The Bank Merger Movement: Efficiency, Stability and Competitive Policy Concerns

• Author: Gerald A. Hanweck,Bernard Shull
• Date: 01 June 1999
• DOI: 10.1177/0003603X9904400201
• Published date: 01 June 1999
• Subject Matter: Article

The Antitrust Bulletin/Summer 1999

The bank merger movement:

efficiency, stability and

competitive policy concerns

BY GERALD A. HANWECK* and BERNARD SHULL**

1.

Introduction

251

The bank mergers of the last decade in the United States and glob-

ally, in particular, large bank mergers, have already produced

radical change in banking structure, and more is in prospect. Few

mergers are denied on competitive grounds and, under current

policy, there is little reason to believe that there will be any

important barriers to future mergers among most of the largest

banking organizations that now exist worldwide.

*Professor of Finance, School of Management, George Mason

University.

** Professor, Department of Economics, Hunter College of the City

University of New York.

AUTHORS' NOTE: We would like to acknowledge the helpful comments

of

Stephen Rhoades, and also Philip Bartholomew, Thomas Lutton, David

Nebhut, Richard Nelson and Lawrence J. White on earlier versions

of

the

article.

© 1999 by Federal Legal Publications, Inc.

252 : The antitrust bulletin

Whatever one's expectation as to the costs and benefits of this

trajectory, it is important to consider what, if any, problems are

posed

before

the current process of reorganization is completed.

If

needed, appropriate policies can then be developed to strengthen

beneficial effects and/or mitigate any harmful effects of structural

change. To this end, we undertake an evaluation

of

the changes

now in progress, both through independent analysis and available

research findings.

Section II presents a description of the merger movement and

its impact on banking structure. Section III briefly reviews current

merger policy. Section IV considers a number of issues raised by

the merger-driven structural change. Section V provides an analy-

sis of price effects. Section VI draws implications for policy.

The several federal banking agencies and the Justice Depart-

ment have authority to review all bank merger proposals under a

policy established in the 1960s. They have modified policy stan-

dards, beginning in the 1980s, on the rationale that deregulation

and market innovation have substantially made the structure of

local banking markets more competitive. Their modified policy

has resulted in approval of almost all bank mergers, including

those

of

the largest banking organizations. However, there is little

evidence that, as a result, consumers and small businesses have

gained from greater efficiency and competition. There is some

evidence that mergers, even though carefully scrutinized for anti-

competitive structural effects in local markets, have had anticom-

petitive consequences; and that the bank consolidation movement

is producing new structural configurations that tend to restrain

competition.

II. Mergers and structural change

Between

1980 and 1997 there were

over

7000

mergers

of

independent

commercial

banking

organizations.

This

long-

running merger movement has been highlighted by large bank

combinations. From 1987 through 1997, there were 171 mergers

in which each of the merging organizations held over $1 billion in

Bank merger

movement:

253

assets.'

Since 1991, there have been about 30 "megamergers"

involving organizations having $10 billion or more in assets,

with

asset

acquisitions

amounting

to

over

a

trillion

dollars

(table 1). The consolidation

of

BankAmerica and Nations-Bank,

approved by the Federal Reserve in August 1998, created a bank-

ing

organization

with

about

$580

billion

in

assets,

the

third

largest

in the

world,

and

8.1 %

of

the

total

amount

of

deposits

of

insured

depository

institutions

in

the

U.S.2 The

combination of Deutche Bank and Bankers Trust, will create the

world's largest banking organization with over $830 billion in

assets.

Principally as a result of these mergers there has been a sub-

stantial decline in the number

of

commercial banking organiza-

tions in the United States, from about 12,300 in 1980 to a little

over 7000 in 1997. National or aggregate concentration among

these institutions has increased substantially, with the share of the

largest ten organizations rising from 18.6% to about 30% over this

period. On average, however, local market concentration for com-

mercial banks alone has hardly changed at all. In 1980, the 3-bank

concentration ratio for Metropolitan Statistical Areas (MSAs)

averaged 66.8% and in 1997,65.4%. In rural (non-MSA) markets,

the 3-bank ratio averaged 89.6% in 1980, and 88.3% in 1997.

Asimilar stability is reflected in the Herfindahl-Hirschman index

(HHI) for the period. Nevertheless, when savings institutions

(thrifts) are combined (weighted at 50%) with commercial banks,

average local market concentration shows a substantial increase,

albeit from a lower level. Including thrifts, the average HHI for

MSAs increased about 20% from 1985 to 1997, from 1370 to

See

STEPHEN

RHOADES,

BANK

MERGERS

AND

INDUSTRYWIDE

STRUC-

TURE,

1980-94 (Staff Studies, Board of Governors of the Federal Reserve

System, Jan.

1996);

Lawrence Meyer, Statement Before Committee on

Banking and Financial Services, U.S. House

of

Representatives, 84

FED.

RES.

BULL.

438 (1998). "Large bank" assets acquired by other "large

banks" have risen by a factor of 5since

1989.

David Holland et al., Inter-

state Banking: The Past, Present and Future, 9FDIC

BANKING

REv., 12,

table 5

(1996).

2NationsBank Corporation, 84

FED.

REs.

BULL.

858

(1998).