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Federal Reserve Bank of Cleveland
Bank Location
and Small Businesses
To individuals and small businesses, a banking market is generally local. A 1981 survey of over 500
of Ohio's small businesses ascertained the locations and distances of
the commercial banks that these firms
used." Small firms, for example, acquire financial services from commercial banks that operate near their
place of business. The responding
firms acquired over 80 percent of
the banking services from offices 10cated within the same comm uni ty and
within 5 miles of the firm (see table
and chart). The firms acquired an
additional 10 percent of their banking services within the same county
and within 10 miles of their offices.
Location and distance of the supplier varied according to the type of
service. Businesses tended to use
banks farther away for loans and
other services than for opening deposit accounts. Seventy percent of
the deposit accounts and loans were
held by banks within 3 miles of the
responding firm. Ninety percent of
the deposit accounts were within an
8-mile radius, whereas 90 percent of
the loans were from banks within a
12-mile radius. The larger an area,
the greater the probability of its
containing an array of feasible
sources for banking services.
Firm size, type of output, and location influence a small business'
choice of banks. Manufacturing, suburban, and large firms (assets between
$1 million and $5 million) generally
bank with institutions located at
greater distances from their offices
than do non manufacturing, nonsuburban, and small firms. Manufactur9. These small firms (less than $5 million in
assets) were selected randomly from the 1981
Ohio Industrial Directory and the yellow pages of
various Ohio telephone directories. The 528
respondents were located in 78 of the 88 counties
in Ohio, and two-thirds of the respondents
reported assets of less than $500,000.

ing and large firms acquired about
25 percent of their banking services
from banks located outside their
local communities, whereas 17percent
of the banking services acquired by
the total sample of firms came from
banks outside their local communities. Manufacturing and large firms
also obtained 15 percent of their
loans from banks located at least 15
miles from their offices. Firms operating in suburban counties used banks
outside the county for 12 percent of
their banking, whereas the total sample acquired 6 percent of banking
services outside the county. Suburban firms acquired 10 percent of
their loans from banks a t least 25
miles away. Indeed, suburban firms
involved in manufacturing used outof-county banks much more for all
their banking services, particularly
for acquiring loans.
When determining geographic
boundaries of banking markets, it is
necessary to investigate the alternative banking sources for local
customers. The firms that responded
to the survey indicated that they
would consider using banks at much
greater distances from their place of
business if they became dissatisfied
with their current financial services. Nearly one-half of the responding firms, for example, indicated
that they would consider acquiring
financial services from out-of-county
banks. Over 40 percent of the responding firms considered possible
banking alternatives more than 25
miles away. Moreover, a greater
percentage of the manufacturing,
suburban, and larger firms considered using alternative institutions
located farther away from their
businesses than did the total sample
of firms. While some firms might be
willing to travel greater distances
for banking services under certain
circumstances, these customers
probably would prefer using alter-

native banks closer to their places
of business."
Conclusion
Banking markets are difficult to
define, as market areas usually
extend beyond the service areas of
individual banks. For antitrust
purposes, the Justice Department,
FDIC, and FRS define banking
markets by taking into account the
area from which individual banks
currently draw the bulk of their
business, along with other supply
and demand factors regarding the
financial services used by local customers. In contrast, the CC tends to
rely primarily on the service areas
of the merging banks; the boundaries of these service areas can
vary wi th the type of service and
volume requirements.
10. To ascertain probable, rather than possible,
banking alternatives, researchers should determine what circumstances would cause customers
to seek alternative banking sources. Researchers
should also identify specific locations of these
alternative banking sources. Because our small
business survey focused primarily on the product
rather than the geographic market, such questions were not included.

Federal Reserve Bank of Cleveland
Research Department
P.O_ Box 6387
Cleveland, OR 44101

Customer surveys are very helpful in determining geographic
boundaries of banking markets.
According to a survey of small
businesses in Ohio, firms usually
obtain banking services locally,
depending on such things as the
type of service and the customer.
The survey results showed that
loans were held at banks farther
away from a place of business than
deposit accounts. Manufacturing,
suburban, and larger firms generally acquired all types of banking
services from institutions located at
greater distances from their place of
business than did non manufacturing,
nonsuburban, and very small firms.
Since size and type of output influence a firm's choice of banking
locations, it is important that the
sample of firms in a survey represent the population in the area being
analyzed. It also is essential to
ascertain not only where firms and
individuals currently are banking,
but the specific locations of their
practical banking alternatives.
NOTE: The last issue of the Economic
Commentary was published July 5, 1983.

