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A primer on bank consolidation in the Ninth District

An analysis of the trend toward bank consolidation and its impact on district banks and communities

January 1, 1998


Ron J. Feldman Senior Financial Specialist
A primer on bank consolidation in the Ninth District

Consolidation has been one of the defining trends in banking over the last decade, and mega mergers seem to occur on an increasingly regular basis. In this light it is reasonable to ask how the number of banks in the Ninth District has changed over time.

The number of banks in the district has dropped by about 33 percent since 1980, largely due to merger activity, and district assets have become more concentrated in larger banks. However, many of these mergers involve banks already controlled by the same parent company rather than reflecting transactions between independent entities. And, the Ninth District still has a high number of small, community and family owned banks, resulting in some of the lowest out-of-district bank ownership rates in the United States. Going forward, consolidation raises both promise and concern about the level of banking services for customers.

Banking consolidation: What happened and how?

Since 1982 the number of banks in the district has been decreasing. The district went from around 1,400 commercial banks at the beginning of the 1980s to about 950 by the end of September 1997. This 33 percent decrease was roughly the same as the drop in the number of banks nationwide during the same period. Mergers and acquisitions have driven the decline in the number of banks in the district and nationwide.

Chart of Change in Number of Ninth District Financial Institutions


Chart of What Changed the Number of Ninth District Commercial Banks

Merger trends greatly reflect relaxation in state and federal laws that restricted the location of banks. For example, consolidation has increased dramatically since the Riegle-Neal Act of 1994, which gave banking organizations greater powers to expand across state lines and to consolidate banks chartered in different states into one institution. The number of mergers involving district banks nearly tripled during 1995, resulting in a decade high contraction of 62 banks (about 6 percent of district banks at the time).

One should not, though, interpret reductions in the number of banks to mean that there were suddenly fewer banks competing. The decrease in the number of banks in the Ninth District often reflects the combination of two banks that were already owned by the same parent company. In many recent years, for example, around 80 percent of mergers (as measured by the assets of merged banks) reflect such in-company activity.

What does consolidation mean for bank ownership and control of assets?

Ownership in the district remains largely local despite recent increases in merger activity. Indeed, the Ninth District is one of the most locally owned regions in the country as measured by the percentage of district assets held by banks and holding companies headquartered in the district. As of third quarter 1997, just 11 percent of assets in district banks were held by out-of-district organizations. In contrast, out-of-district bank holding companies held 54 percent of the assets in the highly consolidated Eleventh District, which includes Texas, New Mexico and Louisiana.

Consolidation has led to a much greater concentration of assets in the district's larger banks. In 1980, district commercial banks with more than $1 billion in assets held 23 percent of total assets in the district while making up just 0.28 percent of district banks. As of September 1997, these banks controlled 62 percent of district assets, while making up just 1 percent of district banks.

Chart of Banks with Assets Over $1 Billion

In contrast, banks with assets under $50 million constituted the vast majority of district banks (nearly 90 percent) in 1980 while they controlled around 40 percent of assets. By the third quarter of 1997, these smaller banks made up 60 percent of the district's total but held only 10 percent of total district assets. Again, the consolidation of banks in the district, and the concentration of assets it produces, often reflects the merger of two institutions already controlled by the same firm rather than the purchase of small independent banks by larger banks.

The promise and concern of consolidation

An oft-repeated fear of the consolidation described above is that banks owned by large organizations with a presence in many states will replace the local community bank. Large banks, for example, have reputations for rigidly applying their underwriting standards when reviewing loan applications, especially for small businesses. As a result, critics see large banks as unnecessarily rejecting loan requests. Smaller, community banks are generally perceived to adapt to and take account of the unique circumstances of a borrower.

Why might large banks operate differently than smaller banks? The executives of a large bank cannot closely monitor all its employees, so they may seek to influence employee behavior by requiring them to adhere to centralized guidelines. There is much less organizational space between the managers of the small bank and those employees with the day-to-day responsibility for extending credit.

This concern must be balanced against the incentives and evidence that suggest small businesses may not see massive reductions in credit after future consolidation. Large banks may buy small banks precisely because the small bank profitably makes business loans. In this vein, empirical research finds that merger activity, even involving a large bank buying a small bank, does not lead to significant changes in the combined banks' lending to small businesses. Moreover, even if the larger bank created through a merger reduces its lending to farms and small businesses, other banks in the community appear to pick up the slack. Finally, large bank and nonbank lenders are reported to have aggressively sought out small business loans over the last several years.

This does not mean that consolidation has no potential costs. Consolidation could potentially lead to a reduction in competition, especially in rural markets that already have fewer depositories. In addition, community banks may contribute to the quality of community life in unique ways that branches of larger, out-of-region banks cannot (see July 1994 fedgazette for a discussion of this issue).