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december
business review
FEDERAL RESERVE RANK of PHILADELPHIA
Changing
Pennsylvania's
Branching Laws:
An Economic Analysi
1973
ABOUT THE STUDY . . .
Over the past decade there has been a
dramatic change in the banking climate
throughout the nation. Banks are entering
new financial arenas via holding companies
and expanding their geographical limits as
more states ease their restrictions on branch
ing. The forces molding this new banking
climate are being felt in Pennsylvania to the
extent that some change in the Common
wealth's banking laws may be in the offing.
A change in the law with respect to
holding companies or branching can have
a major impact on the future banking struc
ture of the Commonwealth. This in turn
can influence how well the banking indus
try meets the future needs of the public.
What kind of a change is likely to provide
the banking services Pennsylvanians will be
demanding over the next few decades, in
an efficient fashion? This is a tough ques
tion for those charged with making the
decision. It is also an important question
for institutions, such as the Federal Reserve
System, charged with protecting the public
interest in a number of banking activities.
I believe the Federal Reserve Bank of
Philadelphia has some responsibility to pro
vide whatever objective information it can
on this question for two reasons: first, to
help those in Harrisburg who will have to
make the important decision about chang
ing Pennsylvania's banking laws; second, to
emphasize the public's interest in a respon
sive banking system. Thus, in cooperation
with the Federal Reserve Bank of Cleveland,
whose district includes the western onethird of Pennsylvania, the Department of
Research has conducted this study to deter
mine the economic implications of possible
changes in Pennsylvania's current branch
ing law.
The study concludes that on econom ic
grounds any liberalization of the contigu
ous county branching law would result in
a more competitive and flexible banking
environment for Pennsylvania. On balance,
statewide branching would bring some
what more competition than either state
wide holding companies or a district
branching plan. I believe these findings
merit close attention because fostering such
an environment will become increasingly
important in an economy characterized by
rapidly changing financial demands and
developments.
David P. Eastburn
President
Federal Reserve Bank of Philadelphia
BUSINESS REVIEW is prod uced in the Department of Research. Ronald B. Williams is Art Director and Manager,
Graphic Services. The authors will be glad to receive comments on their articles.
Requests for additional copies should be addressed to Public Information, Federal Reserve Bank of Philadelphia,
Philadelphia, Pennsylvania 19101.
Changing
Pennsylvania's
Branching Laws:
An Economic Analysis*
Bankers are a cool, calm, and collected
crew . . . until someone mentions the pos
sibility of changing branch banking laws.
Then tempers on all sides of the issue flare
—and understandably so. To a banker, tin
kering with branch banking laws isn't simply
a question of personal convenience or pub
lic interest. The structure of the industry is
vital to the way he competes for business,
to his chances for success or failure, and
above all, to his profits.
Liberalized
branching offers a banker both the chance
to move into new markets and the risk that
others will move into his current domain.
* This summary was prepared by Ronald D. Watson.
It is based on the research work of Jerome C. Darnell,
Cynthia A. Glassman, Marylin C. Mathis, Donald J.
Mullineaux, George S. Oldfield, and Ronald D. Watson.
It's a chance to grow and prosper— or to
become overextended.
But what about Pennsylvanians who must
use banking services? Which banking struc
ture is best for the public? They have seen
local banks merging into larger regional
institutions or forming one-bank holding
companies. They have heard about the
Hunt Commission Report1 and watched new
branching laws enacted in New Jersey. These
can't help but cause Pennsylvanians to won
der: "Is this state's present banking structure
the right one?" Currently, the Common
wealth's banks can branch in their home
county and into any county that touches its
border. As a result, Pennsylvania is classed
as a limited branching state. Multibank hold
1 Presidential Commission on Financial Structure and
Regulation, Report, December 1971.
DECEMBER 1972
BUSINESS REVIEW
among the six neighboring states, still retains
a unit banking structure, forbidding banks
to have branches (see Map).
To liberalize or not to liberalize the bank
ing structure law: Lawmakers in Harrisburg-—
who ultimately must answer this question—
will undoubtedly face a barrage of claims
and counterclaims. Advocates of liberalized
branching tout its competitive benefits. Op
ponents warn that wide area branching
spawns harmful concentration of banking
resources. Other debates center on the
tradeoffs between improvements in the
range of services under branch banking and
the responsiveness of independent bankers
to the unique needs of their local com
munities (see Box).
ing companies are illegal, but one-bank
holding companies2 are not.
Pennsylvania's banking law is not particu
larly restrictive, but only one neighbor
ing state has a tighter branching law. In
Delaware and Maryland banks can branch
statewide, and in New York, New Jersey, and
Ohio they can form multibank holding
companies statewide. Only West Virginia,
2 One-bank holding companies are businesses which
own a controlling interest in a single commercial bank.
Multibank holding companies control more than one
bank. Multibank holding companies differ from
branch bank systems in that the holding company
affiliate banks retain their former identity and can
operate with a degree of autonomy that branches
seldom have.
TRADITIONAL ARGUMENTS ON LIBERALIZING BRANCHING
Against Liberalization
Favoring Liberalization
1. More branching authority will en
able the big metropolitan banks to
move farther into the countryside
through the purchase of smaller
banks. The result will be domina
tion of the industry by the big banks
and less competition.
1. Allowing banks to enter new mar
kets will result in more competition
and more choices for purchasers of
banking services.
2. Local banks can offer a personal,
area-oriented service that a branch
of an outside bank can't match.
They understand the people and the
region.
2. Wider branching areas will stimu
late economic development. Large
branching systems improve the mo
bility and allocation of funds and
larger banks are more able to ac
commodate business lending needs.
3. Large banks use their branch sys
tems as a source of funds for serving
big business customers.
3. Branch banks are more efficient to
operate than unit banks.
4. Political boundary limits for branch
ing (such as county lines) are poor
a p p ro xim a tio n s to co m m e rcia l
trading markets.
4
FEDERAL RESERVE BANK OF PHILADELPHIA
5
BUSINESS REVIEW
DECEMBER 1972
The arguments are linked to three basic
themes:
1. What does more branching mean
for bank concentration and com
petition?
2. Would a different structure entail
higher or lower operating costs?
3. Would a different banking structure
spur or impede economic develop
ment?
Research done by the staff of the Federal
Reserve Bank of Philadelphia suggests three
main conclusions:
1. Liberalized branch banking would in
tensify banking competition. Most
banking markets within Pennsylvania
would be served by more institutions,
and this would improve customers'
choices and their convenience. Fur
thermore, the concentration of bank
ing resources in the hands of the
largest banks would be held in check
as long as the bank regulators con
tinue to interpret the antitrust laws
as they do now.
2. No case can be made either for or
against liberalized branching on the
basis of the comparative costs of
branch and unit banking. For banks
with the financial and managerial re
sources to take advantage of new
branching territory under a liberalized
law, there are no significant cost dif
ferences between unit and branch
banks.
3. While economic theory points to ex
panded branching having some posi
tive influence on a state's growth, the
statistics of economic development
show no measurable effect.
In short, economic development and op
erating cost factors turn out to be unimpor
tant in deciding whether to change the law.
However, competition would be intensified
without increasing banking market concen
tration, and this benefit could be achieved
without offsetting costs. Because economics
puts great stress on the benefits of compe
tition and choice in the marketplace, an
economic analysis of the costs and benefits
of expanded branching makes a substantial
case for liberalizing the law.
These
are
all
econom ic
conclusions.
There may be other factors influencing the
decision, either pro or con, including po
litical considerations. Such noneconomic
factors may be quite important, but they
have not been considered here.
WILL BROADER BRANCHING AUTHORITY
LEAD TO A MORE OR LESS COMPETITIVE
BANKING SYSTEM?
