Financial Update (July-September 2000)

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The Docket

What Attracts New Entries into Southeastern Banking Markets?

Sixth District Map
An Atlanta Fed study found that in the Southeast a banking market’s population size and per capita income have a strong influence over the future entry of a banking institution into a specific market.

by Michael Padhi, senior economic analyst

As part of its bank supervision and regulation responsibilities, the Federal Reserve must review proposed bank mergers when the applicant is a bank holding company or state member bank. One factor the Fed considers in evaluating a merger application is how the merger would affect competition in the local banking market. The Fed cannot approve a merger that would lessen competition or create a monopoly unless these effects would be outweighed by the potential benefits for customer convenience and community needs.

In many Federal Reserve Board of Governors’ rulings on merger applications with potential competitive concerns, the attractiveness of the banking market to entry is often cited as a mitigating factor. In making such assessments, the Board uses market demographic statistics. This practice raises several empirical questions: Is there quantifiable evidence to support using such statistics? How strong is the relationship between these statistics and market entry? Are some of these statistics stronger predictors of entry than others?

To answer these questions, specifically as they apply to the Sixth Federal Reserve District states of Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee, the Federal Reserve Bank of Atlanta recently conducted a study that evaluated four demographic measures: population, population growth, per capita income and per capita income growth.

The Board’s use of demographic statistics

To assess the attractiveness of a banking market, the Fed’s Board of Governors examines demographic characteristics that are assumed to make a market more attractive. The Board has also tended to heavily weight recent entry into a market. Other considerations have included the existence of state laws on branching and evidence of strong business activity.

In evaluating these characteristics, the Board often considers whether the relevant markets are rural or metropolitan and compares them with similar markets within the state. Sometimes the Board will compare a market, particularly a metropolitan one, to other markets in the entire region or nation.

The Atlanta Fed’s study

The Atlanta Fed study approximates banking markets by defining a rural county as a rural market and all the counties composing a particular metropolitan area as a metropolitan market. In the study, “entry” constitutes the appearance in a market of a new deposit-taking office of a bank or thrift organization that did not own any deposit-taking offices in that market during the previous calendar year. Banks and thrifts owned by a holding company are considered part of that same bank or thrift organization. Entry by acquisition is not included in this study because such entry does not change the number of competitors in a market.

In the study, each of the Southeast’s six states generally had similar, permissive rules on intrastate and interstate entry during 1993–99, the period for which entry was tracked. However, until 1997 Georgia had stronger restrictions on intrastate branching than the other states did. The total number of bank and thrift entries into both rural and metropolitan markets between 1993 and 1999 is compared with population and per capita income from 1992 and growth in these statistics between 1985 and 1992. The 1992 population and income statistics are expressed as ratios to the average of similar markets; growth in both population and income is expressed as differences from these measures in similar markets.

Results of the study

During the seven years studied, the average entry into the 380 rural markets in the Sixth District states was 1.18 institutions (see the table). More than one-third (138) of these markets had no entries during this period. Only two metropolitan markets in the entire sample of 54 did not have any entries. The average entry per metropolitan market, 9.07 institutions, was much higher than for rural markets during the same period.

The most important findings are that a market’s size in population and per capita income has a strong positive relationship with future entry and that a market’s recent growth in population has a moderately positive relationship with entry.

The Atlanta Fed study presents the results for metropolitan markets in terms of their demographic characteristics relative to all metropolitan areas in the Southeast because tests of statistical significance show that such comparisons are more meaningful than comparisons only to similar markets within state boundaries. In addition, some metropolitan markets cross state boundaries, making comparisons within a single state less appropriate. The study compares rural markets to the characteristics of other rural markets within the same state.

Market growth. The two measures of growth — for population and per capita income — show mixed predictive powers concerning future entry into Southeastern rural and metropolitan markets.

Population growth proves to be a significant indicator of potential entry. Rural markets where population growth exceeded the average for the state’s rural areas had an average entry of 1.40 institutions, and 69.81 percent of these markets had at least one entry. Rural markets with lower population growth, however, had an average entry of 1.02, and 59.28 percent of such markets had at least one entry.

Metropolitan markets where population growth exceeded the average for the region’s metropolitan areas had an average entry of 13.29 institutions. Metropolitan markets with lower population growth, however, had an average entry of 5.70 institutions.

For both metropolitan and rural markets, the difference in the mean entry rates between markets with above- and below-average population growth is statistically significant. Also, the correlation coefficient, a measure of the relationship between the variations of two variables, shows that the correlation between population growth and entry is both positive (high growth means a greater likelihood of entry and low growth means a lower likelihood of entry) and statistically significant for both rural and metropolitan markets.

