Banking Consolidation in Tenth District States

By Keeton, William R. | Economic Review - Federal Reserve Bank of Kansas City, Second Quarter 1996 | Go to article overview

Banking Consolidation in Tenth District States


Keeton, William R., Economic Review - Federal Reserve Bank of Kansas City


Bank mergers have attracted much attention during the last year due to a surge in mergers among the nation's largest banking companies. The consolidation of the banking industry has been going on much longer, however. Since the early 1980s, the number of banking organizations has fallen by more than a third in both Tenth District states and the nation as a whole. Some of the decline has been due to failures, but most has been due to mergers.

In debating the pros and cons of such consolidation, analysts point to three important ways it may alter the structure of the banking industry. First, if consolidation occurs through the absorption of small banks by large banks, it may reduce the role of small banks in the banking system. Second, if consolidation occurs through the merger of banking organizations in different markets, it may increase the geographic scope of bank operations-that is, the extent to which banks operate over wide areas within and across state lines. And third, if consolidation occurs through the merger of banking organizations within the same market, it may increase the concentration of local markets-that is, the tendency for markets to be dominated by a few banks. Analysts agree each of these effects is important to bank owners and customers but disagree as to whether each effect is beneficial or harmful on balance.

Has consolidation had these effects, and if so, to what degree? To date, no one has carefully examined this question for Tenth District states. This article attempts to fill the gap by documenting the effects of bank mergers on the role of small banks, the geographic scope of bank operations, and the concentration of local banking markets in Tenth District states. The article concludes that consolidation has reduced the role of small banks, increased geographic diversity, and increased local market concentration. The magnitude of these effects, though, has differed across states and between urban and rural markets within each state. The first section provides an overview of how consolidation has reduced the number of banking organizations. The next three sections quantify the effects of consolidation on size distribution, geographic scope, and concentration.

AN OVERVIEW OF DISTRICT BANKING CONSOLIDATION

The number of banking organizations has declined sharply in Tenth District states. This section documents the decline and shows that most of it has been due, not to bank failures, but to a steadily increasing rate of bank mergers.1

The decline in banking organizations

As evidence of banking consolidation, financial commentators often point to the decline in the number of banking organizations.2 A banking organization is defined as a multibank holding company, a one-bank holding company, or an independent bank. Table 1 shows that a sharp break in the growth of district banking organizations took place in the mid-1980s. During the first half of the 1980s, the number of banking organizations in Tenth District states held steady at about 2,400. But the number of organizations fell sharply in the second half of the decade and dropped to about 1,500 by 1995. Over the 197995 period, the number of organizations fell by 37 percent. This decline coincided with a moderate increase in district population, producing a sharp drop in the number of banking organizations per capita.3

The total attrition in banking organizations was about the same in the nation as the district. Over the same 1979-95 period, the number of banking organizations in the nation fell 39 percent, only slightly more than in the district. In contrast to the district, however, the number of banking organizations in the United States fell in all three subperiods, including the first half of the 1980s.

All district states shared in the decline in banking organizations. As indicated in Table 2, the two states that enjoyed the highest population growth over the period also lost the fewest banking organizations-Colorado and New Mexico, both with declines of less than one-fifth. …

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