BULK RATE
U.S. Postage Paid
Cleveland, OR
Permit No. 385

Economic Commentary
ISSN 0428-1276

Geographic Banking Markets
by Paul R. Watro

r.==~ arious

U.S. regulatory
agencies are responsible for
preventing bank mergers
and acquisitions that would
have substantially negative
effects on banking competition. Regulatory agencies identify
relevant product and geographic
markets to assess the competitive
impact of proposed mergers and
acquisitions. Supreme Court decisions indicate that commercial
banking generally should be
considered as a separate line of
commerce, or product market, for
antitrust purposes.' Commercial
banks traditionally offered customers a unique cluster of products
that were not available from other
institutions. Because of expanded
powers, thrift institutions now
operate more like commercial banks,
becoming increasingly important
suppliers of a wide range of
financial services.
Like the line-of-commerce issue,
the framework for defining the
geographic area pertinent to a bank
merger is also open for debate, even
though the Supreme Court has provided some conceptual guidelines for
delineating geographic market
areas. The court has recognized, for
example, that the type of bank customer would alter the pertinent
geographic area." A market consist-

===

1. See United States v. Philadelphia National
Bank, 374 U.S. 321 (1963); United States v.
Phillipsburg National Bank and Trust Company,
399 U.S. 350 (1970); and United States v.
Connecticut National Bank, 418 U.S. 666 (1974).

Address Correction Requested: Please send corrected mailing label to the Federal
Reserve Bank of Cleveland, Research Department, P.O. Box 6387, Cleveland, OR 44101.

September 12,1983

2. See United States v. Philadelphia National
Bank, 374 U.S. 361 (1963).

ing only of the largest corporations
could be national or international in
scope and thereby make the competitive effects of most bank mergers
insignificant. In contrast, a market
defined only in terms of very small
businesses could be so narrow as to
exclude competing banking institutions from the merger analysis.
According to the Supreme Court,
competitive assessments should
focus on the class of customers,
such as individuals and small
businesses, that would be most
affected by bank mergers. Market
boundaries should be thought of as
encompassing the area in which the
bank to be acquired offers its
services, as well as the area in
which local customers could practicably turn for banking services.
Definitions of banking markets
are often disputed by economists,
attorneys, and regulators alike,
Whether a proposed merger is
approved or denied may ultimately
depend on the geographic boundaries of a particular banking
market. This Economic Commentary
discusses the fundamental differences between service areas and
market areas and reviews methods
used by regulatory agencies to
define geographic markets. The
article also examines the areas in
which a sample of Ohio's small
businesses acquires services from
commercial banks.
Economist Paul R. Watro researches issues in
banking for the Federal Reserve Bank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal Reserve System.

Services Acquired within Various Distances from Banks
Distances in miles
Service/type

Percentage

of firm

DeQosit accounts
Total sample
Suburban"
Manufacturer
Suburban
manufacturer

Large"
Loans

Total sample
Suburban"
Manufacturer
Suburban
manufacturer
Largeb

Banking Location and Services
Firm type

70

75

80

85

90

o

3
3

4
4

5
5
6
10
5

5
8
8
12
7

8
12
12
15
10

15
20
20
22
20

12
25
19
25
30

25
35
25
35
65

60

40

20

80

100

95
Total

4

5
5

5
8
5

sample

Suburban"
Manufacturer
Suburban

manufacturer

Large"

3
4

5
8
6

5
5
7
10
7

6
8
9
13
10

8
13
15
20
20

Other services

Deposit accounts
Total sample
Suburban"
Manufacturer

Total sample
Suburban"
Manufacturer
Suburban
manufacturer

3
3
5
8

3
3
5
10
5

5
5
6
12
6

6
6
9
15
6

9
12
12
22
10

20
22
22
35
25

Total sample
Suburban"
Manufacturer
Suburban
manufacturer
La rge b

3
3
5
8
5

4
4

5
5
7
12
6

6
8
10
13
8

10
12
13
20
15

20
22
22
25
35

Large"
Total services

Percent

of services

4

5
10
5

a. Suburban firms are those located in SMSA counties adjacent to a central city.
b. A large firm is defined as having assets between $1 million and $5 million.

