Trends in the Structure of Federally Insured Depository Institutions, 1984-94

Article excerpt

Dean E Amel, of the Board's Division of Research and Statistics, prepared this article. Michael T Howell provided research assistance.

On September 29, 1995, bank holding companies were given the right to purchase banks throughout the United States for the first time since passage of the Bank Holding Company Act in 1956. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which permitted the expansion, will also, by June 1997, allow banks to branch across state lines. Full implementation of this legislation is likely to lead to a continuation of the consolidation of the US. banking industry that has occurred over the past ten years.

From 1984 through 1994, the number of federally insured depository institutions of all types--banking organizations (bank holding companies and independent banks), thrift institutions (savings and loan associations and savings banks), and credit unions--declined considerably. This consolidation of depository institutions resulted mainly from mergers and acquisitions, many made possible by or stimulated by relaxed legal constraints on the geographic expansion of depository institutions, and from failures of depository institutions. Regulatory policies affecting the expansion of credit union membership also played a role.

This article looks at changes in the number and size of federally insured depository institutions over the past ten years.(1) The focus is on retail banking--the sector of activity that deals mainly with small businesses and households in local banking markets. The structure of the retail banking industry is of interest because these firms serve large numbers of consumers within local markets and changes in structure could affect firm performance and competition in some markets. Deposits serve as the measure of firm size.

The use of deposits as the measure of change in the size of depository institutions ignores changes in the volume of nondeposit liabilities and off-balance-sheet activity. Most, though not all, nondeposit liabilities are used by institutions to fund their wholesale activities. Changes in the structure of the wholesale banking industry are not addressed in the article because of the greater number of competitors in wholesale markets and the greater expertise and knowledge about financial services of wholesale customers. The wholesale banking industry includes a large number of investment banks, foreign banks, and other financial institutions that fund large corporations and international institutions in national, and in many cases global, markets. Because of its focus on deposits, this article does not attempt to provide a complete picture of the activity of depository institutions. Although the volume of federally insured deposits is very large ($3.3 trillion) and increased 26 percent over the ten years covered here, the rate of increase of deposit liabilities was much smaller than the rate of increase of US. financial assets. Insured deposits constitute a unique financial product, but it is a product of declining importance to the U.S. economy.

Deposits are far from a perfect measure of retail banking, but they are the best measure of the retail activity of depository institutions available at the national, state, and local levels. Although deposits include a large uninsured component (deposits in excess of $100,000) and are used to fund some nonretail activity, these factors should not appreciably affect the structural analysis.

The article begins with a discussion of the major causes of recent structural change among federally insured depository institutions. Changes in number, size, and deposit concentration at the national, state, and local levels are then analyzed. The data reveal large increases in deposit concentration at the national and state levels but only small increases in local banking markets, where fewer competitors would be most likely to affect competition. Concluding the article is a discussion of the possible consequences of these changes. …