The Riegle-Neal Act and Local Banking Market Concentration

Article excerpt


The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 greatly transformed the American banking system by allowing the widespread establishment of interstate bank branching networks. This paper examines possible effects on local banking market concentration that resulted from the provision in the Riegle-Neal Act that allowed states to opt-in to the establishment of de novo interstate branches. Regression analysis using data from more than seven hundred cities does not provide any evidence that allowing the establishment of de novo interstate branches caused increases in local banking market concentration. These results may help alleviate some concerns that passage of the Financial Services Regulatory Relief Act currently pending in Congress will result in lessened competition in local banking markets. (JEL G21)



During the past decade, changes in American banking laws have led to a significant transformation of the United States Banking banking system. Arguably, one of the most important changes in banking laws came with the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. This Act (henceforth referred to as simply the Riegle-Neal Act) changed the scale of banking by giving banks a much greater ability to operate interstate branches. Prior to the passage of the Act, American banks' ability to operate branches had been severely limited. Virtually all banks were restricted in their ability to operate widespread multi-state branching networks and, in some states, banks were prohibited from operating any branches at all (even within the same county or city). A result of these prohibitions was an American banking system comprised primarily of a large number of relatively small banks. The passage of the Riegle-Neal Act set the stage for a rapid transition of the American banking system from small banking into large banking by giving banks permission to operate widespread interstate branching networks for basically the first time in U.S. history.

Although the number of banks operating in the U.S. has decreased dramatically as a result of the Riegle-Neal Act, the effect of this change on local banking markets is not clear. This paper attempts to determine how a particular provision of the Riegle-Neal Act may have affected the concentration of local banking markets. Specifically, this paper investigates whether local banking market concentration in states that allowed the establishment of de novo interstate branches behaved the same as local banking market concentration in states where de novo interstate branching remained prohibited.

The rest of the paper is organized as follows. The next section provides a very brief history of branch banking restrictions in the U.S. Then, some potential effects resulting from the Riegle-Neal Act concerning banking concentration are discussed. The following section explains the hypotheses that will be tested in this paper and presents the data used in the hypotheses tests. This section is followed by the results of the tests and finally, the last section concludes.

A Brief History of Branching Restrictions in the U.S.

The United States' long history of restricting branch banking is unique in the world. Although a few other nations had restricted branching to some extent in the nineteenth century, by the early twentieth century, the U.S. stood alone among industrialized nations in maintaining such restrictions. As a result of these restrictions, the American banking system became mostly comprised of small, independent unit banks, a situation that persisted throughout much of the twentieth century.

The prohibitions on intrastate branching originally started as a way for states to limit "the sleazy practice of choosing inaccessible office cites to deter customers from redeeming free-wheeling institution's circulation banknotes" [Kane, 1996, p. …