Financial Update (October-December 1997)

Consolidation Concentrates
Bank Markets in Sixth District

by Lynn Woosley, senior economic analyst

B ank consolidation has brought sweeping structural changes to the banking industry in the last several years. The number of commercial banks operating in the United States and its territories declined from 12,204 in 1991 to 9,755 in 1996. During the same period, the number of thrifts in the United States fell from 2,909 to 1,398.

These consolidations were implemented primarily to achieve economies of scale or scope — such as expanding an institution's range of products or services — or to extend a banking firm's geographic reach. In contrast, consolidation among many thrifts occurred as a result of these institutions' being less able to compete in the aftermath of the savings and loan crisis.

Impact on Sixth District States

The Southeast has not been immune to these changes. From 1991 to 1996, the number of banks and thrifts with offices in the Sixth Federal Reserve District states declined by nearly 20 percent, from 1,677 to 1,345 (see Table 1). During the same period, the percentage of the average Sixth District states' deposits held by the three largest depository institutions, or the three-firm ratio, increased by nearly 20 percent — from 35 percent to 42 percent. The forces driving the increasing concentration in these states are similar to those driving structural changes on the national level.

Table 1
Changes in Statewide Concentration
Number of Banks,
BHCs and Thrifts
  Three-Firm Concentration
Ratio (percent)
State 1991 1996 1991 1996

Alabama 203 183 47.45 49.46
Florida 443 331 29.85 46.15
Georgia 369 297 35.32 40.17
Louisiana 271 208 30.04 42.68
Mississippi 145 116 36.18 38.43
Tennessee 246 210 32.33 35.60
Region 1,677 1,345 35.20 42.08

Local Market Concentration

The increasing concentration in the statewide figures is also generally reflected in local markets within the Sixth District's states — and for comparable reasons. At the local market level, three measures of concentration are useful in tracking changes in banking structure. Two of these measures — the number of competitors and the three-firm ratio — are used at the state level. A third measure, the Herfindahl-Hirschman Index (HHI), is also helpful in measuring concentration of local banking resources. The HHI uses a mathematical formula to determine whether a banking market is unconcentrated, moderately concentrated or highly concentrated.

To calculate the HHI for this article, urban markets are approximated by metropolitan statistical areas (MSAs). In 1991 the average Sixth District MSA had 24 depository institutions competing for market share and was moderately concentrated, with an average HHI of 1,785 points. The average three-firm ratio was 61 percent. By 1996, the average number of depository institutions competing in an MSA declined to 19 — a decrease of more than 20 percent. At the same time, MSA markets became slightly more concentrated, with an average HHI of 1,803 points. The 1996 typical three-firm ratio was nearly 62 percent.

By comparison, in 1991 the average urban U.S. banking market was moderately concentrated with an average HHI of 1,511 points. By 1996 this HHI had increased by 6 percent to 1,601 points.

In addition to changes in statewide structure, the withdrawal of some large, super-regional bank holding companies (BHCS) from rural (non-MSA) counties also affected local markets. As with urban markets, the number of depository institutions competing in the District's average rural county declined 20 percent, from five to four, between 1991 and 1996. The average rural three-firm ratio increased by less than 2 percentage points, from 87.64 percent to 89.04 percent. On the other hand, the typical rural HHI actually declined by approximately 3 percent, from 4,198 points to 4,075 points.

These figures indicate that, overall, deposits in rural counties were more equally distributed among a smaller number of banks. Rural counties were significantly more concentrated than urban counties in both 1991 and 1996. The average rural market is highly concentrated, with an average HHI of more than twice that of the average MSA market.

Nationally, by comparison, in 1991 the average rural U.S. banking market was highly concentrated, with an HHI of 3,831 points. By 1996, the HHI remained virtually unchanged at 3,832 points. Both in 1991 and 1996, the average rural U.S. market was more than twice as concentrated as the average urban market.

Deconcentration Occurs in Some Markets

Despite this trend toward greater concentration, urban and rural local markets in some states actually became less concentrated, as measured by the HHI, from 1991 to 1996. Such changes occurred in Alabama urban and rural markets, in Florida and Georgia rural markets, and in Mississippi urban markets. One possible reason these markets bucked the trend was the equalization of market shares among the firms competing in them.

Alabama, for example, is dominated by five Alabama-based regional bank holding companies. The three largest of these regional bank holding companies have approximately equal shares of state deposits. Much of the consolidation in Alabama has been the result of market extension by these regional bank holding companies, and the growth of multiple strong competitors has helped to slightly reduce the HHI in some markets.

Another driving force in southeastern consolidation is the acquisition of thrifts by commercial banking firms. Due to the lower weight given thrift deposits in local market calculations, acquisition of a thrift institution by a commercial bank or bank holding company can sometimes reduce the HHI in a local market. Other factors contributing to deconcentration include more rapid growth by small and midsize firms and de novo entry into new local markets, whether by branching or by chartering a new financial institution.

Consolidation Likely to Continue

Although deconcentration is evident in some markets, consolidation remains the prevalent trend throughout the Sixth District. Mergers and acquisitions account for most bank consolidation since 1991.

While the number of banks operating in any given state may change, no conclusive evidence is available to suggest that consolidation negatively impacts financial institutions or their customers.

For the future, the consolidation trend does not show any signs of slowing. In fact, most observers predict that the consolidation trend in the District will expand under the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act, which went into effect in June 1997 to allow banks to expand across state borders without forming a separate bank.

Table 2
Changes in Local Market Concentration
Local Market
Number of Banks,
BHCs and Thrifts
  Three-Firm Concentration
Ratio (percent)
1991 1996 1991 1996 1991 1996

Alabama Urban Markets 13 12 63.08 63.61 1,847 1,787
Alabama Rural Markets 5 5 83.60 82.13 3,562 3,282
Florida Urban Markets 37 27 51.04 56.15 1,222 1,474
Florida Rural Markets 4 5 91.20 89.92 4,699 4,265
Georgia Urban Markets 26 20 63.67 63.16 1,713 1,789
Georgia Rural Markets 6 3 89.90 92.12 4,919 4,849
Louisiana Urban Markets 25 20 62.89 66.11 1,689 1,833
Louisiana Rural Markets 4 4 88.33 90.39 3,948 3,993
Mississippi Urban Markets 14 12 73.17 61.98 2,937 2,366
Mississippi Rural Markets 5 4 88.62 92.16 4,062 4,150
Tennessee Urban Markets 23 21 52.18 60.37 1,300 1,568
Tennessee Rural Markets 5 4 84.20 87.51 3,995 3,908
Urban Average 24 19 61.01 61.90 1,785 1,803
Rural Average 5 4 87.64 89.04 4,198 4,075

Note: Thrifts owned by commercial banks are given full weighting, while independent thrifts are given half weighting. Differential weighting reflects the expertise and legal limits under qualified thrift lender.
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