Market Delineations
Some analysts contend that the
service areas of banks are the appropriate geographic areas for evaluating the competitive consequences of
a bank merger. A service area
generally represents the geographic
area from which a bank draws the
bulk of its existing deposits. The
fundamental drawback with service
areas is that such areas do not represent markets in the pure economic
sense. A service area takes into
account only a portion of existing
customers of an institution, failing
to consider potential customers who
would use the institution as an alternative source for banking services.
Geographic banking markets are
usually larger than service areas of
individual banks. Determining which
banks represent reasonable alternatives for a significant number of

consumers and businesses within a
given area is a subjective decision
that is based not only on current
banking practices but also on the
amount of economic interaction
between the communities or areas
in question. If a high level of
economic interaction exists between
two communities-reflected
in significant commuting for employment
and shopping, ease of transportation, commonality of media coverage,
and other factors-many
customers
in one community might consider
the banks in the other community
as a reasonable alternative to the
banks currently serving them.
Methods used to define geographic
banking markets vary among the
regulatory agencies. The Justice
Department, for example, initially
assumes that the geographic market
is approximately the same as the

Suburban

manufacturer

Largeb

Loans
Total

sample

Suburban"
Manufacturer
Suburban

manufacturer

Largeb

Other services
Total

sample

.

--- - --- ---

Suburban"

-

Manufacturer
Suburban

manufacturer

Large"
Total services
a. Suburban firms are those
located in SMSA counties
adjacent to a central city.
b. A large firm is defined as
having assets between $1 million and $5 million.

•••

Banks in same community

•••

Banks outside community

L-_--li Banks

•••

in adjacent

but within county

counties

Banks in other counties

service areas of the institution to be
acquired and its nearest cornpetitors." In a second step, the Justice
Department uses evidence on economic interaction as a basis for
modifying the market area. The Jus3. See "U.S. Department of Justice Merger
Guidelines," issued June 14, 1982, for a discussion
of how markets are determined.

tice Department expands the boundaries of the market area if it
anticipates that a significant,
nontransitory change in price would
lead a significant number of
customers to shift to banks outside
the initial market area. While the
area continues to be expanded as
long as this criterion is met, the

Justice Department does not specify
how this judgment is made.
Although the banking regulatory
agencies-Federal
Deposit Insurance Corporation (FDIC), Federal
Reserve System (FRS), and Comptroller of the Currency (CC)-do not
appear to have explicit guidelines
for defining geographic markets,
past merger decisions provide some
perspective regarding the definitions
used by each agency. The FDIC has
stated "the fact that a bank does not
have any customers in a particular
portion of its market can mean,
among other things, that its marketing efforts in that area are overshadowed by those of competing banks."!
Like the Justice Department, the
FDIC and FRS consider both supply
and demand factors in delineating
banking markets." Demand factors
include commuting for employment
and shopping, road networks, media
coverage, and designated socioeconomic areas, such as standard metropolitan statistical areas (SMSAs)
and Ranally metro areas (RMAs).
Supply factors include prices,
banking hours, advertising, and
branching patterns.
Like the other regulatory agencies, the FRS usually does not
provide detailed information in its
decisions on how banking markets
are defined. However, the FRS occasionally has cited selected data in
market delineations when denying
merger applications. In one decision,
for example, the FRS considered
Schenectady County in New York state
to be part of the Albany banking
market. Among other factors 17.6
4. See decision to deny the proposed merger between the Pennsylvania Bank and Trust Company,
Warren, Pennsylvania, and the Farmers National
Bank of Conneautville, Conneautville, Pennsylvania, FDIC's Annual Report, 1980, pp. 205-07.
5. It should be noted, however, that the courts
have often relied on the service-area approach
because of the lack of evidence on demand factors.

