Have Barriers to Entry in Retail Commercial Banking Disappeared?

DOI10.1177/0003603X9704200406
AuthorStephen A. Rhoades
Date01 December 1997
Published date01 December 1997
Subject MatterEconomic
The Antitrust Bulletin/Winter 1997
Have barriers to entry in retail
commercial banking disappeared?
BY STEPHEN A. RHOADES*
I. Introduction
997
Have barriers to entry in retail commercial banking disappeared?
The
answer
is
both
yes
(substantially)
and no
depending
on
whether one is referring to legal or market-based barriers to entry.
Legal barriers to entry, at least by established firms, have substan-
tially disappeared as a result of the liberalization
of
state and fed-
eral
laws
with
respect
to
geographic
expansion
by
banking
organizations.IThe states began the liberalization in the 1980s as
many
of
them
passed
laws to allow
statewide
branching
and
permit interstate banking via bank holding companies, typically
on a reciprocal basis with other states, often through regional
*Federal Reserve Board, Washington, DC.
AUTHOR'S
NOTE: The views expressed herein are the author's and do not
necessarily reflect the views
of
the Federal Reserve Board. I extend thanks
to Dean Amel and Myron Kwast
for
useful comments on the article.
New firms must still obtain a state or federal charter to operate,
and some states continue to have some restrictions on branching, such as
home-office protection laws.
©1998 by Federal Legal Publications. Inc.
998
The antitrust bulletin
compacts.> The liberalization of geographic expansion opportuni-
ties culminated with passage of the Riegle-Neal Act in 1994. 3
This
legislation permitted interstate banking
via
bank holding
companies effective September 29, 1995 and via branches effec-
tive June 1,1997.
Although it is clear that legal barriers to entry into local retail
banking markets have declined, it is a mistake to assume that bar-
riers to entry generally have disappeared in banking. Indeed, a
key thesis of this article is that "switching costs," which are a bar-
rier to entry, are unusually high in retail banking. Both economic
theory and empirical evidence suggest that market-based barriers
to entry
continue
to be significant in retail banking. Thus, to
assume that barriers to entry have generally disappeared in retail
banking would give rise to a misguided competition policy toward
bank
mergers, whereby any possible public benefit from bank
mergers in the aggregate may be offset by adverse effects on com-
petition. The effects of such a policy would be substantial and
widespread because the industry continues to undergo an unprece-
dented merger movement that is likely to continue for some time.s
It is notable that it is possible to have an extraordinary consolida-
tion (resulting in a maximum of only five or six remaining bank-
ing organizations in any local market)
of
the industry under current
merger guidelines and standards.> Thus, even if one believes that
2
Reduction
of
restrictions on
geographic
expansion
by the
states
is
described
in
AMEL,
STATE
LAWS
AFFEcrING
THE
GEOGRAPHIC
EXPANSION
OF
COMMERCIAL
BANKS
(Working
Paper,
Federal
Reserve
Board,
Sept.
1993)
and
Savage,
Interstate Banking: AStatus Report, 79 FED. RES.
BULL.
1075
(1993).
The
Riegle-Neal
Interstate
Banking
and
Branching
Efficiency
Act
of
1994,
Pub.
L. No. 103-328, 108 Stat.
2338
(codified
in
scattered
sec-
tions
of
titles
7
and
12
of
the
United
States
Code).
4
RHOADES,
BANK
MERGERS
AND
INDUSTRY
WIDE
STRUcrURE,
1980-94
(Staff
Study
No. 169, Federal
Reserve
Board,
Jan. 1996).
Results
of
simulations
of
all
possible
horizontal
(in-market)
bank
mergers
under
current
numerical
guidelines,
without
accounting
for
"mit-
igating"
factors
that
would
aIlow
even
more
mergers,
are
presented
in
Rhoades,
Consolidation
of
the Banking Industry and the Merger Guide-
lines, 37
ANTITRUST
BULL.
689
(1992).

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