Legislators, bank regulators, and the courts
must periodically implement or revise the
rules controlling bank expansion, but it's dif
ficult to predict the long-run consequences
of some of these decisions. In an effort to
forecast the outcome of possible changes in
the laws, we employed a computer simula
tion model of Pennsylvania's banking in
dustry to mirror the process of bank expan
sion." We projected current patterns of
branch banking and merging activity into
the 1980s to examine the potential impact
of revamping Pennsylvania's laws. We also
tested the effect that both stricter and more
■
‘ Simulation is a technique for conducting experi
ments on a computer. It is based on the use of a
mathematical model that describes the behavior of an
economic system over time. In this instance, the eco
nomic system modeled is Pennsylvania's banking
structure as it evolves over the next decade. Precise
descriptions of each bank's financial and managerial
characteristics and a profile of the economy of each
banking market are used to form projections of the
evolution of the state's banking industry. The projec
tions are all based on the assumption that mergers and
c/e novo branching decisions in the future will be
made on essentially the same criteria as they were in
the recent past. If the forces governing bank expan
sion change, then the results of the simulation will
have to be interpreted with greater care. However,
it is unlikely that the fundamental determinants of
branching will change so dramatically that the direc
tions or relative rankings of the outcomes we have
projected will undergo much change.
6
FEDERAL RESERVE BANK OF PHILADELPHIA
lenient supervision of mergers might have
on the state's banking structure. In each
experimental test, the analysis focused on
likely changes in the structure of each of
the state's local banking markets as well as
the state as a whole.
Defining Competition. Everyone wants
to create the ''ideal'' banking structure
for the Commonwealth, but defining this
"ideal" is a slippery business. No one knows
precisely what contributes most to the pub
lic good. However, high quality service, low
costs, and a wider choice of banking alter
natives certainly ought to lead the list.
It is generally presumed in economics
that the more competitive a market is, the
more closely it aproaches the "ideal." This
notion applies to banking just as it does to
any other form of commercial endeavor.
Competition between banks will cause each
of them to search for ways of convincing
customers that the services it provides are
somehow superior to those offered by other
banks. A bank can reduce service charges,
lower its lending rates, increase payments
for deposits, and provide additional service
— all to the benefit of its customers. As
markets become more competitive, a bank's
opportunities for making more than a "nor
mal" return are reduced because its cus
tomers will have more or better alternatives
for purchasing those services. The pressure
on profits that results from offering a better
quality product may also force more careful
cost control within each bank. The result
would be more or better financial service
for each dollar spent— a benefit to the state
as a whole.
One event that usually stimulates com
petition is the entry of an additional com
petitor (or at least a new competitor) into
a market. If the entrant is large and innova
tive— common characteristics of many banks
venturing into new banking markets— it
should possess an above-average ability to
compete. Those who oppose liberalized
branching authority, however, have some
times argued the opposite. They say that
banks will enter new markets by purchasing
existing banks and, because of their lack of
familiarity with the region, will offer services
inferior to those formerly available from the
independent bank.
Arguments like these seem to sell the
average bank customer short. If an outside
bank enters a market by purchasing a local
bank, the service mix it offers could very
well differ from that of the acquired bank.
However, this just gives bank customers in
the area the choice of a "new package" of
products or the "old package" as offered
by other banks in the region. Customers
can then choose the services they prefer,
and the banks that offer those services will
prosper. If personal service from a local
institution that knows its market and the
people who live there is what depositors
and borrowers want, they will not do busi
ness with the new branch bank. Conversely,
if the new branch prospers or is able to
attract business from other institutions, that
would be clear evidence that bank cus
tomers in that market want the services
offered by the entering bank.
Competition isn't always strictly a ques
tion of numbers of competitors. There are
markets in which three aggressive banks
generate more competition than exists in
other markets having ten less aggressive
banks. Nevertheless, the number of banks
and the share of the market that each com
mands are the best measures available for
assessing the probable intensity of competi
tion between banks. Consequently, several
readily obtainable measures of banking con
centration are employed to judge the qual
ity of bank competition: number of banks
serving a market,4 three-bank concentration
ratio, and numbers-equivalent (see Box).
4 In Pennsylvania the most relevant area for measur
ing competition is the local banking market even
though the largest banks compete for customers in a
national market. We have defined 55 bank markets
for this state.
7
DECEMBER 1972
BUSINESS REVIEW
MEASURING MARKET CONCENTRATION
Lacking hard-and-fast guidelines on the measurement of competition, regula
tors must use their judgment to cultivate the benefits of competition. Two com
mon statistical measures for assessing competition are used to compare the results
of the simulation's projected market structures. They are the "number of banks
operating in a market" and the "three-bank concentration ratio." A third index of
market structure is the "numbers-equivalent," a measure that has only recently
been adopted for judging the concentration of banking markets.
Number of Banks. "Banks serving a market" is the total number of commer
cial banks having at least one office in the market. This is a relevant indicator of
competition because it describes the number of independent banks involved in
establishing prices and services in the market and the number of choices cus
tomers face in buying those services. The more banks there are in the market, the
greater the potential for competition. A bank need not be headquartered in a
market to be a force there. Each bank operating branches in a market is a com
petitive factor which other banks must consider when pricing their services.
Concentration Ratio. A "three-bank concentration ratio" is the total market
share of the three largest banks operating in a market. The higher the market share
of the top banks, the more they dominate the market, and market domination
normally represents an anticompetitive force. In general, competition should be
stimulated by policies which cause a reduction in the concentration ratio of each
local market.
Numbers-Equivalent. The new statistic, the "numbers-equivalent," is a numerical
index of seller concentration in a market. It is designed to represent the num
ber of hypothetical banks, each of the same size, that would generate the same
degree of concentration that currently exists in the market. This measure attempts
to capture information not only on the number of banks operating in the market
but on the market share of each competitor. For instance, a market in which a
single bank has a monopoly would have a numbers-equivalent of 1. Likewise, if
five banks controlled equal shares of a market, its numbers-equivalent would be 5.
However, if one of these five banks held a dominant market share (such as 90
percent), the numbers-equivalent would be approximately 1.6. This would indicate
that the market concentration is greater than a situation in which two equal-sized
banks operate, but less than a complete monopoly. The higher the numbers-equiv
alent for a market, the less concentrated the market is and the better off bank
customers are.
8
FEDERAL RESERVE BANK OF PHILADELPHIA
This study projects differences in the
state's banking structure under four branch
ing laws. They represent the general kinds
of choices open to Pennsylvanians for liber
alizing their state's branching laws.
The first choice represents "no change"—
sticking with the present contiguous county
branching law. It's important to know ap
proximately what the state's banking struc
ture would be like in the future under the
status quo. Without this information it
would be impossible to judge whether an
alternative branching code would produce
a structure different enough to warrant
altering the law.
The second legal alternative considered is
branching within banking districts. For these
experiments Pennsylvania is divided into two
regions, an eastern and a western district,
and banks are given the hypothetical oppor
tunity to branch anywhere within their home
district.
The third choice is multibank holding
companies. The law selected for testing is
statewide multibank holding companies, but
each member of the holding company is
restricted to its former contiguous county
limits for further branching and merging;
The final option explored is statewide
branching in which banks would be free to
expand into new markets, subject only to the
limits of their own resources. The bank
market structures for these alternatives are
projected under the assumption that regu
lators use a strict set of guidelines for judging
proposed mergers and that the intensity
of merger and branching activity doesn't
change dramatically. If there were a flurry
of merger or c/e novo branching applications
following a change in the law, the market
structures described in these projections
might occur closer to '1980 than 1982, as
we are projecting. None of the laws ana
lyzed considers the possibility of including
a home-office protection clause, since such
restrictions only serve to thwart the benefits
of competition (see Box).
A Decade from Now: The Options Com
pared. Looking at the statewide structure
of the banking industry a decade hence, the
picture is one of higher concentration.
Whether the Commonwealth stays with con
tiguous county branching or selects a more
liberal branching law, there will likely be
fewer banks in the state— probably around
330 to 340 rather than the current total of
about 450. Of necessity, fewer competitors
mean an increase in banking concentration
(see Figure 1).
However, statistics on concentration for
the state as a whole have little meaning for
competition except for the largest banks.
