Banking consolidation in Tenth District states

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This section confirms that consolidation has significantly reduced the role of small banking organizations in Tenth District states. Such organizations, however, remain much more important in the district than in the nation, and urban bank customers have been less affected than rural customers. Thus, the recent interest in the costs and benefits of a decline in the role of small banks appears fully warranted.

Change in the size distribution of assets

The role of small banking organizations can be measured by their share of total banking assets. Table 4 shows the distribution of assets among three size categories of banking organizationssmall organizations, with less than $100 million in assets in constant 1995 dollars; medium-size organizations, with $100 million to $1 billion in assets; and large organizations, with more than $1 billion in assets. For the district as a whole, the share of small organizations fell from just under a third of total assets at the end of 1979 to a fifth at the end of 1995-a drop of 11 percentage points. The gain accrued entirely to large organizations, as the share of medium-size organizations slipped a couple of percentage points.9

The distribution of banking assets also shifted from small organizations toward large organizations in the nation as a whole, but to a lesser degree. The share of small organizations fell only five percentage points and the share of large organizations increased only eight points, reducing somewhat the sharp difference in size distribution between the district and the nation. At the end of the period, however, small organizations still accounted for a much smaller share of assets in the United States than the district.

While the asset share of small organizations fell in all district states, the magnitude of the decline varied greatly among states (Table A2 in the appendix). The two states that started the period with the highest percentage of assets in small organizations-Kansas and Nebraska-also experienced the biggest declines in that percentage. The state with the least change in size distribution was Oklahoma, where the failure of several large energy banks during the 1980s limited the increase in the share of large organizations to only a few percentage points. The only state in which the share of large organizations did not rise at all was Colorado. Large organizations in Colorado started out much more important than in the rest of the district but suffered a loss in asset share to medium-size organizations, causing the state to resemble the district more closely by the end of the period.

The decline in the role of small banking organizations affected bank customers in all areas of the district but had an especially large impact on rural customers. Chart 2 shows the shares of rural and urban deposits held in offices of small banking organizations.10 From mid-1979 to mid1995, this deposit share fell 20 percentage points in rural areas but only six percentage points in urban areas. The reason the deposit share fell more in rural areas was not that small rural banking organizations disappeared at a greater rate than small urban banking organizations-on the contrary, the number of small organizations fell about the same percentage in both areas. Rather, the reason was that rural areas started out the period much more dependent on small organizations for banking services. Thus, as small banking organizations disappeared, a relatively high proportion of rural bank customers were forced to shift their business to larger organizations, many of them based in urban areas.

Did mergers cause the decline in the role of small banks?

The fact that the share of small organizations in district banking assets declined during a period when mergers were high does not prove that mergers caused the decline. Mergers would have led to such a decline if large or medium-size organizations had acquired small organizations. On the other hand, if mergers had been confined to large and medium-size organizations or to very small organizations, the percent of assets in the smallest size category would have been unaffected. Moreover, the share of small organizations in total assets could have declined for other reasons besides mergers-for example, because large organizations had outcompeted small organizations for funds or because small organizations were located primarily in slower growing areas.

The evidence shows that many small banking organizations in the district were acquired by larger organizations over the course of the period, implying that at least some of the shift in size distribution was due to mergers. Over the entire 16-year period, 840 small organizations ($25 billion in assets) were acquired in voluntary mergers. Of these small organizations, about half ($8.5 billion in assets) were acquired by other small organizations, with little effect on the size distribution of assets.11 But the other half ($16.5 billion in assets) were absorbed by large and medium-size organizations, directly reducing the percent of total assets in the smallest size category. Such acquisitions were especially high in 1993 and 1994, exceeding $2 billion both years.

Mergers clearly helped reduce the role of small banking organization, but did they account for all of the decline? To answer this question, the direct effect of all voluntary mergers and breakups on the asset shares of the three size categories was calculated for each quarter. These estimates of the quarterly merger effect were then summed over the entire period to obtain an estimate of the total merger effect.12 According to this calculation, mergers reduced the asset share of small organizations by a total of 11 percentage points, the same as the actual decline. Thus, the decline in the role of small banking organizations was due entirely to mergers and not to any tendency for large organizations to outcompete small organizations for funds.13

CONSOLIDATION'S IMPACT ON GEOGRAPHIC EXPANSION

Another possible consequence of banking consolidation is an increase in the geographic scope of bank operations. Mergers among banking organizations in different markets of the same state should result in more organizations with statewide operations, while mergers among organizations in different states should result in more organizations with nationwide or regional operations. Some analysts argue that the growth of banking organizations with widely dispersed operations is undesirable because such banks are inattentive to the needs of local communities and inefficient at lending to small borrowers. Others argue that the growth of such organizations is desirable because they are more diversified and thus less vulnerable to local downturns, and because they can better serve the needs of large nationwide businesses.14

This section shows that consolidation has significantly increased the geographic scope of district bank operations, both within and across states. Out-of-market mergers have steadily increased the share of local deposits controlled by organizations based elsewhere in the state, especially in rural areas. And after a slow start, interstate mergers have increased the share of deposits controlled by organizations based outside the state. This increase in geographic scope may well be the biggest effect of district banking consolidation, although the data do not reveal whether the effect has been harmful or beneficial to bank customers.

Intrastate expansion

One measure of intrastate expansion is the average penetration ratio in local banking markets-the percent of deposits in each local market held in branches or subsidiaries of organizations based outside that market.15 Chart 3 and Table 5 show that this ratio increased in both rural and urban areas in the district but especially in rural areas. In rural areas, the penetration ratio increased throughout the period, accelerating somewhat after 1985. At the end of the period, the ratio stood at 41 percent, an increase of 28 percentage points. The penetration ratio also increased in urban areas. The increase was less than half as much, however, and was concentrated in 1984 and 1985.

District banking organizations were not the only ones to expand within state lines during the period. Rural and urban penetration ratios rose roughly the same amount in the United States as the district and remained significantly higher than in the district. Thus, despite the spread of banking operations within district states, the district continued to lag well behind the nation in intrastate banking.

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