percent of the employed residents of
Schenectady County commuted to
Albany County. Nearly all of the
commercial banks with offices in
Schenectady County also operated
offices in Albany County, and rates
on selected services were similar
among these banking offices." In
another proposed acquisition that
was denied, the FRS concluded that
the two Michigan banking organizations involved were in the same
banking market. One of the two
banks drew 10 percent of its loans
from the service area of the other
bank; the banks were only 13 miles
apart and directly connected by a
highway, making the organizations
practical alternatives for customers
in either town."
In contrast to the Justice Department, FDIC, and FRS, the CC very
often adheres essentially to the
service-area approach in defining
banking markets. Yet, in a recent
merger decision the CC stated that
"commuting, shopping, pricing behavior, market strategies, and branch
networks can sometimes cause banks
to perform as if they were operating
in a market area substantially larger
than loan or deposit service areas."8
The CC generally contends that the
proper area to assess the competitive effects of the proposed merger is
the area where the banks involved
operate offices and from which they
draw the bulk of their business. As
a result, the CC's definitions of
some market areas seem rather narrow.
6. See Federal Reserve Bulletin, vol. 64, no. 11
(November 1978), p. 895.
7. See Federal Reserve Bulletin, vol. 67, no. 5
(May 1981), p. 438.
8. See Firestone Bank, Akron, Ohio, to merge
with Bank One of Medina County, N.A., Wadsworth, Ohio, Quarterly Journal, Comptroller of the
Currency, Administrator of National Banks,
vol. I, no. 2 (1981), p. 48.

Services Acquired within Various Distances from Banks
Distances in miles
Service/type

Percentage

of firm

DeQosit accounts
Total sample
Suburban"
Manufacturer
Suburban
manufacturer

Large"
Loans

Total sample
Suburban"
Manufacturer
Suburban
manufacturer
Largeb

Banking Location and Services
Firm type

70

75

80

85

90

o

3
3

4
4

5
5
6
10
5

5
8
8
12
7

8
12
12
15
10

15
20
20
22
20

12
25
19
25
30

25
35
25
35
65

60

40

20

80

100

95
Total

4

5
5

5
8
5

sample

Suburban"
Manufacturer
Suburban

manufacturer

Large"

3
4

5
8
6

5
5
7
10
7

6
8
9
13
10

8
13
15
20
20

Other services

Deposit accounts
Total sample
Suburban"
Manufacturer

Total sample
Suburban"
Manufacturer
Suburban
manufacturer

3
3
5
8

3
3
5
10
5

5
5
6
12
6

6
6
9
15
6

9
12
12
22
10

20
22
22
35
25

Total sample
Suburban"
Manufacturer
Suburban
manufacturer
La rge b

3
3
5
8
5

4
4

5
5
7
12
6

6
8
10
13
8

10
12
13
20
15

20
22
22
25
35

Large"
Total services

Percent

of services

4

5
10
5

a. Suburban firms are those located in SMSA counties adjacent to a central city.
b. A large firm is defined as having assets between $1 million and $5 million.

Market Delineations
Some analysts contend that the
service areas of banks are the appropriate geographic areas for evaluating the competitive consequences of
a bank merger. A service area
generally represents the geographic
area from which a bank draws the
bulk of its existing deposits. The
fundamental drawback with service
areas is that such areas do not represent markets in the pure economic
sense. A service area takes into
account only a portion of existing
customers of an institution, failing
to consider potential customers who
would use the institution as an alternative source for banking services.
Geographic banking markets are
usually larger than service areas of
individual banks. Determining which
banks represent reasonable alternatives for a significant number of

consumers and businesses within a
given area is a subjective decision
that is based not only on current
banking practices but also on the
amount of economic interaction
between the communities or areas
in question. If a high level of
economic interaction exists between
two communities-reflected
in significant commuting for employment
and shopping, ease of transportation, commonality of media coverage,
and other factors-many
customers
in one community might consider
the banks in the other community
as a reasonable alternative to the
banks currently serving them.
Methods used to define geographic
banking markets vary among the
regulatory agencies. The Justice
Department, for example, initially
assumes that the geographic market
is approximately the same as the

Suburban

manufacturer

Largeb

Loans
Total

sample

Suburban"
Manufacturer
Suburban

manufacturer

Largeb

Other services
Total

sample

.

--- - --- ---

Suburban"

-

Manufacturer
Suburban

manufacturer

Large"
Total services
a. Suburban firms are those
located in SMSA counties
adjacent to a central city.
b. A large firm is defined as
having assets between $1 million and $5 million.

