The Structural Impact of Multiple-Office Banking in New York and Virginia

• Author: Bernard Shull
• DOI: 10.1177/0003603X7802300303
• Published date: 01 September 1978
• Date: 01 September 1978
• Subject Matter: Article

THE

STRUCTURAL

IMPACT OF MULTIPLE.OFFICE

BANKING IN NEW YORK AND VIRGINIA

by

BERNARD

SHULL·

It

has frequently been argued by those opposed to multi-

ple-office banking

that

aliberalization of

state

law permitting

commercial banks to establish

offices

in distant locations; i.e.,

to extend themselves geographically by branching or through

holding companies, will result in increased concentration and

adeterioration of competition.' Sometimes states such as

Oregon, in which the two largest organizations clearly domi-

nate commercial banking,

are

cited as examples of

what

can

happen if restrictions on multiple-office banking

are

given up."

Such arguments

are

often supported by

data

showing:

(1)

that

states

permitting

unlimited branching have, on aver-

age, fewer banks

and

higher concentration than states

that

restrict

or

prohibit branching; and (2)

that

this condition

•Professor, Department of Economics,

Hunter

College of the

City University of New York.

AUTHOR'S

NOTE:

This

paper

is a revision of an earlier report sub-

mitted to the President's Commission on F'inaneial

Structure

and

Regulation

(Hunt

Commission) in 1971. The revision, which in-

cluded an updating of

data

and

further

statistical analysis, was

supported by a

Faculty

Research Award from the Research Foun-

dation of the City University of New York. Ronald Goldstein pro-

vided research assistance,

and

Barry

Putnam

and

Loree

Bernard

of

the Board of Governors of the Federal Reserve System provided

much of the data. Some of the results of this study were previously

reported in A Conference on Bank Structure and Competition, Fed-

eral Reserve Bank of Chicago, 1972.

1See, for example,

the

statement of Rober Lanzillotti before the

Committee on Banking

and

Currency, in Conflict of Federal and

State Banking Laws, House of Representatives, 88th Cong., 1st Sess.,

April, May 1963, pp, 26-29.

aSee, for example, the interesting testimony of Albert Baillargeon,

Chairman, Seattle

Trust

&Savings Bank, before the State of Wash-

ington Interim Committee on Banking, Insurance

and

Transportation,

Nov. 7, 1969.

511

512

THE

ANTITRUST

BULLETIN

also holds

for

metropolitan

areas

with similar-sized popula-

tions."

Needless to say, these arguments have not been completely

persuasive. Many economists believe

that

multiple-office bank-

ing is a way of increasing competition

and

improving bank

efficiency. Thus,

it

has also been argued

that

liberalization

of laws restricting multiple-office banking will: (1) increase

existing competition by

permitting

banks to

enter

markets

previously prohibited to them; (2) intensify potential com-

petition among banks previously separated by legal

barriers;

and (3) improve banking efficiency by (a) permitting banks

to grow

through;

geographic extension, (b) facilitating the

absorption of sub-optimal sized banks through merger

or

holding company affiliation,

and

(c) promoting a

better

geo-

graphic allocation of financial resources!

In addition, there is room

for

skepticism about the invidi-

ous

data

comparisons among states and metropolitan areas.

"States"

are

not generally considered to be markets

for

com-

mercial banks.

Important

banking services

are

generally

thought to be provided in "local" markets, frequently ap-

proximated by metropolitan

areas

(SMSA's). But, then too,

metropolitan

area

comparisons imply

that

the geographic ex-

tent of local markets is unaffected by the form of banking

organization; i.e., by whether multiple

office

or unit banking

exists. There is evidence to

support

the hypothesis

that

"local" banking markets

are

smaller in metropolitan

areas

where multiple-office banking is prohibited, so

that

eoncentra-

a

For

relevant data, see

Bernard

Shull

and

William Wiles, Recent

Changes in Banking Structure in the United States, Report of the

Federal Reserve System to the Senate Select Committee on Small

Business, March 30, 1970;

Bernard

Shull and

Paul

M. Horvitz,

"Branch Banking

and

the

Structure

of Competition," The National

Banking Review, March 1964, pp. 325-336; and "Recent Changes in

the

Structure

of Commercial Banking," Federal Reserve BuUetin,

March 1970, pp. 206-208.

4These arguments,

88

they have been supported in the literature,

are reviewed in

Jack

M. Guttentag

and

Edward

Herman, Banking

Structure and Performance, New York University,

February

1967.

See, particularly, the relevant sections of chapters 3through 6.

MULTIPLE-OFFICE

BANKING

513

tion would tend to be systematically understated in metro-

politan

areas

where

unit

banking prevailed."

The validity of cross section comparisons based on his-

torical

data

may, moreover, be irrelevant. There have been

important legal changes in recent years designed to preserve

competition in banking markets by prohibiting anticompeti-

tive bank combinations. The Bank Holding Company Act of

1956

and

the Bank Merger

Act

of 1960, both as amended in

1966, were seemingly aimed

at

preventing the

sort

of com-

petitive deterioration visualized by many opposed to multiple-

office

banking."

No doubt the continuing public controversy over the com-

petitive impact of multiple-office banking is fueled by special

interests-on

the one hand, the large banking organizations

wishing to escape

urban

compounds mainly established in the

early 20th century by

rural

dominated legislatures;

and

on

the other, by small

rural

banks wishing to escape the antic-

ipated dominance of these large urban-based banking organi-

zations.

In

fact, however, there remains unresolved economic

issues.

It

seems likely

that

the immediate effect of a liberali-

zation of multiple-office banking law will intensify competi-

tion.

But

whether

or

not

this immediate impact will

persist

over time depends on uncertain factors, including the

nature

and

impact of bank regulation.

It

is suggested

here

that

the issue cannot be resolved a

priori. An

attempt

is made to throw light on the longer-term

effects of a liberalization of multiple-office banking law

through

an

examination of the experience in the states of New

5See Shull

and

Horvitz, op. cit., pp. 328-330.

Franklin

Edwards,

"The Banking Competition Controversy," The National Banking

Review, Sept. 1965, pp. 8-11;

and

Paul

M. Horvitz, "Price Uniformity

and Banking Markets," The Appalachian Financial Review, Spring,

1969, pp. 213-219.

6

It

would

appear

that

congressional objectives, as visualized in

the late 1950's and early 1960's, have largely been attained. See

Paul

Horvitz

and

Bernard

Shull, "The

Bank

Merger Act of 1960:

A Decade After," The Antitrust Bulletin,

Winter

1971, pp.

859-889.