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Banking consolidation in Tenth District states
Continued from last page
Among district states, differences in intrastate expansion are partly explained by differences in legal restrictions (Table A3 in the Appendix). The three states in which outside penetration of local markets increased the most were Kansas, Nebraska, and Oklahoma, all of which prohibited multibank holding company expansion at the start of the period but dropped the ban later on. Local market penetration increased almost as much in Missouri, even though that state already permitted multibank holding company expansion.
Interstate expansion
Has consolidation resulted in more banking organizations operating across state lines, as well as over broader areas within states? Interstate expansion can be measured by the proportion of deposits in each state held in subsidiaries of organizations headquartered outside the state (Table 6). In the district as a whole, this proportion remained low throughout the 1980s, increasing only slightly from 4 percent at the beginning of the decade to 6 percent at the end. The deposit share of out-of-state organizations then increased sharply in the 1990s, reaching 23 percent by the end of 1995.16
Interstate banking got off to an earlier start in the nation and ended up increasing even more than in the district. The proportion of all deposits in the United States held in out-of-state organizations surged from 3 percent to 20 percent in the 1980s. The share then continued climbing during the 1990s, reaching 29 percent at the end of 1995.
While most district states experienced substantial intrastate expansion during the period, the degree of interstate expansion varied sharply (Table A4 in the appendix). At one extreme were the three mountain states of Colorado, New Mexico, and Wyoming, where the deposit share of out-of-state organizations increased well over 40 percentage points. In each of these states, more than half of all deposits were controlled by out-of-state organizations at the end of the period, well above the national average. At the other extreme were Missouri, where the out-ofstate deposit share failed to rise above 2 percent, and Nebraska, where the deposit share reached only 12 percent. These differences can be explained partly by differences in laws governing out-ofstate entry. By the end of the period, Colorado, New Mexico, and Wyoming all permitted entry by bank holding companies from anywhere in the nation, while Missouri allowed entry only from neighboring states. Such legal differences cannot explain all the variation in interstate banking within the district, however, suggesting that on economic grounds some district states were more attractive to out-of-state banks than others.17
In contrast to intrastate expansion, which has had a bigger impact on rural markets than urban markets, interstate banking has mainly affected urban markets. In mid-1979, 4 percent of rural deposits and 5 percent of urban deposits in the district were held in subsidiaries of out-of-state banking organizations. By mid-1995, the percent of rural deposits in out-of-state organizations had increased to 13 percent, while the percent of urban deposits in out-of-state organizations had jumped to 29 percent.
CONSOLIDATION'S IMPACT ON LOCAL MARKET CONCENTRATION
The third possible consequence of consolidation is an increase in the concentration of local banking markets. Markets are said to be concentrated if they are dominated by a few organizations that hold most of the deposits or make most of the loans. To the extent consolidation occurs through mergers among organizations operating in the same market, concentration should increase. Some analysts argue that such an increase in concentration is undesirable because it reduces competition among banking organizations, leading to lower deposit rates, higher loan rates, and lower quality services. Others argue that increases in local market concentration do not have these adverse effects because the threat of entry by outside organizations keeps organizations with high market shares from trying to exploit their customers. Some analysts even argue that in-market mergers, which increase local concentration, may benefit bank customers by reducing wasteful overlap among banking organizations and enabling organizations to cut their expenses.18
This section shows that consolidation has boosted the concentration of district banking markets, especially urban markets. The increase in concentration, however, appears to be less dramatic than the decrease in the role of small banks or the increase in geographic scope. And the overall level of concentration remains moderate, due partly to strong growth by those smaller banking organizations that remained independent. In the case of urban markets, however, the increase in concentration is also fairly recent. If current trends continued, concentration could become a greater concern.
Changes in local market concentration
The most common measure of local market concentration used by bank regulators is the Herfindahl-Hirschman Index (HHI). For each market, this index measures the tendency for deposits to be concentrated in a few banking organizations.19 The HHI can range from close to zero to as high as 10,000, with higher values representing higher degrees of concentration. For example, a market with ten equal-size organizations would have an index of 1,000; a market with two equal-size organizations would have an index of 5,000; and a market with only one organization would have an index of 10,000. In estimating local market concentration, regulators also adjust the index to take into account that thrift institutions compete for at least some of the same business as banks.20
Although there are exceptions, regulators generally worry about the anticompetitive effects of a merger if it would raise the HHI by more than 200 points and also result in an index above 1,800. In keeping with this standard, most banking analysts consider a market to be unconcentrated if it has an HHI below 1,000, moderately concentrated if it has an HHI between 1,000 and 1,800, and highly concentrated if it has an index above 1,800. Rural markets usually have an HHI well above 1,800 because they are defined to include only one county and thus have a much smaller number of organizations.
Chart 4 and Table 7 show that since 1979 concentration has increased in both rural and urban markets in the district but especially in urban markets. From mid-1979 to mid-1995, the average HHI increased 186 points in rural markets and 449 points in urban markets. The index for urban markets ended up at 1,202, above the cutoff for unconcentrated markets but near the bottom of the range for moderately concentrated markets. The timing as well as the magnitude of the increase differed between the two types of markets. In rural markets, the index edged down during the early 1980s, turned up in 1986, and then leveled off in the 1990s. In urban markets, by contrast, the HHI did not turn up until 1989 and then continued rising through the end of the period, with an especially large jump in 1993.
Concentration also increased in rural and urban markets nationwide, but to a smaller degree than in the district. The average HHI rose 91 points in rural markets and 218 points in urban markets. Despite the smaller increase, urban concentration remained slightly higher in the United States than the district. Rural concentration, on the other hand, ended the period slightly lower in the United States than the district.
Local market concentration increased more in some district states than others (Table A5 in the appendix). The urban HHI rose more than 300 points in all states except Oklahoma, where the index increased only slightly. The change in rural concentration varied more, with the HHI increasing more than 200 points in Kansas, Nebraska, and Oklahoma but falling modestly in Colorado and Wyoming.
Did mergers cause the increase in local market concentration?
As with the shift in size distribution, the fact that concentration increased at a time when bank mergers were high does not necessarily mean that the mergers caused the increase. Local market concentration may have increased only because the dominant organizations in each market outbid their smaller competitors for funds and grew faster. Alternatively, concentration may have increased due to the wave of thrift failures in the late 1980s and early 1990s. Anytime the deposits of a failed thrift disappeared, the HHI tended to increase because thrift institutions are included in the calculation of the index. And anytime the deposits of a failed thrift were taken over by a large banking organization in the same market, the HHI tended to increase because the distribution of bank deposits became more unequal.21
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