It's the local banking markets that represent
the most relevant area for analyzing inter
bank competition and the number of bank
ing choices open to the customer. In these
markets the story is quite different. The
average banking market will likely be served
by more rather than fewer banks, and the
statistics point to more competition rather
than less. Of the four possible laws, the one
that would produce the market structures
that are least concentrated would be state
wide branch banking. The number of com
petitors in the average market and the
numbers-equivalent are highest under that
law, and the concentration ratio is lowest.
However, any of the four laws would prob
ably create a more competitive structure.
Even a continuation of the contiguous
county branching law would promise more
competitors and less banking concentration.
It's a question of degree rather than direc
tion.
Not every banking market achieves its
most competitive structure under the same
banking law (see Figures 2, 3, 4). In the
state's two largest markets, Philadelphia and
Pittsburgh, the most competitive structures
would evolve under a statewide branching
law. Neither district branching nor multi
bank holding companies would reduce con9
BUSINESS REVIEW
DECEMBER 1972
FIGURE 1
PROJECTIONS OF BANKING MARKET STRUCTURE
I. STATEWIDE STRUCTURE
II. AVERAGE MARKET STRUCTURE
CONTIGUOUS COUNTY BRANCHING
V/
STATEWIDE HOLDING COMPANIES
DISTRICTWIDE BRANCHING
STATEWIDE BRANCH BANKING
10
FEDERAL RESERVE BANK OF PHILADELPHIA
HOME-OFFICE PROTECTION
"Home-office protection" statutes prohibit banks from establishing new branches
in communities already served by other banks. These laws attempt to shield the
the state from the overbanking that might result when too many banks try to
share in servicing an area which has limited financial resources. Many people
feel that the stability of banking services in such areas is best maintained by
preventing unlimited branching into new markets and the destructive compe
tition which might accompany it.
New Jersey presently operates under a home-office protection statute. Banks
are prohibited from branching de novo into any community in which another bank
has its home office or into any town of less than 7500 population which is served
by a branch office of another bank. However, a bill which would gradually elim
inate most of the home-office protection rules is currently being considered by
New Jersey's lawmakers.
Home-office protection is a questionable way to promote a community's best
interests. While it may shelter a few banks that currently enjoy protected
market positions, it denies the benefits of interbank competition to the people
living in these markets. The fact that a bank located elsewhere wishes to enter
such a market is prima facie evidence that the potential entrant feels it can capture
enough of the market's business to make a profit. It will get this business only by
offering a better banking product than that presently available from the existing
bank. In short, home-office protection rules, by thwarting competition, work con
trary to the best interests of the banking public.
centration as effectively as a statewide limit
on branching. The secondary metropolitan
markets of the state, however, would be
more competitive under a law providing for
multibank holding companies. The Harris
burg and Reading area markets, for example,
would wind up with more banking alterna
tives, lower concentration ratios, and higher
numbers-equivalents under a m u ltib an k
holding company law than under statewide
or district branching. Most of the state's
smaller, nonmetropolitan markets develop
the most competitive structure under a state
wide branching system. The Bedford mar
ket and the Millersburg-Lykens area market,
for example, demonstrate the impact of the
alternative banking statutes on this class of
banking market.
More Competition-A Matter of Degree.
Projections for the early 1980s offer the hope
that consumers of banking services will see
more competition in Pennsylvania regardless
of which banking law is ultimately selected.
Another decade of contiguous county
branching seems certain to produce greater
competition in individual markets without
creating problems of excessive market con
centration.
However, a change in the branching law
to provide for either district branching,
multibank holding companies, or statewide
branching has no predictable competitive
costs and appears to offer an opportunity
for improving the competitive climate of
many of the state's banking markets. Of
the three alternatives to the present law,
11
BUSINESS REVIEW
DECEMBER 1972
FIGURE 2
PROJECTIONS OF BANKING MARKET STRUCTURE
1 PHILADELPHIA MARKET
.
Number of Banks
3-Bank Concentration Ratio
Numbers - Equivalent
I///
%
_
J_____ J ____
10
/ '■’I
/
1971
1982
1971
1982
1971
1982
2 PITTSBURGH MARKET
.
1971
1982
1982
1971
1971
1982
CONTIGUOUS COUNTY BRANCHING
STATEWIDE HOLDING COMPANIES
DISTRICTWIDE BRANCHING
STATEWIDE BRANCH BANKING
12
FEDERAL RESERVE BANK OF PHILADELPHIA
FIGURE 3
PROJECTIONS OF BANKING MARKET STRUCTURE
3 HARRISBURG MARKET
.
Number of Banks
3-Bank Concentration Ratio
.75
4. READING MARKET
13
Numbers - Equivalent
BUSINESS REVIEW
DECEMBER 1972
FIGURE 4
PROJECTIONS OF BANKING MARKET STRUCTURE
5 MILLERSBURG - LYKENS MARKET
.
Number of Banks
3-Bank Concentration Ratio
Numbers - Equivalent
20
15
10
1971
1982
6 BEDFORD MARKET
.
14
1971
1982
FEDERAL RESERVE BANK OF PHILADELPHIA
statewide branching offers the greatest po
tential for reaping the benefits of increased
competition. The choice between district
branching and multibank holding companies
is less clear. The selection of one over the
other would not be material in terms of
projected competition.
WHICH BANKING STRUCTURE IS
CHEAPEST TO OPERATE?
Organizational efficiency is important to
a society that can legislate the form of bank
ing organization it wants. If branch banks
produce services at a lower cost to the
citizens of Pennsylvania than unit banks or
multibank holding companies, they should
be encouraged (as long as no other costs
are involved). Our analysis of this question
relies on measurements of the relationship
between a bank's operating expenses and
either the dollar volume of services pro
duced (total revenue) or the number of
accounts serviced.
An accurate analysis of bank costs re
quires distinguishing between two separate
kinds of cost relationships: economics of
scale and diseconom ies of branch banking.
Economies of scale occur when costs in
crease less than proportionately as output
increases. That is, other things being equal,
if there are economies of scale, large
banks will be more efficient than small
ones. Since branching is one way banks can
grow larger, the existence of economies of
scale might imply that branching should be
encouraged. But that conclusion ignores
such "diseconomies" as the costs of over
head, organization, and transportation as
sociated with additional banking offices.
Investigating the efficiencv of branch banks
relative to unit banks requires weighing the
benefits from economies of scale and the
costs resulting from the diseconomies of
branching.
Implications of the Cost Comparisons.
Our studies uncovered some evidence of
economies of scale, but only for relatively
small banks. Once a bank's assets reach $50
million, increasing the size of the operation
will not lead to lower unit costs.
Little evidence could be found to support
the claim commonly made by proponents
of liberalized branching that branch systems
operate more efficiently than a collection of
unit banks with the same number of offices
(see Table). However, these cost compari
sons fail to consider one of branch banking's
most important forms of service output—
convenience of location— because it is in
tangible. Multiple office locations reduce the
traveling time of the average customer and
benefit those using the bank. Therefore, the
comparison of unit and branch bank costs
and outputs requires that we assume that
competition forces unit banks to supply
some offsetting services to compensate for
their lower convenience.
The cost disadvantages associated with
branching seem to dwindle as the branching
system increases in size— possibly because
of automated control processes. No signifi
cant diseconomies were found when the
costs of large branch banks (over $100
million) were compared to those of unit
banks. As a result, we must conclude that,
even without their "convenience" output,
large branch systems are neither more nor
less costly to operate than equal-sized col
lections of unit banks.
Affiliation with a holding company seems
to have opposite effects on the costs of
unit and branch banks. When a unit bank
joins a holding company, there is a tendency
toward lower costs, but it is not significant.
But, when a branch bank joins a holding
company, there is a significant increase in
the branch bank's costs, presumably because
of duplication of functions.
These resu lts suggest that expanded
branching laws would have different effects
on bank costs depending on the size of the
banks involved. If large banks expand, costs
would not increase significantly. This result
15
BUSINESS REVIEW
DECEMBER 1972
ECONOMIES OF SCALE AND DISECONOMIES OF BRANCHING
A.