•••

Banks in same community

•••

Banks outside community

L-_--li Banks

•••

in adjacent

but within county

counties

Banks in other counties

service areas of the institution to be
acquired and its nearest cornpetitors." In a second step, the Justice
Department uses evidence on economic interaction as a basis for
modifying the market area. The Jus3. See "U.S. Department of Justice Merger
Guidelines," issued June 14, 1982, for a discussion
of how markets are determined.

tice Department expands the boundaries of the market area if it
anticipates that a significant,
nontransitory change in price would
lead a significant number of
customers to shift to banks outside
the initial market area. While the
area continues to be expanded as
long as this criterion is met, the

Justice Department does not specify
how this judgment is made.
Although the banking regulatory
agencies-Federal
Deposit Insurance Corporation (FDIC), Federal
Reserve System (FRS), and Comptroller of the Currency (CC)-do not
appear to have explicit guidelines
for defining geographic markets,
past merger decisions provide some
perspective regarding the definitions
used by each agency. The FDIC has
stated "the fact that a bank does not
have any customers in a particular
portion of its market can mean,
among other things, that its marketing efforts in that area are overshadowed by those of competing banks."!
Like the Justice Department, the
FDIC and FRS consider both supply
and demand factors in delineating
banking markets." Demand factors
include commuting for employment
and shopping, road networks, media
coverage, and designated socioeconomic areas, such as standard metropolitan statistical areas (SMSAs)
and Ranally metro areas (RMAs).
Supply factors include prices,
banking hours, advertising, and
branching patterns.
Like the other regulatory agencies, the FRS usually does not
provide detailed information in its
decisions on how banking markets
are defined. However, the FRS occasionally has cited selected data in
market delineations when denying
merger applications. In one decision,
for example, the FRS considered
Schenectady County in New York state
to be part of the Albany banking
market. Among other factors 17.6
4. See decision to deny the proposed merger between the Pennsylvania Bank and Trust Company,
Warren, Pennsylvania, and the Farmers National
Bank of Conneautville, Conneautville, Pennsylvania, FDIC's Annual Report, 1980, pp. 205-07.
5. It should be noted, however, that the courts
have often relied on the service-area approach
because of the lack of evidence on demand factors.

percent of the employed residents of
Schenectady County commuted to
Albany County. Nearly all of the
commercial banks with offices in
Schenectady County also operated
offices in Albany County, and rates
on selected services were similar
among these banking offices." In
another proposed acquisition that
was denied, the FRS concluded that
the two Michigan banking organizations involved were in the same
banking market. One of the two
banks drew 10 percent of its loans
from the service area of the other
bank; the banks were only 13 miles
apart and directly connected by a
highway, making the organizations
practical alternatives for customers
in either town."
In contrast to the Justice Department, FDIC, and FRS, the CC very
often adheres essentially to the
service-area approach in defining
banking markets. Yet, in a recent
merger decision the CC stated that
"commuting, shopping, pricing behavior, market strategies, and branch
networks can sometimes cause banks
to perform as if they were operating
in a market area substantially larger
than loan or deposit service areas."8
The CC generally contends that the
proper area to assess the competitive effects of the proposed merger is
the area where the banks involved
operate offices and from which they
draw the bulk of their business. As
a result, the CC's definitions of
some market areas seem rather narrow.
6. See Federal Reserve Bulletin, vol. 64, no. 11
(November 1978), p. 895.
7. See Federal Reserve Bulletin, vol. 67, no. 5
(May 1981), p. 438.
8. See Firestone Bank, Akron, Ohio, to merge
with Bank One of Medina County, N.A., Wadsworth, Ohio, Quarterly Journal, Comptroller of the
Currency, Administrator of National Banks,
vol. I, no. 2 (1981), p. 48.

Services Acquired within Various Distances from Banks
Distances in miles
Service/type

Percentage

of firm

DeQosit accounts
Total sample
Suburban"
Manufacturer
Suburban
manufacturer

Large"
Loans

Total sample
Suburban"
Manufacturer
Suburban
manufacturer
Largeb

Banking Location and Services
Firm type

70

75

80

85

90

o

3
3

4
4

5
5
6
10
5

5
8
8
12
7

8
12
12
15
10

15
20
20
22
20

12
25
19
25
30

25
35
25
35
65

60

40

20

80

100

95
Total

4

5
5

5
8
5

sample

Suburban"
Manufacturer
Suburban

manufacturer

Large"

3
4

5
8
6

5
5
7
10
7

6
8
9
13
10

8
13
15
20
20

Other services

Deposit accounts
Total sample
Suburban"
Manufacturer

Total sample
Suburban"
Manufacturer
Suburban
manufacturer

3
3
5
8

3
3
5
10
5

5
5
6
12
6

6
6
9
15
6

9
12
12
22
10

20
22
22
35
25

Total sample
Suburban"
Manufacturer
Suburban
manufacturer
La rge b

3
3
5
8
5

4
4

5
5
7
12
6

6
8
10
13
8

10
12
13
20
15

20
22
22
25
35

Large"
Total services

Percent

of services

4

5
10
5

a. Suburban firms are those located in SMSA counties adjacent to a central city.
b. A large firm is defined as having assets between $1 million and $5 million.

