Publications: Interstate Banking, Branching, Organization Size, and Market Rivalry
by Gary Whalen
Abstract
The 1994 Reigle-Neal Act gave multistate bank holding companies the option to convert to an interstate
branch bank structure by authorizing the merger of bank subsidiaries across state lines. Over the
following five year period, an increasing number of banking companies, including a number of very
large ones, have done so. As a result, large companies operating through interstate branches have
come to account for a significant share of deposits in many local markets and relatively little
research has focused specifically on the competitive effects of this trend. This is a potentially
important issue because the performance and competitive effects of large, multistate branch banks
could differ from those associated with the operation of separately incorporated bank subsidiaries
by multibank holding companies.
In this study, measures of competitive rivalry are constructed using Summary of Deposit data for all
urban (MSA) markets in the U.S. for each year over the 1995-1999 period. Tobit models are estimated
using the data pooled over the entire period to determine whether and how alternative measures of the
extent to which multistate banking companies operate in the market influence the rivalry variables.
The aim of the analysis is to determine if the results are sensitive to the size of multistate
companies, the location of the market (home state vs. out-of-state), or the organizational form used
by nonlocal competitors (interstate branches vs. bank subsidiaries). The results show a positive
relationship between large multistate multibank holding company (MSMBHC) deposit share and rivalry
when a simple linear specification is used. Adding a concentration-MSMBHC share interaction term to
the equation reveals that the positive effect of MSMBHC share on rivalry rises with market
concentration. This result is largely attributable to the behavior of MSMBHCs operating outside
their home state. When the separate effects of interstate branches and out-of-state bank subs are
examined, only the former is found to be significantly related to rivalry. And in these equations,
the pattern of the estimated coefficients on the aggregate interstate branch deposit share variables
is the same as that seen in the other equations (a positive coefficient in the absence of the
interaction term, and a positive coefficient on the interaction term when it is included). These
results do not change, and in fact, are typically stronger when the deposit shares are calculated
using only large multistate holding companies. They also do not change greatly when markets where
the identity of the top-tier firms changed are excluded or when random-effects Tobit specifications
are used.
Disclaimer
As with all OCC Working Papers, the opinions expressed in this paper are those of the author alone, and
do not necessarily reflect the views of the Office of the Comptroller of the Currency or the Department of the Treasury.
Any whole or partial reproduction of material in this paper should include the following citation:
Whalen, "Interstate Banking, Branching, Organization Size, and Market Rivalry,"
Office of the Comptroller of the Currency, E&PA Working Paper 2000-7, July 2000.
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