Output Measured as Total Revenue
BRANCH BANKS
UNIT BANKS
Significant
Economies
of Scale
Significant
Economies
of Scale
0-5
No
__ *
5-25
No
Yes
25-100
—
No
over 100
—
No
Yes
Yes
No
No
Yes
No
No
(000,000)
$
Significant
Diseconomies
of Branching
—
Output Measured as Numbers of Accounts
$
0-50
over 50
Yes
—
*A blank cell indicates that too few observations were available to estimate the cost function
in this size classification.
is quite important in evaluating the eco
nomic costs of liberalized branching. In
most cases the branching opportunities of
small banks are limited by their financial
resources rather than by branch banking
laws. Therefore, any branching they are
likely to undertake in the future will be
the same regardless of whether the law is
altered.
It's the slate's larger banks that have the
capacity to expand beyond the contiguous
county limits. Because of their financial
strength and ability to manage far-flung
branch systems, it is these banks that would
use the new limits of a wider branching law.
Moreover, since the larger branch systems
don't experience the same branching dis
economies prevalent among small branch
banks, there would be no additional cost
associated with liberalized branching.
IS THERE ANY RELATIONSHIP BETWEEN
BANKING STRUCTURE AND ECONOMIC
GROWTH? COULD PENNSYLVANIA EX
PLOIT THIS GROWTH BY ALTERING ITS
BANKING STRUCTURE?
The answer is that there probably is an
indirect relationship, but that it can't be
exploited in any meaningful way/’
On the one hand, we might expect liber
alized branching to spur economic deveiopr* For a more detailed discussion of this topic, see
Jerome C. Darnell, “ Does Banking Structure Spur Eco
nomic Growth?'' Business Review of the Federal
Reserve Bank of Philadelphia, November 1972, pp.
14-22.
16
FEDERAL RESERVE BANK OF PHILADELPHIA
merit because extended branching facilitates
the movement of capital into areas of the
economy showing the greatest need. A
branch of a large bank can tap the resources
and lending talent of the parent bank, there
by making money available to its community
that couldn't be generated locally. Large
banks normally make more loans per dollar
of deposits and are better equipped to bear
the risks of business lending. Therefore, the
creation of larger banks through branch
expansion should produce more loan funds
for the state.
On the other hand, several factors tend to
mitigate the impact that liberalized branch
ing could have on economic growth. First,
the banking system has already developed
ways to improve the mobility of capital in
the economy. Small banks can sometimes
use loan participations from large corres
pondent banks to obtain loan funds they
can't provide internally. Furthermore, the
Federal funds market0 allows banks to sell
excess reserve balances to institutions cur
rently facing expanded lending opportuni
ties. Finally, it's clear that capital allocation
isn't the only factor that affects the state's
development. Economic resources, the pres
ent state of development, the skills of the
work force, climate, and tax structure will
all be important in attracting new develop
ment and retaining current business. A
state's banking structure can hardly offset
serious deficiencies in these other essential
ingredients.
state's banking structure to its economic
development can be seen if we look at some
statistical comparisons. Consider some state
wide comparisons of common economic
indicators grouped according to whether a
state's banking structure is unit, limited
branching, or statewide branching. If bank
ing structure has a measurable impact on a
state's economic growth, these statistics
should reflect that influence.
Four representative measures of personal
wealth are compared (see Figure 5). Per
capita personal income in 1971 and the per
centage growth in total personal income
between 1960 and 1970 both suggest that
statewide branching is the banking structure
common to our most prosperous states.
However, changes over the last decade in
per capita personal income favor unit bank
ing while the percentage change in median
family income during the same period puts
limited branching on top. Not only are the
results inconclusive, but the differences in
these indices among the banking structures
being compared aren't large enough to be
statistically meaningful for policy conclu
sions.
Changes in population should reflect
migrations of labor as job opportunities
develop in areas experiencing economic
growth. During the 1960s population in
states having statewide branch banking grew
more rapidly than in those with other
branching laws. While the relationship is
significant, it would be difficult to conclude
from this single bit of evidence that a state
wide branching law can create economic
growth. Additional supporting evidence
would be needed to establish the relation
ship. The final statistic examined is the
percentage change in nonagricultural em
ployment between 1961 and 1971. Once
again the differences are not substantial
enough to be meaningful. These compari
sons suggest a tenuous link between a state's
branching structure and its economic de-
What the Numbers Show. The difficulty
of trying to estimate the importance of a
“ The Federal funds market is the financial market
through which banks buy and sell excess reserve
balances. Banks that supply funds to this market usually
do so either because they don't wish to make addi
tional loans to their own customers or there is no
demand for additional loans, or as a temporary ad
justment to their portfolio. Currently small banks
are the major net suppliers in the Federal funds
market.
17
BUSINESS REVIEW
DECEMBER 1972
FIGURE 5
MIXED RESULTS FROM GROWTH INDICATORS
UNIT BANKING STATES
LIMITED BRANCHING STATES
STATEWIDE BRANCHING STATES
a) Per Capita Personal Income: 1971
b) Percentage Change in Total
Personal Income: 1961-1971
90.0
c) Percentage Change in Per Capita
Personal Income: 1961-1971
50
52.2
d) Percentage Change in Median
Family Income: 1959-71
e) Percentage Change in Population:
1960-70
f) Percentage Change in
Non-Agricultural Employment:
1961-71
18
FEDERAL RESERVE BANK OF PHILADELPHIA
than they would be under the contiguous
county law, and competition would be stim
ulated. Any analysis of the costs and bene
fits of extended branching authority must
cope with the cost that the state incurs if
the branching law selected does less to
stimulate competition than another option.
That opportunity cost is paid in terms of
reduced customer choice and lack of service
in outlying areas. Such a cost is intangible,
but it is nonetheless real.
Any of the expanded branching laws dis
cussed offers more competitive banking
markets in the future than the present con
tiguous county branching law. However, the
average market achieves its most competitive
structure under the statewide branching law.
Statewide branching is the least restricted
organizational structure, and it is a more
efficient form of organization than multi
bank holding companies.
While multibank holding companies seem
likely to create the most competitive market
structure in the state's secondary metropoli
tan areas, the primary attraction of this form
of organization is a noneconom ic one.
Multibank holding companies preserve some
degree of local control of an area's banking
industry. In a holding company more deci
sions would be made at the local level, be
cause more of the affiliate bank's top
management is normally retained in a hold
ing company acquisition than in a merger.
The local bank's identity would also be pre
served. Finally, a bank that affiliated with
a multibank holding company would prob
ably experience less disruption of its operat
ing procedures than if it merged outright
with a larger bank.
Districtwide branching does more to fos
ter competition than contiguous county
branching, but the only advantage it seems
to offer over multibank holding companies
or statewide branching is gradualism. In
addition, establishing boundaries for the
branching districts which satisfied all inter
ested parties might be very difficult.
velopment, but there is nothing on which to
build a case one way or the other. The num
bers also fail to reflect the possibility that
changes in banking structure could influence
the development of local areas within the
state. If a community is not being adequate
ly served by the banks located there, liberal
ized branching offers the prospect of
increasing the number of competitors and
getting new blood into that area.
Recap. An analysis of factors relevant to
economic development leaves little on
which to choose sides in the branch bank
ing controversy. There is no empirical sup
port for the contention that one type of
banking structure is likely to stimulate sub
stantially faster economic development in
the state than another. Similarly, while eco
nomic theory points toward statewide
branching as the structure most likely to
provide the maximum capital mobility and
entry of branch systems to less-developed
markets, banking structure can't be expected
to be the catalyst which sets off an economic
chain reaction. Other more basic requisites
for economic growth must also be present.
Conversely, the risk of economic harm re
sulting from a liberalization of the branching
law is virtually nil. Furthermore, it is possible
that expanded branching could benefit some
local areas in the state where the banking
system currently is not equipped to handle
the need for funds. By facilitating new entry
into these markets, competition might be
sharpened and local development spurred.
WHICH OPTION?