Market Delineations
Some analysts contend that the
service areas of banks are the appropriate geographic areas for evaluating the competitive consequences of
a bank merger. A service area
generally represents the geographic
area from which a bank draws the
bulk of its existing deposits. The
fundamental drawback with service
areas is that such areas do not represent markets in the pure economic
sense. A service area takes into
account only a portion of existing
customers of an institution, failing
to consider potential customers who
would use the institution as an alternative source for banking services.
Geographic banking markets are
usually larger than service areas of
individual banks. Determining which
banks represent reasonable alternatives for a significant number of

consumers and businesses within a
given area is a subjective decision
that is based not only on current
banking practices but also on the
amount of economic interaction
between the communities or areas
in question. If a high level of
economic interaction exists between
two communities-reflected
in significant commuting for employment
and shopping, ease of transportation, commonality of media coverage,
and other factors-many
customers
in one community might consider
the banks in the other community
as a reasonable alternative to the
banks currently serving them.
Methods used to define geographic
banking markets vary among the
regulatory agencies. The Justice
Department, for example, initially
assumes that the geographic market
is approximately the same as the

Suburban

manufacturer

Largeb

Loans
Total

sample

Suburban"
Manufacturer
Suburban

manufacturer

Largeb

Other services
Total

sample

.

--- - --- ---

Suburban"

-

Manufacturer
Suburban

manufacturer

Large"
Total services
a. Suburban firms are those
located in SMSA counties
adjacent to a central city.
b. A large firm is defined as
having assets between $1 million and $5 million.

•••

Banks in same community

•••

Banks outside community

L-_--li Banks

•••

in adjacent

but within county

counties

Banks in other counties

service areas of the institution to be
acquired and its nearest cornpetitors." In a second step, the Justice
Department uses evidence on economic interaction as a basis for
modifying the market area. The Jus3. See "U.S. Department of Justice Merger
Guidelines," issued June 14, 1982, for a discussion
of how markets are determined.

tice Department expands the boundaries of the market area if it
anticipates that a significant,
nontransitory change in price would
lead a significant number of
customers to shift to banks outside
the initial market area. While the
area continues to be expanded as
long as this criterion is met, the

Justice Department does not specify
how this judgment is made.
Although the banking regulatory
agencies-Federal
Deposit Insurance Corporation (FDIC), Federal
Reserve System (FRS), and Comptroller of the Currency (CC)-do not
appear to have explicit guidelines
for defining geographic markets,
past merger decisions provide some
perspective regarding the definitions
used by each agency. The FDIC has
stated "the fact that a bank does not
have any customers in a particular
portion of its market can mean,
among other things, that its marketing efforts in that area are overshadowed by those of competing banks."!
Like the Justice Department, the
FDIC and FRS consider both supply
and demand factors in delineating
banking markets." Demand factors
include commuting for employment
and shopping, road networks, media
coverage, and designated socioeconomic areas, such as standard metropolitan statistical areas (SMSAs)
and Ranally metro areas (RMAs).
Supply factors include prices,
banking hours, advertising, and
branching patterns.
Like the other regulatory agencies, the FRS usually does not
provide detailed information in its
decisions on how banking markets
are defined. However, the FRS occasionally has cited selected data in
market delineations when denying
merger applications. In one decision,
for example, the FRS considered
Schenectady County in New York state
to be part of the Albany banking
market. Among other factors 17.6
4. See decision to deny the proposed merger between the Pennsylvania Bank and Trust Company,
Warren, Pennsylvania, and the Farmers National
Bank of Conneautville, Conneautville, Pennsylvania, FDIC's Annual Report, 1980, pp. 205-07.
5. It should be noted, however, that the courts
have often relied on the service-area approach
because of the lack of evidence on demand factors.

