FRBSF Economic Letter
2002-21; July 26, 2002
Trends in the Concentration of Bank Deposits: The Northwest
Western Banking Quarterly is a review of banking
developments in the Twelfth Federal Reserve District, and includes FRBSF's
Tables. It is normally published in the Economic Letter on
the fourth Friday of January, April, July, and October.
Two major trends affecting the structure of the banking industry since
the mid-1980s have been tremendous consolidation and the liberalization
of interstate banking. Consolidation has unambiguously increased concentration
at the national level. The effects on concentration in smaller geographic
areas are more complicated. For one thing, mergers can involve interstate
transactions, and a merger between banks in two states usually leaves
both states, and their local banking markets, with the same number of
banks. For another, antitrust enforcement, as well as market forces, tends
to limit the impact of mergers on concentration in local markets.
This Letter looks at how bank consolidation has affected deposit
concentration at the national level and in two key states in the Twelfth
Federal Reserve District—Oregon and Washington. Both states have seen
declines in the number of depository organizations, as well as a considerable
degree of acquisition by out-of-state organizations. The analysis indicates
that concentration has increased notably at the national level and for
the state of Washington, but less so for Oregon. However, relatively few
local markets within the states have become highly concentrated.
Trends in consolidation and interstate banking
The U.S. banking industry has seen massive consolidation since the mid-1980s.
The number of independent bank and thrift organizations (collectively,
depository organizations) in the U.S. fell from 15,416 in 1984 to 8,191
in 2001, a drop of 46.9%. Some of the depository organizations that have
been eliminated ranked among the largest in the nation. As a result, the
share of deposits held by the five largest increased from about 9% in
1984 to over 23% in 2001.
The consolidation of banking at the national level has been facilitated
by the liberalization of the laws governing interstate banking. Beginning
in the mid-1970s, states allowed bank holding companies headquartered
in other states to acquire banks in their state. The passage of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 permitted interstate
branching, whereby banks in one state could acquire banks in another state
and turn the acquired branches into their own, rather than keeping the
acquired bank as a separately chartered entity.
The experience with interstate banking and the effect on concentration
at the state level vary considerably. Oregon has been especially affected
by interstate acquisitions—as of 2001, out-of-state organizations controlled
74.2% of Oregon deposits, the second highest percentage in the nation.
For Oregon, for the most part, out-of-state acquirers have merely replaced
the large in-state institutions, with little effect on concentration at
the state level. Thus, the deposit share of the top five institutions
operating in Oregon barely has changed, increasing from 63.1% to 67.9%
since 1984. (These shares are considerably higher than in states without
a long history of statewide branching.) At 45.2% and ranking seventh in
the nation, Washington's out-of-state controlled deposit share also is
relatively high. However, the top-five share in Washington increased more
than Oregon's, from 48.6% in 1984 to 60.5% in 2001, largely due to gains
by one of the state's own—Washington Mutual, Inc., the second largest
depository institution in Washington.
Public policy concerns
From a public policy perspective, the main concern is the impact that
bank mergers and acquisitions may have on local banking markets. A local
banking market typically encompasses a metropolitan area or a number of
rural communities that are economically linked. Survey evidence regarding
where people do their banking and research linking local banking market
concentration and prices, such as loan rates, suggest that banking markets
retain a local dimension.
Indeed, antitrust enforcement regarding bank mergers focuses primarily
on the effects on local market concentration. Under the Bank Holding Company
Act, the Bank Merger Act, and other statutes, the Federal Reserve and
the other bank regulatory agencies review proposed bank mergers for acceptable
increases in concentration, post-merger levels of concentration, and post-merger
Regulatory approval of a merger may require a divestiture of acquirer
or target branches in the relevant markets to a third party such that
the resulting change in concentration is acceptable. On the other hand,
mitigating factors may argue for approval in a particular market. For
example, the relevant market may have strong population growth, indicating
the likelihood of a rapidly increasing demand for banking services. In
such a case, the market would be expected to attract new entrants at an
above average rate, which would tend to alleviate the increase in concentration
due to the merger.
Concentration in local markets
Interstate mergers usually would not have affected concentration at the
local level, since the acquirer and the target would have operated in
different states and therefore, usually, in different local markets. However,
intrastate mergers, even among the smaller organizations, and failures
could have had a significant impact. Therefore, the change in the number
of depository organizations within a state is an important indicator of
the potential effects of consolidation on local markets. Between 1984
and 2001, the number of depository organizations in Oregon declined 46.1%,
from 102 to 55, while the number in Washington declined 30%, from 160
Regulators assessing the effect of mergers on concentration in local
banking markets typically rely on a statistic called the Herfindahl-Hirschman
Index (HHI), which is calculated by summing the squares of the individual
percent market shares of all the participants in a market. For example,
a market with four firms with market shares of 30%, 30%, 20%, and 20%
has an HHI of 2,600. The HHI gives proportionally greater weight to the
market shares of the larger firms, in accord with their relative importance
in competitive interactions. The Department of Justice divides the spectrum
of market concentration into three broad categories: unconcentrated (HHI
below 1,000), moderately concentrated (HHI between 1,000 and 1,800), and
highly concentrated (HHI above 1,800).
For Oregon and Washington, changes in local banking market concentration
were computed for 15 urban markets and 26 rural markets between 1984 and
2001. In urban markets, the average HHI increased 206 points, from 1,296
to 1,502. So, on average, urban markets in Oregon and Washington stayed
within the moderately concentrated range.
Regarding individual markets, 11 urban markets (73.3%) had a higher HHI
in 2001 than in 1984. However, only one—Longview, Washington—moved up
to being highly concentrated. After starting out at 993 in 1984, Longview's
HHI increased to 1,986 in 2001. All the other urban markets except for
Walla Walla, Washington, which already was highly concentrated in 1984,
remained moderately concentrated.
In rural markets, the average HHI increased 75 points, from 2,095 in
1984 to 2,170 in 2001. So, on average, rural markets in Oregon and Washington
already were highly concentrated in 1984, and became only very slightly
In 14 rural markets (53.9%), the HHI was higher in 2001 than in 1984.
Among these, seven markets went from being moderately concentrated in
1984 to highly concentrated in 2001. These were the Coos Bay, Hood River,
Lincoln County, Pendleton, and Roseburg markets in Oregon, and the Sunnyside
and Wenatchee markets in Washington. Four of these—Coos Bay, Pendleton,
Roseburg, and Sunnyside—now have HHIs more than 300 points above the
highly concentrated benchmark of 1,800. However, given that 9 of the 12
rural markets that already were highly concentrated in 1984 became less
concentrated by 2001, it is possible that concentration in some of these
newly highly concentrated markets rural markets eventually also may fall.
Consolidation in banking has left its mark on concentration in the Northwest.
At the state level, concentration has increased slightly in Oregon, more
so in Washington. Among local banking markets, concentration increased
both on average and in the majority of urban and rural markets. However,
relatively few markets moved into the highly concentrated range—one urban
market and about one-fourth of the rural markets. Even among the rural
markets, the average increase in market concentration has been limited.