While the evidence regarding economic
growth and banking costs supports neither
the case for liberalized branching nor the
status quo, projections of competition make
a strong economic argument in favor of
expanded branching authority. If the present
law is liberalized, it's probable that most
markets would be served by more banks,
those markets would be less concentrated
19
DECEMBER 1972
BUSINESS REVIEW
competition tips the scale toward statewide
branch banking, with holding companies a
close second. Adoption of either alternative
holds the potential for providing the state
with a flexible and competitive banking
system equipped to meet the needs of a
rapidly changing economy.
■
The econom ics of branch banking point
to the desirability of liberalizing Pennsyl
vania's laws. A move toward liberalized
branching costs very little and would prob
ably enhance the competitiveness of the
state's banking industry. The importance
that this analysis assigns to the benefits of
WHAT ABOUT THE SMALL BANK?
Many people have expressed the apprehension that small, locally owned and
operated banks would be doomed by liberalized branching laws. No doubt, many
of the state's smaller institutions will be absorbed over the next decade. However,
three factors should be considered in putting this loss in perspective. First, any
small bank that is an attractive merger partner is vulnerable under the current
branching law. We project that over 100 mergers will occur in the next ten
years under the present branching law. A shift to liberalized branching might lead
to a flurry of merging activity, but when the dust settled only a few more banks
would have been absorbed under the new rules than under the current ones.
Wider branching authority would simply offer additional choices to expansionminded banks.
Second, the small bank's chances for survival might actually be improved. Wider
branching authority would give expansion-minded banks the chance to acquire
larger partners through merger than they can at present. This results from their
ability to branch into markets which are beyond their current area of competi
tive influence. Moreover, expanded branching bolsters the bargaining power of
banks which are willing to be acquired, because it substantially increases the
number of potential bidders in the acquisition market. This improves the chances
that the acquired bank will command a price that benefits its shareholders.
Finally, small banks offering a competitively-priced array of services that meet
the needs of their market will be successful regardless of the branching law under
which they operate. If a bank—small or large— is unable to compete effectively,
the interests of its shareholders and its community might be best served by absorp
tion into another institution.
20
FEDERAL RESERVE BANK OF PHILADELPHIA
APPENDIX
SUMMARIES OF SUPPORTING RESEARCH PAPERS
"Changing Pennsylvania's Branching Laws: An Economic Analysis" is a consensus of the findings
of several technical studies conducted by economists in the Department of Research. These studies
range from descriptive papers on Pennsylvania banking to highly technical econometric pieces.
Brief summaries of these studies are presented below. Complete copies are available upon re
quest. Please address requests to the Department of Research, Federal Reserve Bank of Philadel
phia, 925 Chestnut Street, Philadelphia, Pennsylvania 19101.
PENNSYLVANIA'S CHECKERED BANKING HERITAGE
By Marylin C. Mathis
Legislation on banking structure in Pennsylvania dates from 1793 when a statewide branching law
was passed. The present contiguous county limits originated in a 1933 version of the law. As a re
sult of this law, Pennsylvania banks can expand (either do novo or by merging) into a county whose
border touches that of their home office county. Multibank holding companies are illegal, but banks
have recently started forming one-bank holding companies. Bankers are using this method of or
ganization to facilitate expansion into new commercial activities related to banking.
Several factors, including a liberalization in 1955 of the grounds which justify proposals for new
branches, account for the push toward branch banking. Branching allows banks to follow their cli
entele as both industry and population shift from the central cities of Pennsylvania to outlying
regions. Rising incomes of consumers and the attendant demands for wider, more varied financial
services put pressure on bankers to upgrade the quality of their financial product. By branching into
expanding areas such as new communities, shopping centers, and commercial developments, banks
have been able to provide the community with belter services and to sustain their own growth
and profitability.
This growth is not unique to Pennsylvania; it is part of a trend in all stales that permit some form
of branching. Yet the surge in the number of branch offices in Pennsylvania seems to have been ex
ceptionally high. Opening new branches accounted for the lion's share of this surge, but a large
number of branches resulted from converting independent banks into branch offices following
mergers.
Bankers generally prefer expansion by merger to do novo branching. The tighter merger require
ments imposed by the Bank Merger Act of 1960 have not appreciably dampened Pennsylvania's
merger wave. However, this law may be partially responsible for the sharp increase in de novo
branching since 1960.
This checkered legal heritage leaves the Keystone State with a heterogeneous banking structure.
Branch banking and unit banking coexist in most parts of the Commonwealth. However, banks
with branches account for about 93 percent (as of lune 30, 1970) of the total commercial bank de
posits in the state. Clearly, branch banking dominates the industry. Although the state has grown
and prospered under this system, the question remains: Is it the best system for facing a rapidly
changing economy?
21
DECEMBER 1972
BUSINESS REVIEW
BANKING MARKETS IN PENNSYLVANIA
By Cynthia A. Classman
Areas commonly used as markets in bank structure studies are counties, cities, or Standard Metro
politan Statistical Areas (SMSAs). These do not always conform to the theoretical notion that
markets are areas in which economic decision-makers tend to react in the same way to the same influ
ences. This analysis establishes a procedure to define and describe bank market areas in Pennsyl
vania that is consistent with a theoretical definition of economic markets.
The procedure involves two basic steps: First, economic areas are outlined with the use of
service area information, population densities, and commuting pattern data obtained from reports
of the various planning commissions within the state. Second, the location of every bank office
in the state is pinpointed on a map. Probable boundaries of banking market areas are then estimated
with information on geographic factors, structure of industry, and the economic areas already deter
mined. The resulting market areas— 55 in all— cover all of the Commonwealth without overlap
ping. Therefore, each bank office is included in only one area. The process employed relies on
judgmental factors and includes subjective elements.
By assuming that price differences between two areas indicate market differences, we can test
whether the bank markets, as defined, are meaningful classifications. The price variable used is the
interest rate paid on regular savings accounts, which is available for every bank in Pennsylvania. The
results of the statistical tests (chi-squared test based on contingency tables) indicate that there is
a significant dependence between these rates and market areas, counties, or SMSAs. However, the
similarity of results is explained, in part, by similarities in some of the areas. That is, the SMSAs are
similar to those markets which include the same cities. Furthermore, some counties are good ap
proximations to bank markets because of coincidence between country boundaries and natural geo
graphic barriers which also help define markets. Also, all markets on the state borders share some
common boundaries with border counties.
In short, there is an economic rationale underlying the market areas delineated by the procedures
set out in this study. In addition, statistical tests indicate that the market areas are as significant as
the political boundaries used in previous research. Thus, these 55 bank markets are employed as
the relevant areas to be used in studying Pennsylvania's banking structure.
PENNSYLVANIA BANKING STRUCTURE
By George S. O ldfield and Ronald D. Watson
Legislators, regulatory agencies, and the courts implement or revise periodically the rules
that govern bank expansion. Usually, it's difficult to predict the long-run consequences of a series
of individual decisions. In an effort to overcome this obstacle, a computer simulation model of the
bank expansion process in Pennsylvania is used If) generate market structure forecasts ten years hence
for each of the local banking markets in the state. The model is specifically designed to examine the
impact of alternative branching laws on the industry's structure. Contiguous county branching, twodistrict branching, multibank holding companies, and statewide branching are all analyzed. In addi
tion, the model is used to test the influence bank regulatory authorities have on the develop
ment of market structure.
The simulated development of market structure is based on hypothetical sequences of branching
and merging actions by the state's commercial banks. Historical data are analyzed using multiple
discriminant analysis to determine how banks select both merger partners and c/e novo branch loca
tions. The results of this analysis serve as a guide to the probable course of bank expansion in the
future.
22
FEDERAL RESERVE BANK OF PHILADELPHIA
In each simulated year of the forecast, the model estimates the number of mergers and branches
that will occur, and selects banks that, on the basis of their size and historical aggressiveness, are
likely to expand. If a bank is chosen to open a branch, it first determines the markets it could
legally enter and then selects the most attractive market from among these choices. If the bank is
attempting to merge, it disregards potential partners which seem likely to draw fire from the regu
latory authorities and selects a suitable partner from the remaining banks.
