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Data out of context: reporting banking data in the Ninth District

January 1, 1998


Data out of context: reporting banking data in the Ninth District

Recent banking data suggest a remarkable change in the structure of banking in the Ninth District during 1997. Bank assets grew by $56 billion to reach $169 billion at the end of third quarter 1997, an increase of more than 50 percent. Loans in district banks increased more than 65 percent to $118 billion, and deposits grew 48 percent to reach $127 billion. The data also suggest a boom in Minnesota during the year, but stagnancy elsewhere in the district. Assets of Minnesota banks grew an outstanding 78 percent through third quarter 1997, while bank assets in all other district states remained the same.

Surprisingly, because of the manner in which regulators collect banking data, events outside the district or the state in which a bank is located can have more to do with perceived bank growth than district economic or banking conditions. To ensure that the banking data are not viewed out of context, we have changed their presentation.

Merger activity and perceived growth

Analysts measure increases in bank assets, primarily loans, to analyze the growth of district banking. One normally assumes that loan growth reflects a greater demand by local consumers and businesses. Indeed, loan demand in the Ninth District has been strong during 1997 and contributed to the growth of district banking. But it was merger activity involving district banks that explains the apparent runaway growth.

When a bank is acquired or two banks merge, the loans and deposits of the old bank are reported on the balance sheet of the consolidated institution. Banking data that are not adjusted for merger and consolidation activity could show large movements of loans and deposits between states and districts. The data may imply a banking crisis in one state—a mass exodus of borrowers and depositors—and show a banking boom in another. In reality, the data reflect changes in bank structure. For example, the merger of U.S. Bancorp of Oregon into First Bank System of Minnesota seems to have added $26 billion of loans into the district and the state of Minnesota, accounting for nearly 35 percent of the entire loan growth in the district during 1997. Of course, neither the borrowers of these loans nor the depositors actually moved from Portland to Minneapolis. Rather, US Bancorp moved its headquarters, and the loans and deposits of the merged institution are now reported as Minnesota-based.

Merger activity in the Ninth District and the United States has increased considerably during the 1990s. (See article on consolidation.) There were 336 mergers involving district banks between 1990 and 1997 compared with 183 during the 1980s. This activity is likely to increase with the elimination of barriers that prevented banks from expanding across state lines. And more mergers could mean larger and more frequent complications in the state-level banking data.

pie chart showing district assets by bank size pie chart showing number of district banks by bank size

A new data format

If the geographical boundaries have fallen for banks, are they still useful for analyzing bank performance in the district? State-level banking data are still informative; they just require a little tweaking to make them meaningful.

Beginning with this issue of the fedgazette, performance data of district banks with more than $1 billion in total assets are reported separately from those of district banks smaller than $1 billion in assets. This format should minimize the effect of mergers and acquisition activity by isolating the district's largest banks in which the biggest mergers have occurred. Furthermore, the distinction should better describe the district's small and large banks, since they may have very different strategies, funding sources and lending areas—all of which determine profitability and performance.