7
Retail Commercial Banking An Industry in Transition

Stephen A. Rhoades

Commercial banking is a particularly important industry because of its exceptional size and scope. In addition to its role as the transmission mechanism for monetary policy, the industry provides essential services to most consumers and businesses in the country, with about $4 trillion in financial assets (compared to $2.6 trillion in the insurance industry) and 1.5 million employees (more than the motor vehicle, steel, and petroleum industries combined). Basic structural changes and competition in an industry of this size and scope are of considerable importance.

In conducting an analysis concerned with competition in commercial banking, it is important to distinguish between retail (or community) banking and wholesale banking. This distinction is essential for both policy and analytical purposes. The retail banking industry is especially interesting at this time because it is an industry in the throes of major changes resulting from the removal of legal barriers to entry, an unprecedented merger movement, and the adoption of electronic technology in the provision of some services. Furthermore, retail banking encompasses most of the firms in commercial banking; it is the industry that provides the basic financial services most consumers and firms use; and the industry provides an unusually good laboratory for research on various topics in the field of industrial organization.1

The various changes under way in retail banking raise questions about competition, barriers to entry, and public policy that are of interest to students of industrial organization and policymakers. This chapter seeks to use empirical evidence and some of the basic concepts of industrial organization to put these changes in perspective and examine some of the implications for competition analysis and public policy in the industry.


Banking as a Laboratory for Study

Banking is a regulated industry. Consequently, teachers of industrial organization tend to place it in a special class with other regulated industries that are regarded as not very useful for studying

____________________
The views expressed herein are the author's and do not necessarily reflect the views of the Federal Reserve Board. This chapter borrows heavily from two of the author's papers: "Competition and Bank Mergers: Directions for Analysis from Available Evidence," Antitrust Bulletin, Summer 1996: 339-64, and "Have Barriers to Entry in Retail Commercial Banking Disappeared?" Antitrust Bulletin, Winter 1997: 997-1013. Extractions reprinted with permission of Federal Legal Publications, Inc.

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