In contrast to population growth, per capita income growth is not a significant indicator of potential entry into either rural or metropolitan Southeastern markets. There were the same average number of entrants, 1.18, into rural markets that exceeded the state’s average rural income growth as there were into rural markets where income grew less.

An average of 6.97 institutions entered metropolitan markets in which per capita income growth exceeded the regional metropolitan average. But an average of nearly twice as many, 12.14, entered metropolitan markets with less income growth. This difference in mean entry rates for metropolitan markets is statistically significant.

The correlation between income growth and entry into both rural and metropolitan markets is statistically insignificant, however.

ENTRY INTO SOUTHEASTERN BANKING MARKETS, 1993–99a
  Average Entry  
Demographic Below-Average
Markets
Above-Average
Markets
Bottom 10%
of Markets
Top 10%
of Markets
Correlation
with Entryb
Rural Banking Marketsc
Population growth (1985–92) 1.02   1.40 0.50   1.42 0.15
Per capita income growth (1985–92)   1.18d     1.18d   0.87d     0.87d –0.01e
1992 population 0.75   1.96 0.32   2.76 0.57
1992 per capita income 0.87   1.87 0.58   2.74 0.46
Metropolitan Banking Marketsf
Population growth (1985–92) 5.70 13.29   4.67g   12.17g 0.36
Per capita income growth (1985–92) 12.14g     6.97g   9.83d   13.00d –0.15e
1992 population 6.00 17.86 2.50 25.83 0.86
1992 per capita income 5.44 14.37 3.33 23.50 0.60
a    The differences in the relevant average entry statistics and the correlation coefficients are all significant at a confidence level greater than 99 percent unless otherwise noted.
b    Correlation = covariance of number of entrants per market and market demographic/(standard deviation in number of entrants per market 3 standard deviation in market demographic). Correlation has a range of –1 to +1 where –1 means perfect negative correlation and +1 means perfect positive correlation.
c    The sample consists of 380 rural markets with an average entry of 1.18 institutions. Demographics are in relation to the state rural average.
d    Difference with corresponding statistic is not significant.
e    Statistic is not significant.
f    The sample consists of 54 metropolitan markets with an average entry of 9.07 institutions. Demographics are in relation to the Southeastern metropolitan average.
g    Statistic is significant at a confidence level greater than 95 percent.

Market size. The absolute levels of both 1992 population and per capita income in rural and metropolitan markets have a much stronger predictive power than growth statistics for these measures in assessing potential for entry.

Rural markets where the population exceeded the state’s rural market average had an average entry of 1.96 institutions, and 82.96 percent of such markets had at least one entry. Where the population was less than average, the average entry was only 0.75, and 53.06 percent had at least one entry.

Metropolitan markets where the 1992 population exceeded the region’s market average had an average of 17.86 entering institutions. In metropolitan markets where the population was less than the region’s average, an average of 6.00 institutions entered.

The differences in mean entry rates are statistically significant for both rural and metropolitan samples. Also, the correlations between 1992 population size and entry into rural and metropolitan markets are significant, positive and greater than the correlations between population growth and entry.

In rural markets where 1992 per capita income exceeded the state’s average, an average of 1.87 institutions entered, and 80.51 percent had at least one entry. Where the income was less, the average entry was only 0.87, and 56.11 percent had at least one entry.

In metropolitan markets where 1992 per capita income exceeded the regional average, an average of 14.37 institutions entered. In metropolitan markets with less income, there was an average of 5.44 entrants.

The differences in mean entry rates are statistically significant for both rural and metropolitan samples. Also, there is significant and positive correlation between per capita income and entry into rural and metropolitan markets.

Ranking. Results of the study show that rural and metropolitan markets that are in the top 10 percent in population size and per capita income have a higher average number of entries than all markets that are merely above average in these measures. See the table to compare entry rates in the top and bottom 10 percent of markets. Rural and metropolitan markets that lead in population and income growth, however, do not demonstrate this pattern.

Implications for antitrust analysis

The Fed has demonstrated a realistic approach to assessing the attractiveness of banking markets for entry by considering many factors and not using a rigid formula.

By providing quantifiable results that support emphasizing some factors over others, the Atlanta Fed’s research should enhance assessments of how likely banks are to enter Southeastern banking markets. The most important findings are that a market’s size in population and per capita income has a strong positive relationship with future entry and that a market’s recent growth in population has a moderately positive relationship with entry. The study also indicates that a market’s per capita income growth does not have a significant relationship to entry and that differences in entry patterns between rural and metropolitan markets need to be recognized.