The proposed combination is then examined by a simulated regulatory agency which either ap
proves or disapproves the merger according to prespecified guidelines (determined by using multiple
discriminant analysis). Mergers passing this test are consummated, and the model is updated to re
flect the change in banking structure.
This bank expansion process is continued for ten years. The entire experiment is then repeated
several times in order to estimate the range of possible outcomes and the most likely result under
the specific branching law and regulatory guidelines examined.
The projected concentration statistics, which are measures of competition in each banking market,
reveal the economic advantages of a more liberal branching law. Concentration is minimized and cus
tomer choice maximized in most markets when the state adopts a statewide branch banking law.
The banking structure seems likely to be more competitive under statewide branching than either
multibank holding companies or district branch banking. However, each of these alternatives fos
ters a more competitive banking structure than the one likely to occur under the current contiguous
county branching law.
BRANCH VERSUS UNIT BANKING:
AN ANALYSIS OF RELATIVE CO STS
By Donald J. Mullineaux
This analysis of the costs of branch and unit banking differs from other studies in a number of
respects. (1) It compares costs of branch and unit banks located in the same geographic area for
two different measures of bank output: a single-valued index of output— (total revenue) and a mul
tiple-product measure of output— (the number of various types of accounts). Some conclusions of
the study depend on the measure of output used. (2) The cost effects of increasing size (the question
of economies of scale) are carefully separated from the cost effects of organizational structure (the
question of branch versus unit organizations). Several previous studies fail to allow for differences in
scale economies between unit and branch banks. (3) The costs of a collection of unit banks are
compared with the costs of operating a branch bank system with the same number of offices. This
is a more relevant policy question than whether a branch bank is more or less economical than a unit
bank of the same size. (4) The effect on branch bank costs of liberalized geographical branching
restrictions is investigated. Most studies fail to weigh the costs of statewide versus limited geo
graphic expansion. (5) The cost effect of affiliation with a multibank holding company is investigated.
Statistical estimates of the extent of economies of scale and of the diseconomies associated with
branch banking are derived from an estimated commercial-bank cost function. Data used in the
analysis include 1970 balance sheet and income report variables and data collected for that year
in the Federal Reserve's Functional Cost Analysis program. Banks in the sample include those lo
cated in the First, Second, Third, and Fifth Federal Reserve Districts.
The major results of this study suggest that: (1) Conclusions concerning the existence and mag
nitude of economies of scale and the relative efficiency of unit and branch banks depend on how
commercial bank output is defined. Unfortunately for policymakers, it is difficult to demonstrate
the superiority of one definition over the other. (2) Regardless of the definition of output, the dis
economies of branching decline with the scale of operations. (3) Statewide branching by "large"
23
DECEMBER 1972
BUSINESS REVIEW
banks (assets over $50 million) does not significantly increase estimated banking costs relative to
those in a limited branching environment. However, greater geographical expansion by smaller banks
ups costs significantly. (4) Affiliation with a multiple-bank holding company increases costs for
branch but not unit banks.
BANKING STRUCTURE AND ECONOM IC GROW TH
By Jerome C. Darnell
Research efforts have not uncovered a clear linkage between the type of banking structure and
economic growth. Therefore, it is unlikely that a state can increase its rate of economic growth
significantly by merely altering its style of banking organization.
Economic growth primarily relies upon the interaction of a host of nonbanking factors that con
stitutes the economic resource base. Banks, by marshaling financial resources, can enhance the
growth process providing that an adequate base exists. But banks cannot offset deficiencies in such
vital growth ingredients as availability of skilled labor and transportation networks, the accessibility
to raw materials, the proximity of markets, local tax rates, work attitudes, and the cultural
environment.
Perhaps the strongest assertion regarding the kinship between banking structure and level of eco
nomic activity is that banks, as one of the leaders of the infrastructure, help generate growth. But
their role is a secondary one.
An analysis of several growth indicators over the past decade gives a mixed reading on the rela
tionship between economic performance and a state's branching laws. For example, the 1971 level
of per capita personal income averages about $300 higher in statewide branching states than in
unit or limited branching states. Alternatively, the average rate of growth in per capita personal
income recently has been higher in unit banking states. Still another measure, median family in
come, favors limited branching states. Despite differences among states grouped by the three major
banking structure categories, statistical tests indicate that none of the income variables is syste
matically associated with style of banking structure.
Population changes are highest in the statewide branching states, a finding systematically associated
with banking structure classes. Yet, changes in nonagricultural employment, another barometer of
economic growth, reveals no close relationship to banking structure. It appears, however, that the
level of industrialization is an important conditioner of incomes. States making more rapid strides
in manufacturing employment often have had larger gains in personal income.
Two common banking measures are analyzed, and they also yield mixed results. Growth in total
commercial bank deposits over the past ten years are not closely allied to banking structure. Con
versely, loan-to-deposit ratios are significantly higher in statewide branching states.
Thus, the measures of economic performance as a whole show no consistent relationship between
economic development and a particular type of banking structure. This means that changing a state's
branching laws is not likely to spur a "great leap forward."
■
24
The Fed in Print
BANK EARNINGS (Cont'd)
Bank income in 1971: Year of the jitters?—
Phila July 72 p 17
Business Review Topics,
Third Quarter 1972
Selected by Doris Zimmermann
Income and expenses of Eighth District
member banks— 1971—
St Louis July 72 p 6
Articles appearing in the Federal Reserve
Bulletin and in the business reviews of the
BANK HOLDING COMPANIES
Operations of savings and loan
associations—
FR Bull Aug 72 p 717, p 744
Federal Reserve banks during the third
quarter of 1972 are included in this compila
tion. A cumulation of these entries covering
the years 7969 to date is available upon
request. If you wish to be put on the mailing
list for the cumulation, write to the Publica
tions Department, Federal Reserve Bank of
Philadelphia.
To receive copies of the Federal Reserve
Bulletin, mail sixty cents for each to the
Federal Reserve Board at the Washington
address on page 29. You may send for
business reviews of the Federal Reserve
banks, free of charge , by writing directly to
the issuing banks whose addresses also
appear on page 29.
BANK LOANS
District loans and investments expand
sharply—Atlanta Sept 72 p 161
Brisk loan expansion—
San Fran Aug 72 p 16
BANK RESERVES
RPDs and other Reserve operating
targets—
St Louis Aug 72 p 2
BANK SUPERVISION
Capital flows and the dollar—
Chic Aug 72 p 8
POLICIES FOR A MORE COMPETITIVE
FINANCIAL SYSTEM
available—
Bost Sept 72 p 23
Will capital reflows induce domestic
interest rate changes?—
St Louis July 72 p 2
Comments on the Hunt Commission
report—
Kansas City Sept 72 p 3
BALANCE OF PAYMENTS
BALLES, JOHN J.
BANKING— FOREIGN BRANCHES
Appointed president
Federal Reserve Bank of San Fran—
FR Bull Oct 72 p 942
Recent activities of foreign branches of
U.S. banks—
FR Bull Oct 72 p 855
BANK CREDIT CARDS
Overseas branches of member banks—
FR Bull Oct 72 p 942
Bank credit cards—
Chic July 72 p 8
BONDS— YIELDS
BANK EARNINGS
Yields on newly issued corporate bonds—
FR Bull Sept 72 p 783
Commercial bank profitability: 1961-71-—
Kansas City Sept 72 p 15
25
DECEMBER 1972
BUSINESS REVIEW
BOOK ENTRY
COTTON
The program for the automation of the
government securities market—
N.Y. July 72 p 178
Prices stimulating output may tend to
dampen demand—
Dallas Aug 72 p 1
CREDIT
BURNS, ARTHUR F.
