Thinking Nationally, Competing Locally
How Does the Fed Define Local Banking Markets?
Each of the 12 Federal Reserve banks, in consultation with the Board of Governors of the Federal Reserve System, is responsible for defining the boundaries of local banking markets within its district. The other federal banking regulators usually use these definitions when analyzing a merger or acquisition application.
A local banking market is an economically integrated area that includes and surrounds a central city or large town. Often, banking markets are based on metropolitan or similar areas in urban regions, and on counties in rural regions. Local economic and demographic data—such as commuting patterns, locations of large employers and retailers, and other information that could demonstrate an economic tie or separation between two areas—are then used to enlarge or shrink the size of the market from the base.
To date, more than 1,500 banking markets have been defined in the United States, covering almost all parts of the country. These definitions are always subject to change as local areas grow or shrink, however. For help in finding a banking market definition, you can visit CASSIDI®, an application on the St. Louis Fed’s web site that includes all market definitions in the country and interactive maps for many of them. Visit http://cassidi.stlouisfed.org. (See sidebar on CASSIDI®.)
Inside the Numbers: Fewer Banks, Not Necessarily Fewer Offices
We’ve already seen that one of the effects of interstate branching is fewer banking institutions overall; this reduction, however, does not translate into fewer offices in local markets. Suppose, for example, Chrome Bank has offices in St. Louis, Carbondale, Ill., and Little Rock, Ark. Although the name above the door is the same, before interstate branching was allowed, these were three separate banks because of branching restrictions. That is, there were three institutions and three offices. After interstate branching, though, the three banks could be combined into one. Now, there is one institution, but still three offices. These types of mergers have no effect on local banking competition even though the total number of institutions goes down.
Another type of transaction could have Chrome Bank buying Town Bank, which has one office located in Memphis, Tenn. Before the transaction, there were two institutions and four offices. After the transaction, there will be one institution, but still four offices. Again, we see that although the overall number of institutions has declined, there has been no effect on local competition. All that has happened in Memphis is that Town Bank has become Chrome Bank. Many of these types of transactions have occurred over the past 20 years too. All the while, many small banks have started up in numerous communities, adding to local competition. The “crazy-quilt banking system” example below further illustrates these principles in a simple way.
A Crazy-Quilt Banking System Consolidates
To illustrate how the number of independent banks nationwide can decrease, while the average number of banks in each local market stays the same or increases, think about the patterns and colors in a quilt. Suppose we represent the U.S. national banking market as a huge quilt. Each two-by-two group of squares within the quilts below corresponds to a local banking market. These are separated from each other by black lines, representing the distinctness of local markets. Each individual colored square stands for a bank or one of its branches. The identities of banks are differentiated by their colors. Changes in the colors of the quilt represent the changing structure of the U.S. banking market.
Before interstate branching was allowed, U.S. banking was composed largely of single-market banks. The quilt representing this situation consists of colored squares, each of which appears only once. There are 36 different banks and 36 different colors. That is, each unique bank in a local market also is unique in the larger, national market. Each local market has four competing banks; this simple statistic can be used as a measure of local banking competition.
Since interstate branching has been allowed and thousands of bank mergers have taken place, the U.S. banking market today is composed of both multimarket and single-market banks. Multimarket banks appear in many local markets. Single-market banks appear in only one local market.
The quilt representing this situation consists of some colored squares that appear many times—for example, red appears nine times, yellow appears seven times, dark green appears five times, etc.—while other colors appear only once (for example, sky blue). There now are 14 different banks, down from 36. So, the banking system as a whole has undergone a significant consolidation. But each local market still consists of four competing banks; so, local market competition remains unchanged.
The key point of this illustration is that even though many mergers have occurred and there now are far fewer independent banks—represented by fewer unique colors in the quilt—each local banking market has four competing banks (four different colors), just as before. Thus, bank mergers need not decrease competition in local markets as long as the specific mergers that take place are controlled.
For example, the bank represented by a red square probably would not be allowed to acquire another bank in any local market, while the bank represented by yellow probably would be allowed to acquire another bank only in one of the local markets in which it does not already appear, and so on. Even a single-market bank (represented by sky blue) probably would be prohibited from acquiring another bank in its own local market, though it likely would be allowed to buy another bank in any other market.
The quilts illustrate the Fed’s attempt to balance competing goals in our bank-merger policy—namely, to allow efficiency-enhancing bank mergers to occur across local banking markets without sacrificing the benefits of competition within each local banking market.
