Academic journal article Quarterly Journal of Business and Economics

Banking Markets and Interstate Entry in the Southeastern United States

Academic journal article Quarterly Journal of Business and Economics

Banking Markets and Interstate Entry in the Southeastern United States

Article excerpt


The issue of the competitive consequences of multibank holding company entry into intrastate banking markets has received much interest in the literature (Boczar, 1977; Schweitzer and Green, 1979; Rose and Savage, 1983; Duncan, 1985; Hooks and Martell, 1985; Lawrence and Watkins, 1986; and Thomas and Rivard, 1990). These works have analyzed, among other things, whether, and what types of, multibank holding company entry has procompetitive or anticompetitive effects. The market characteristics that are attractive for intrastate entry also have been identified. These studies have dealt only with intrastate entry because interstate bank expansion effectively was prohibited until recently. This paper is an extension of previous research to the analysis of interstate bank expansion.

Many dire predictions have been offered on the anticompetitive effects of interstate banking. It has been argued that interstate banking likely will result in increased concentration of banking services, increased chance of collusion and mutual forbearance, decreased soundness of the banking system, and a reduction in the choices and levels of banking services. On the other hand, many commentators have concluded that interstate banking will be procompetitive rather than anticompetitive. In this case, the effects of interstate banking include more competitive interest rates, higher service quality, and the expansion of banking services.(1) The data necessary to conduct empirical studies on the effects of interstate banking are just becoming available.(2) Previous empirical studies that have addressed the effects of interstate banking look at prior intrastate expansion and then extrapolate the results to interstate banking.

For instance, Duncan (1985) uses new entry into metropolitan markets in statewide branching states to see if new entry increases or decreases concentration and then uses his findings to determine implications for interstate banking. He finds that de novo entry and small mergers tend to decrease concentration, while large mergers tend to increase concentration. Evanoff and Fortier (1987) find that concentration in banking over time has fallen, not risen, with intrastate holding company expansion and expect that trend to continue with interstate banking. Boczar (1977) and Lawrence and Watkins (1986) identify the market characteristics that are attractive to intrastate holding company entry, at least in part to help regulators deal with the question of potential competition in future bank merger cases. Lawrence and Watkins explicitly state that their results can be used to identify attractive markets to out-of-state firms as the removal of interstate banking restrictions proceeds.

This paper looks at the pattern of actual interstate bank entry within one of the first regional interstate banking compacts. The market characteristics that affect interstate bank entry in the states of Florida, Georgia, North Carolina, South Carolina, Tennessee, and Virginia are investigated. Rose (1989, p. 121) identifies this area as one of the regions of the U.S. with the most interstate bank entry.

The restrictions on interstate banking have been relaxed during the deregulation wave of the 1980s, and interstate expansion now is allowed under certain conditions. The McFadden Act of 1927 and the Douglas Amendment to the Bank Holding Company Act of 1956 until recently effectively prohibited interstate commercial banking. The interstate activities that were allowed under these acts consisted of banking offices grandfathered under the McFadden and Bank Holding Company acts, the operation of nonbank subsidiaries, and offices engaged in international banking allowed under the Edge Act. The Garn-St Germain Depository Institutions Act of 1982 allowed banks and thrifts to expand across state lines to take over failing banking institutions.(3)

The Douglas Amendment left open the possibility of the expansion of interstate banking by allowing state legislatures the option of passing laws permitting the entry of out-of-state bank holding companies. …

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