Trends in Banking Structure since the Mid-1970s

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Trends in Banking Structure since the Mid-1970s The structure of the American banking system has changed significantly since the mid-1970s. Over the period from 1977 to 1987, the number of banking organizations has declined considerably, while the share of banking assets controlled by the largest banking organizations has increased sharply. At the same time, banks have expanded beyond their traditional geographic borders; differences between commercial banks and nonbank financial institutions have diminished; and the number of bank mergers and acquisitions has soared. The factors responsible for these developments are still at work and will likely lead to continued rapid change in banking structure.

Recent structural change in the banking industry is of interest for at least three reasons. First, changes in costs attributable to changes in bank size may affect the operating efficiency of banks and, in turn, their profitability, and the prices, quality, and convenience of the services they offer. Second, theory and empirical evidence suggest that changes in banking structure and entry conditions may affect the degree of competition for financial services. As in nonfinancial industries, the degree of competition in banking also influences profitability and the prices of services offered by firms. Finally, concern over potential changes in the structure of the banking industry historically has stimulated debate over the consequences of increases in aggregate concentration of economic resources in banking.

Because of the extensive recent changes in banking structure and the important issues that such changes raise, it is timely to examine the causes and significance of these developments. The first section of this article discusses the causes of the major structural changes that have occurred in banking over the past decade. The later sections analyze data describing these changes at the national, regional, state, and local levels.

CAUSES OF RECENT CHANGES IN BANKING STRUCTURE Recent changes in banking structure have been made possible by two primary developments: (1) recently enacted legislation has allowed banking organizations to expand geographically; (2) legislative and regulatory changes have facilitated mergers and acquisitions among banking organizations located in the same geographic area.

Legislation Affecting Geographic Expansion by Banks Legislation relaxing constraints on the geographic expansion of banks and bank holding companies has come principally from the states.(1) This legislation has substantially increased opportunities for bank expansion both within states and across state lines. The legislation itself has been spurred by a number of forces, including technological changes in making it easier to make loans and gather deposits from distant customers, the attempts of regulators to arrange takeovers of an increasing number of failing and troubled banks, efforts by state authorities and local business and community groups seeking to attract capital into a state, and the desires of the banking industry itself.

The states that have passed legislation allowing increased instrastate and interstate geographic expansion of banking organizations in the 1970s and 1980s are listed in the box. As indicated, intrastate expansion can occur either through bank branching or by multibank holding company acquisition or expansion. Since 1970, the number of states that reduced branching restrictions has grown markedly, rising from 6 during the 1970s to 22 during the 1980s. As a result, 35 states currently allow unlimited statewide branching or statewide expansion through acquisition of existing banks. Eleven states allow only limited branching, but two of these have passed legislation that will permit statewide branching in the future. Only four states remain unit banking states, allowing no branching.

The easing of restrictions on the intrastate expansion of multibank holding companies permits banking organizations to expand statewide by chartering separate banks under one holding company. …