Sharing the credit: A quarter century of
change—
Phila Sept 72 p 13
Statement to Congress, July 26,1972
(state of the economy)—
FR Bull Aug 72 p 696
DISCOUNT OPERATIONS
Statement to Congress, Sept 15,1972
(foreign exchange)—
FR Bull Sept 72 p 785
REAPPRAISAL volume 3 available—
FR Bull Aug 72 p 744
ECONOMETRICS
BUSINESS CYCLES
OF PRICE DETERMINATION available—
FR Bull Oct 72 p 943
Growth cycles, and the current
expansion—
Rich Sept 72 p 11
FARM CREDIT
Southeastern agriculture: A new dress and
a new girl, too—
Atlanta Sept 72 p 150
BUSINESS FORECASTS & REVIEWS
. . . The economy at midyear—
Chic July 72 p 2
The Farm Credit System—
Chic Sept 72 p 10
Financial developments in the second
quarter of 1972—
FR Bull Aug 72 p 687
FARM MANAGEMENT
The role of financial management in
agriculture—
Kansas City July 72 p 14
Widespread advance—
San Fran Aug 72 p 3
FARM OUTLOOK
The economy and monetary actions at
midyear. . . —
St Louis Sept 72 p 2
Agriculture— midyear review and
outlook—
Chic Aug 72 p 2
CERTIFICATES OF DEPOSIT
FEDERAL RESERVE BANKS FINANCIAL
STATEMENTS
GLOSSARY available from Federal Reserve
Reach record level at District banks—
Atlanta July 72 p 123
Bank of N.Y.
FR Bull Oct 72 p 944
CITY PLANNING
New towns vs old problems—
San Fran July 72 p 3
FEDERAL RESERVE DISTRICTS
Transfer of Federal Reserve Branch
territory—
FR Bull Aug 72 p 744
CONSUMER CREDIT
Revision of statistics—
FR Bull Oct 72 p 878
COST OF LIVING
FEDERAL RESERVE— FOREIGN EXCHANGE
Urban living costs: How Philadelphia
family budgets stack up—
Phila July 72 p 12
Treasury and Federal Reserve foreign
exchange operations—
March-Sept 72—
26
FEDERAL RESERVE BANK OF PHILADELPHIA
FEDERAL RESERVE— FOREIGN EXCHANGE
(Cont'd)
FR Bull
INDUSTRIAL DEMOBILIZATION
On San Diego Bay—
San Fran Sept 72 p 3
Sept 72 p 757
Treasury and Federal Reserve foreign
exchange operations—
N.Y. Sept 72 p 210
INTEREST RATES— PRIME
Floating the prime rate—
Rich Aug 72 p 10
FEDERAL RESERVE SYSTEM PUBLICATIONS
IRON AND STEEL INDUSTRY— IMPORTS
Quotas on foreign steel—
San Fran July 72 p 16
The Fed in print—
Phila Sept 72 p 25
LABOR COSTS
FINANCE INTERNATIONAL
Labor market in an expanding economy—
FR Bull Sept 72 p 747
Directory of international organizations—
Chic Sept 72 p 2
LOANS, DISASTER
FOREIGN EXCHANGE— RATES
Banking with vaults awash—
Phila Aug 72 p 3
Exchange-rate flexibility and the cost of
using the foreign-exchange market—
Bost July 72 p 18
MANUFACTURING
Growth “ down South"—
Atlanta Aug 72 p 130
FOREIGN INVESTMENT
Impact of direct investment abroad by
U.S. multinational companies on
the balance of payments—
N.Y. July 72 p 166
MISSISSIPPI
In 1972—
Atlanta
Sept 72 p 155
MITCHELL, GEORGE
Statement to Congress, August 1,1972
(bank tax)—
FR Bull Aug 72 p 700
FOREIGN TRADE
Changing views of comparative
advantage—
Rich July 72 p 9
MONETARY STABILIZATION
New world monetary policies
(Coldwell)—
Dallas July 72 p 1
FUTURES
Speculative markets: Valuable institutions
or dens of inequity?—
Phila July 72 p 3
An appropriate international currency-—
gold, dollars, or SDRs?—
St Louis Aug 72 p 8
GEORGIA
Smooth sailing for Georgia's economy—
Atlanta July 72 p 119
MONEY SUPPLY
CONTROLLING MONETARY AGGRE
GATES: THE IMPLEMENTATION
available—
Bost Sept 72 p 23
GROSS NATIONAL PRODUCT
Production prices and money in four
industrial countries—
St Louis Sept 72 p 11
Policy influence on the monetary stock in
1971—
Cleve Aug 72 p 3
HOUSING
The housing rebound—
Rich July 72 p 2
27
BUSINESS REVIEW
DECEMBER 1972
MONEY SUPPLY (Cont'd)
PORTS
Major ports of the Fifth District—
Rich Aug 72 p 2
Money stock— attention to series increases
as link to economy discussed—
Dallas Sept 72 p 1
REAL ESTATE INVESTMENT TRUSTS
Sources of money growth in 1970 and
1971—
Kansas City July 72 p 3
Recent developments in the REIT
industry—
Bost Sept 72 p 3
Money and output: Keynes and Friedman
in historical perspective—
Phila Sept 72 p 3
REGIONAL ANALYSIS
A review of empirical studies on the
money supply mechanism—
St Louis July 72 p 11
REGULATION D
Trends and fluctuations in monetary
growth—
St Louis Sept 72 p 6
REGULATION G
Regional advance—
San Fran Aug 72 p 12
Amendment June 22,1972—
N.Y. July 72 p 154
Amendment September 18,1972—
FR Bull Aug 72 p 713
MORTGAGES
REGULATION J
Structure of the residential mortgage
market—
Rich Sept 72 p 2
Amendment June 22,1972—
N.Y. July 72 p 154
REGULATION Q
MORTGAGES VARIABLE
Interest ban on demand deposits . . . —
Phila Aug 72 p 13
Variable-rate mortgages: Boon or bane?—
Phila Sept 72 p 16
REGULATION T
MUNICIPAL FINANCE
Amendment September 5,1972—
FR Bull Aug 72 p 714
The market for state and local government
bonds—
Cleve Aug 72 p 13
Amendment October 16,1972—
FR Bull Sept 72 p 797
OPEN MARKET OPERATIONS
REGULATION U
Record of policy actions, May 23,1972—
FR Bull Aug 72 p 707
Amendment September 18,1972—
FR Bull Aug 72 p 716
Record of policy actions, June 19-20,
1972—
FR Bull Sept 72 p 790
Amendment October 16,1972—
FR Bull Sept 72 p 797
REGULATION Y
Record of policy actions, July 18,1972—
FR Bull Oct 72 p 899
Amendment September 1,1971
interpreted—
FR Bull Sept 72 p 800
PETROLEUM INDUSTRY
A gusher for the Southeast—
Atlanta Aug 72 p 137
Activities not closely related to banking—
FR Bull Oct 72 p 905
28
FEDERAL RESERVE BANK OF PHILADELPHIA
RESERVE REQUIREMENTS
TRUST DEPARTMENT BANK
TRUST SURVEY 1971 available—
Reform of reserve requirements—
N.Y. Aug 72 p 201
Dallas
SAVINGS AND LOAN ASSOCIATIONS
July 72 p 6
UNEMPLOYMENT
Structural reform for thrift institutions:
The experience in the United States
and Canada—
Bost July 72 p 3
Counting the jobless—
San Fran Sept 72 p 10
VALUE ADDED
The very controversial tax on value
added—
Atlanta July 72 p 110
STOCK MARKET
Growing role of institutional investors on
Wall Street—
Phila Aug 72 p 8
WASHINGTON, D.C.
