Banking Industry Consolidation and Market Structure: Impact of the Financial Crisis and Recession

By Wheelock, David C. | Federal Reserve Bank of St. Louis Review, November-December 2011 | Go to article overview

Banking Industry Consolidation and Market Structure: Impact of the Financial Crisis and Recession


Wheelock, David C., Federal Reserve Bank of St. Louis Review


The number of U.S. commercial banks and savings institutions declined by 12 percent between December 31, 2006, and December 31, 2010, continuing a consolidation trend begun in the mid1980s. Banking industry consolidation has been marked by sharply higher shares of deposits held by the largest banks--the 10 largest banks now hold nearly 50 percent of total U.S. deposits. However, antitrust policy is predicated on the assumption that banking markets are local in nature, and enforcement has focused on preventing bank mergers from increasing the concentration of local banking markets. The author finds little change over time in the average concentration of local banking markets or the average number of dominant banks in them, even during the recent financial crisis and recession when numerous bank failures and several large bank mergers occurred. Concentration did not increase substantially, on average, in markets where mergers occurred among banks when both the acquiring and acquired banks had existing local offices, though rural markets generally saw larger increases in concentration from such mergers than did urban markets. Although the structures of local banking markets, on average, have changed little since the mid-1980s, deposit concentration has continued to increase at the level of U.S. Census regions. As technology evolves and the costs of obtaining banking services from distant providers fall further, local market characteristics may become less relevant for analysis of competition in banking. (JEL G21, G28, L41)

Federal Reserve Bank of St. Louis Review, November/December 2011, 93(6), pp. 419-38.

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The recent financial crisis and recession produced a sharp increase in the number of commercial bank and savings institution failures in the United States. Mergers of non-failed commercial banks and savings institutions (hereafter "banks") eliminated still more banks, and in total, the number of U.S. banks fell by 12 percent between December 31, 2006, and December 31, 2010. (1) Over the same period, the share of total U.S. deposits held by the 10 largest commercial banks rose from 44 to 49 percent, continuing a trend that began in the early 1990s toward greater concentration of total U.S. deposits among the largest banks. (2)

Federal law prohibits any bank from obtaining more than 10 percent of total U.S. deposits or more than 30 percent of a single state's total deposits by acquiring other non-failed banks, and some states have imposed even lower deposit share limits. (3) Further, antitrust enforcement prevents mergers of non-failed banks that would significantly increase the concentration of local banking markets. However, antitrust policy does not (i) prevent acquisitions of failed banks that increase local market concentration or (ii) attempt to limit increases in concentration that do not result from mergers. Nonetheless, during the 1990s, local urban banking markets generally did not become significantly more concentrated, despite increases in the deposit shares of the largest U.S. and regional banks (Amel, 1996, and Dick, 2006).

Banking industry consolidation has since continued, spurred in part by the recent financial crisis and recession. This article examines changes since 1999 in the concentration of U.S. banking markets, defined both at the local level (metropolitan statistical areas [MSAs] and non-MSA rural counties) and at the Census-region level. It examines whether the characteristics of urban and regional banking markets observed during the 1990s continued over the subsequent decade. The article focuses in particular on the years 2006-10 to gauge whether trends in banking market structures continued during the financial crisis and recession. The resolution of failed banks during 2007-10 did not increase the concentration of most local banking markets (Wheelock, 2011). However, unassisted mergers accounted for more of the decline in the number of U. …

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