a good economy associates with higher concentration. Thus, the deregulation of interstate and intrastate banking and branching correlates with higher concentration within a state.28