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
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
What does consolidation mean for bank ownership and control of
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.
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).