Federal Reserve Bank of San Francisco

FRBSF Economic Letter

1996-31 | October 25, 1996

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The California "Rate Gap" since the BankAmerica-Security Pacific Merger

Elizabeth Laderman

Well before the merger of BankAmerica Corporation and Security Pacific Corporation in 1992, California had a “rate gap”–that is, interest rates on small denomination (retail) deposits tended to be lower at California banks than at banks nationwide. According to economic theory, an increase in banking market concentration due to, say, a large bank merger, may decrease deposit interest rates. So, it is legitimate to ask whether the merger between the first and third largest banking organizations in the state–one of the largest bank mergers in history–further widened the California rate gap.

In this Economic Letter, I address this question by examining the relationship between California and U.S. deposit interest rates before and after the 1992 merger and by attempting to account for other factors that might affect deposit rates. While the evidence presented here does not provide a definitive answer, it does suggest that the merger did not serve to lower interest rates on deposits in California relative to national rates.

Concentration and deposit rates

An influential theory in economics posits that an increase in market concentration will decrease the level of competition in the market, thereby increasing prices for consumers, or, in the case of deposits, decreasing interest rates. Market concentration refers to the degree to which deposits are concentrated in the largest banks in the market. A merger between two banks in a market will increase concentration, and concentration is highest when there is only one bank in the market. Whether and under what circumstances this theory is borne out in the real world is an open question. In any case, the theory suggests that it is worth investigating whether the BankAmerica-Security Pacific merger decreased California retail deposit interest rates relative to U.S. rates.

After the merger

The merger of BankAmerica Corporation and Security Pacific Corporation, the first and third largest banking organizations in California, affected 59 local banking markets in the state, representing about 98 percent of California deposits. As with all bank mergers, the bank regulatory agencies considered the competitive effects of the merger, and steps were taken to address them. In this case, BankAmerica agreed to divest about 44 California branches to third parties to address concerns of potential anti-competitive effects from undue increases in market concentration in some local banking markets. This application of bank regulatory policy reduced the probability that the merger would result in a significant decrease in deposit interest rates in California. In addition, any new bank entry or convergence of market shares since the merger would have acted to reduce concentration.

But the ultimate test of whether the BankAmerica-Security Pacific merger reduced California deposit rates is empirical. Figure 1 shows two retail deposit interest rate series for California and the whole U.S. for the period 1986 to 1996: the average rate on savings and money market deposit accounts (MMDAs) and the average rate on certificates of deposit with a maturity between three and six months (six-month CDs). Over the past decade, interest rates for both types of deposits have tended to be lower in California than in the U.S. as a whole.

A look at Figure 1 suggests that the California rate gap did not widen after the 1992 BankAmerica-Security Pacific merger. In fact, in the last few months shown (ending with April 1996), the average California six-month CD rate was just slightly higher than the U.S. six-month CD rate, and the California MMDA rate approached and then equaled the U.S. MMDA rate.

A closer look

Even though the gap has been relatively constant or even shrinking, that does not necessarily imply that the merger itself did not exert downward pressure on California deposit rates relative to U.S. deposit rates. Other factors may have been exerting upward pressure on relative rates in California at the same time. For example, the average wage in California relative to the average wage in the U.S. has been falling since about 1992. This decrease in relative costs should have exerted upward pressure on relative deposit rates in California.

To conduct a more careful test, taking into account some additional factors, I compared the actual average interest rates on MMDAs and six-month CDs in California after the consummation of the merger (April 22, 1992) to the levels one would have predicted based on U.S. rates on the same types of deposits and the pre-merger relationship between California and U.S. rates. To obtain predictions, I estimated the relationship between California MMDA rates and U.S. MMDA rates for the period April 1986 through June 1991, two months before the announcement of the merger (January 1984 through June 1991 for six-month CDs). The estimation also took into account the influence of market interest rates and the ratio of average California wages to average U.S. wages on California deposit rates.

Figure 2 shows the actual and predicted average interest rates for MMDAs and six-month CDs in California since the BankAmerica-Security Pacific merger. For both types of deposits, the actual interest rates were higher than expected during most or all of the period.

These results suggest, then, that the BankAmerica-Security Pacific merger did not reduce California deposit interest rates relative to U.S. rates. However, it should be pointed out that, taking into account wage costs, both U.S. and California deposit interest rates have declined relative to market rates in recent years. Recent research has shown, though, that despite mergers across the country, local banking market concentration has not been on the rise (Rhoades 1996). This suggests that factors other than concentration may be affecting national retail deposit rates relative to market interest rates.


When the BankAmerica-Security Pacific merger was announced, it was the largest bank merger in U.S. history and might have been expected to increase the difference between U.S. and California retail deposit interest rates. However, the application of bank regulatory policy tends to limit increases in concentration stemming from bank mergers, and new entry and market share convergence can also exert downward pressure on concentration. Indeed, a look at California and U.S. deposit rates since the merger, coupled with an analysis that takes account of the possible influences of several factors, both suggest that this consolidation of two California banking giants did not further widen the California rate gap.

Elizabeth Laderman


Rhoades, Stephen A. 1996. “Bank Mergers and Industrywide Structure, 1980-94.” Board of Governors of the Federal Reserve System Staff Study 169.

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. This publication is edited by Sam Zuckerman and Anita Todd. Permission to reprint must be obtained in writing.

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