Government finance in the nation's
capital—
Rich Sept 72 p 7
TERM LOANS
Term credit is on the rise . . . —
Atlanta Aug 72 p 145
WOMEN EMPLOYMENT
TIME DEPOSITS
Working mothers: The need for more
part-time jobs—
Bost Sept 72 p 13
Changes in time and savings deposits at
commercial banks—
FR Bull Oct 72 p 867
FEDERAL RESERVE BANKS AND BOARD OF GOVERNORS
Federal Reserve Bank of Kansas City
Federal Reserve Station
Kansas City, Missouri 64198
Publications Services
Division of Administrative Services
Board of Governors of the
Federal Reserve System
Washington, D. C. 20551
Federal Reserve Bank of Minneapolis
Minneapolis, Minnesota 55440
Federal Reserve Bank of Atlanta
Federal Reserve Station
Atlanta, Georgia 30303
Federal Reserve Bank of New York
Federal Reserve P.O. Station
New York, New York 10045
Federal Reserve Bank of Boston
30 Pearl Street
Boston, Massachusetts 02106
Federal Reserve Bank of Philadelphia
925 Chestnut Street
Philadelphia, Pennsylvania 19101
Federal Reserve Bank of Chicago
Box 834
Chicago, Illinois 60690
Federal Reserve Bank of Richmond
P.O. Box 27622
Richmond, Virginia 23261
Federal Reserve Bank of Cleveland
P.O. Box 6387
Cleveland, Ohio 44101
Federal Reserve Bank of St. Louis
P.O. Box 442
St. Louis, Missouri 63166
Federal Reserve Bank of Dallas
Station K
Dallas, Texas 75222
Federal Reserve Bank of San Francisco
San Francisco, California 94120
29
FEDERAL RESERVE BANK OF PHILADELPHIA BUSINESS REVIEW
TABLE OF CONTENTS—1972
JANUARY
JULY
"Can Credit Controls Be Controlled?"
"Speculative Markets: Valuable
Institutions or Dens of Inequity?"
by James M. O'Brien
"District Economy in '71—On the Way Up"
by Kathryn L. Kindi
"A Salute to King Coaf" by Evan B. Alderfer
Annual Operations and Executive Changes
FEBRUARY
by Jack Clark Francis
"Urban Living Costs: How Philadelphia
Family Budgets Stack Up"
by Howard Keen, Jr.
"Bank Income in 1971: Year of the Jitters?"
"Productivity in Urban Areas" by David P. Eastburn AUGUST
"Banking with Vaults Awash" by Evan B. Alderfer
"Boom in Bank Credit Cards"
"Growing Role of Institutional Investors
by Marylin C. Mathis
"The Pleasant Predicament of the
on Wall Street" by Gertrude Mazza
Corporate Treasurer in '72" by Jerome C. Darnell "Interest Ban on Demand Deposits: Victim of the
Profit Motive?" by James M. O'Brien
MARCH
"Wage Pressures on City Hall:
Philadelphia's Experience in Perspective"
by James L. Freund
"The '72 Unemployment Puzzle"
by L. Christine Grad
"Bank Bond Management:
The Maturity Dilemma" by Ronald D. Watson
"The Fed in Print" by Doris Zimmermann
APRIL
"Stock Market Commission Fees:
Competition or Bust . . . or Be Busted?"
by Donald J. Mullineaux
"Closing Uncle Sam's Trade Gap"
by Alan J. Krupnick
"Fiscal Alternatives for Philadelphia"
by Anita A. Summers
MAY
SEPTEMBER
"Money and Output: Keynes and Friedman
In Historical Perspective"
by J. H. Wood
"Sharing the Credit: A Quarter
Century of Change"
by Josephine Polomski
"Variable-Rate Mortgages: Boon or Bane?"
by Alan J. Krupnick
by Doris Zimmermann
"The Fed in Print"
OCTOBER
"Inflation Insurance: An 'Escalator Clause'
For Securities?"
by Donald J. Mullineaux
"Vietnam Vets and the Job Scene"
by Curtis R. Smith
"Regional Growth: The Whys and Wherefores"
by James L. Freund
"Banking's Widening Limits" by David P. Eastburn
NOVEMBER
"Boom in Multibank Holding Companies"
"Banking Structure Changes in the '60s: A New "The Energy Crisis: Scarcity Amid Affluence"
Financial Climate" by Jerome C. Darnell
by David P. Eastburn
"Household Savings at Commercial Banks:
JUNE
Bigger Slice of a Bigger Pie" by Howard Keen, Jr.
"Financial Analysts and the Nongrowth Cult"
"Does Banking Structure Spur Economic Growth?"
by David P. Eastburn
"The Economic Situation of Blacks:
Notable Gains but Gaps Remain"
by Robert Ritchie
"Compensating Victims of Crime:
Blunting the Blow" by Duane C. Eiarris
"The Fed in Print" by Doris Zimmermann
by Jerome C. Darnell
DECEMBER
"Changing Pennsylvania's Branching Laws:
An Economic Analysis"
Summaries of Supporting Research Papers
"The Fed in Print" by Doris Zimmermann
FO R TH E R E C O R D ...
Billions of Dollars
■
■
■
■
■
■
■
- 'M
I
Third Federal
Reserve District
October 1972
from
mo.
ago
year
ago
year
ago
Man-hours, total*...............
Employment, total..............
Wage income*......................
CONSTRUCTION**
COAL PRODUCTION.............
BANKING
(All member banks)
Deposits..................................
Loans........................................
U.S. Govt, securities.. .
Other...................................
Check payments***...........
October 1972
from
mo.
ago
year
ago
+ 1 +
+
7
1
2
7
in
+
+10
+3725
+
*
■
4- 4
1
3
+ 5
15
■ 2
1
+
9
1 ®
10
mos.
1972
from
year
ago
Standard
Metropolitan
Statistical Areas*
Payrolls
Percent
change
Oct. 1972
from
+ 4
0
Percent
change
Oct. 1972
from
Percent
change
Oct. 1972
from
month year month year month year month year
ago ago ago ago
ago ago ago ago
7
0 + 7
Atlantic City................... + 2 + 4 + 9 + 18 + 8 +18
+ 7
0 + 6
N/A
0 + 3
+ 2
0 + 15
N/A
-f-1 5
n -f
4 +24 7g + 2
+ 2 + 10
+ 13
+ 14 + 1 + 16
0 + 7
+12
0
0
0
0 + 11
+ 19
1 + 14
+ 15t
l i l t
Banking
Percent
change
Oct. 1972
from
0 + 1 + 1 + 9
+ 1 +17
Wilmington......................
+ 10
+13
+ 9
+ 1
+ 14
+ 14
-19
-
0 + 3
Trenton.............................
+
Altoona.............................
-
N/A
N/A
N/A
N/A
+
3
1
+
5
-
2 +19
+31
+31
+
4 +10
+
N/A
+
1
-
5
-
1
+
4
-1 1
7
+
2 +13
0
Harrisburg.......................
+
2
-
1
+
9
+
1 +27
+
3 +20
1
+
8
-
3 +21
+
5 +22
0 +17
+ 6 +54
4 +12
+ 5 +25
+ 1 +15
0 + 8 + 4 +21
+ 3 +14
Lancaster......................... + 1 + 5
+ 14
+ 15
+ 8
+ 2
+ 10
+
18t
:
Check
Total
Payments** Deposits***
Employ
ment •
LO C A L
CHAN GES
Johnstown.......................
+ 3
0
+ 1
I
Manufacturing
Percent change
10
mos.
1972
from
MANUFACTURING
Production.........................
+ 1
+ 1
+
1
+
1
—24
-
United States
Percent change
SU M M ARY
l
Lehigh Valley................. + 1 + 1 0
Philadelphia....................
-
1
Reading............................ + 3 + 1 + 3 +12
0
+
9
+ 2 +14
It
+ 6 + 8 + 8 +15
PRICES
-f
0
Consumer...............................
Ot
‘ Production workers only
“ Value of contracts
“ ‘ Adjusted for seasonal variation
+
3{
+
3t
0
+
3
4
+
3
^Increase due to strike
in October 1971
fl5 SMSA's
{Philadelphia
1
-
1
+
2
+
8
-
2 +11
+
2 +12
Wilkes-Barre..................
+
0
-
2
+
1
+
8
+
3 +36
+
5 +31
Williamsport...................
N/A
N/A
+
5 +17
+
1
York...................................
+
8
+
2 +43
+
2 +12
Scranton...........................
-
3
N/A
+
2
N/A
+
2
+
N/A
•Not restricted to corporate limits of cities but covers areas of one or more
counties.
“ All commercial banks. Adjusted for seasonal variation.
•••Member banks only. Last Wednesday of the month.
@FedFRASER