Banking consolidation in Tenth District states

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.4 Declines were much greater in the other five states, exceeding a third in each state.

Sources of the decline in banking organizations

The number of banking organizations is influenced by other factors besides mergers. Some of the decline in banking organizations could be due to a high rate of failures or a low rate of formation of new organizations. To determine the relative importance of these various factors, Table 3 decomposes the change in district banking organizations from the end of 1979 to the end of 1995 into four sources-voluntary mergers and breakups, failures, new bank charters, and net conversions of nonbanks to banks. The last column shows the results for the entire period, while the first four columns report the results for three subperiods-1980-84, 1985-89, and 199095. The same decomposition is reported for each district state in Table A1 of the appendix.

Table 3 highlights three important facts about district banking consolidation. First, over the period as a whole, mergers actually accounted for all of the decline in banking organizations, with the positive effect of new charters and conversions approximately offsetting the negative effect of failures. Specifically, voluntary mergers and breakups resulted in a net loss of 907 organizations over the 16-year period, slightly more than the actual decline in organizations.

Second, while the steep decline in organizations in the district did not begin in earnest until 1985, a substantial number of organizations were lost through mergers even before that point. A total of 182 organizations were lost through mergers in the years 1980-84. The only reason the number of organizations remained approximately unchanged during those years was that there were sufficient new charters to offset the negative effect of mergers.

Third, while sizable throughout the period, the loss of organizations through voluntary mergers increased over time, reaching an especially high level in the 1990s. The net loss of organizations from mergers and breakups increased to 257 in 1985-89 (an average of 51 per year) and then jumped to 468 in 1990-95 (an average of 78 per year). The only reason the number of organizations did not fall significantly more in 1990-95 was a sharp slowdown in failures. In the 1990s, only 42 banking organizations were lost from this source, far fewer than the 225 failures during the second half of the 1980s.

The upward trend in district mergers is also evident in Chart 1, which plots the number and inflation-adjusted assets of organizations acquired each year through voluntary mergers.5 The chart shows that acquisitions increased over the period but varied somewhat from year to year, peaking in 1984,1988, and 1993. Acquisitions jumped an especially large amount in 1993, remained high in 1994, and then subsided somewhat in 1995. The amount of assets acquired through voluntary mergers peaked in the same years but showed much more variation, dominated as it was by the handful of megamergers between very large organizations.6

What accounted for the general increase in district merger activity over the period? Some of the increase was due to the same factors at work in the nation as a whole, while some of the increase was due to factors specific to the district. During the 1980s, a desire to reduce risk through geographic diversification accounted for many acquisitions. And in the 1990s, many mergers were motivated by a desire to cut costs by eliminating overlap in branches and back-office facilities. Relaxation of legal barriers to consolidation also played an especially important role in the district. At the beginning of the period, no district state allowed banks to operate branches throughout the state, and no district state allowed acquisitions by out-ofstate holding companies. Moreover, three states prohibited bank holding companies from acquiring additional banks within the state-Kansas, Nebraska, and Oklahoma. By the end of the period, these barriers had been drastically reduced, with all seven states allowing multibank holding company expansion, some form of statewide branching, and some form of out-of-state entry.7

CONSOLIDATION'S IMPACT ON THE SIZE OF BANKING ORGANIZATIONS

It is widely believed that an important consequence of banking consolidation is a reduced role for small banks in the banking system. Some analysts welcome this change, arguing that small banking organizations are less efficient at backroom operations than large organizations, less able to offer a wide array of financial services to their customers, and less able to lend because of their lack of access to the capital markets. Other analysts decry the change, arguing that small banking organizations are more able and willing than large organizations to lend to small businesses. Moreover, small banking organizations are less likely to impose huge costs on the government should they fail.8

source: find articles.com

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