Academic journal article Federal Reserve Bulletin

Banking Markets and the Use of Financial Services by Households

Academic journal article Federal Reserve Bulletin

Banking Markets and the Use of Financial Services by Households

Article excerpt

Gregory E. Elliehausen and John D. Wolken, of the Board's Division of Research and Statistics, prepared this article. Ronnie McWilliams provided research assistance.

When a bank proposes to absorb another bank through merger or acquisition, analysts must determine whether the proposed transaction is likely to reduce the competitiveness of banking services. And whether competition would be diminished depends crucially on the definition of the financial services and geographic area that constitute the "banking market." The current definition assumes that competition occurs only in relatively small geographic areas among financial institutions offering the full range of banking products. Therefore, only local commercial banks (and, when their offerings warrant, local thrift institutions), with their broad range of services, are included in the current definition of a banking market.

The vast majority of banking customers households and small businesses-historically have relied heavily on local commercial banks for their financial services; hence, the current definition of a banking market has worked well for assessing most dimensions of banking competition, such as deposit taking and the provision of credit to small businesses. Yet, although past evidence supports the current approach to defining banking markets, little recent data has been available regarding the banking practices of small businesses and households. The lack of current data has been troublesome because changes in the financial markets in the 1980s may have altered the banking practices of these customers. Among the key market changes are the authorization of interest-bearing checking accounts at all depository institutions; the introduction of money market deposit accounts; the spread of automated teller machines; legislation in most states permitting the interstate acquisition of banks by bank holding companies; and the growth of large, nationwide issuers of credit cards.

To assess the importance of these changes for the analysis of banking markets, the Board of Governors of the Federal Reserve System surveyed small businesses and consumers to learn more about their use of financial services and financial institutions. The survey results regarding small businesses have already been published.1 This article examines evidence on banking markets for households based on the 1989 Survey of Consumer Finances. These data permit an investigation of the full range of financial services and institutions used by households and the distances over which these households conduct their financial affairs.


Analyzing proposed bank mergers for their effect on competition and hence for their potential violation of antitrust statutes requires a case-by-case examination of the relevant economic market. To perform the required review, one must identify all firms that significantly affect the price, quantity, and quality of the services produced by the merging parties. Typically this involves specifying both the variety of products (product market) and the geographic extent (geographic market) over which the firms compete. This section briefly examines the current approach to defining banking markets, reviews arguments concerning changes in the product and geographic dimensions of banking markets, and discusses the information needed to help resolve the issues.

The Current Definition

Until recently, markets for financial services have generally been thought to be local and segmented along institutional lines. This view as applied to banking is based on the Supreme Court's 1963 decision in the Philadelphia National Bank case and has been supported by numerous subsequent empirical studies and several judicial decisions.2 In the Philadelphia decision, the Court concluded that the product market for antitrust purposes was the entire bundle or "cluster" of financial services offered by commercial banks. …

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