percent of the employed residents of
Schenectady County commuted to
Albany County. Nearly all of the
commercial banks with offices in
Schenectady County also operated
offices in Albany County, and rates
on selected services were similar
among these banking offices." In
another proposed acquisition that
was denied, the FRS concluded that
the two Michigan banking organizations involved were in the same
banking market. One of the two
banks drew 10 percent of its loans
from the service area of the other
bank; the banks were only 13 miles
apart and directly connected by a
highway, making the organizations
practical alternatives for customers
in either town."
In contrast to the Justice Department, FDIC, and FRS, the CC very
often adheres essentially to the
service-area approach in defining
banking markets. Yet, in a recent
merger decision the CC stated that
"commuting, shopping, pricing behavior, market strategies, and branch
networks can sometimes cause banks
to perform as if they were operating
in a market area substantially larger
than loan or deposit service areas."8
The CC generally contends that the
proper area to assess the competitive effects of the proposed merger is
the area where the banks involved
operate offices and from which they
draw the bulk of their business. As
a result, the CC's definitions of
some market areas seem rather narrow.
6. See Federal Reserve Bulletin, vol. 64, no. 11
(November 1978), p. 895.
7. See Federal Reserve Bulletin, vol. 67, no. 5
(May 1981), p. 438.
8. See Firestone Bank, Akron, Ohio, to merge
with Bank One of Medina County, N.A., Wadsworth, Ohio, Quarterly Journal, Comptroller of the
Currency, Administrator of National Banks,
vol. I, no. 2 (1981), p. 48.

Federal Reserve Bank of Cleveland
Bank Location
and Small Businesses
To individuals and small businesses, a banking market is generally local. A 1981 survey of over 500
of Ohio's small businesses ascertained the locations and distances of
the commercial banks that these firms
used." Small firms, for example, acquire financial services from commercial banks that operate near their
place of business. The responding
firms acquired over 80 percent of
the banking services from offices 10cated within the same comm uni ty and
within 5 miles of the firm (see table
and chart). The firms acquired an
additional 10 percent of their banking services within the same county
and within 10 miles of their offices.
Location and distance of the supplier varied according to the type of
service. Businesses tended to use
banks farther away for loans and
other services than for opening deposit accounts. Seventy percent of
the deposit accounts and loans were
held by banks within 3 miles of the
responding firm. Ninety percent of
the deposit accounts were within an
8-mile radius, whereas 90 percent of
the loans were from banks within a
12-mile radius. The larger an area,
the greater the probability of its
containing an array of feasible
sources for banking services.
Firm size, type of output, and location influence a small business'
choice of banks. Manufacturing, suburban, and large firms (assets between
$1 million and $5 million) generally
bank with institutions located at
greater distances from their offices
than do non manufacturing, nonsuburban, and small firms. Manufactur9. These small firms (less than $5 million in
assets) were selected randomly from the 1981
Ohio Industrial Directory and the yellow pages of
various Ohio telephone directories. The 528
respondents were located in 78 of the 88 counties
in Ohio, and two-thirds of the respondents
reported assets of less than $500,000.

ing and large firms acquired about
25 percent of their banking services
from banks located outside their
local communities, whereas 17percent
of the banking services acquired by
the total sample of firms came from
banks outside their local communities. Manufacturing and large firms
also obtained 15 percent of their
loans from banks located at least 15
miles from their offices. Firms operating in suburban counties used banks
outside the county for 12 percent of
their banking, whereas the total sample acquired 6 percent of banking
services outside the county. Suburban firms acquired 10 percent of
their loans from banks a t least 25
miles away. Indeed, suburban firms
involved in manufacturing used outof-county banks much more for all
their banking services, particularly
for acquiring loans.
When determining geographic
boundaries of banking markets, it is
necessary to investigate the alternative banking sources for local
customers. The firms that responded
to the survey indicated that they
would consider using banks at much
greater distances from their place of
business if they became dissatisfied
with their current financial services. Nearly one-half of the responding firms, for example, indicated
that they would consider acquiring
financial services from out-of-county
banks. Over 40 percent of the responding firms considered possible
banking alternatives more than 25
miles away. Moreover, a greater
percentage of the manufacturing,
suburban, and larger firms considered using alternative institutions
located farther away from their
businesses than did the total sample
of firms. While some firms might be
willing to travel greater distances
for banking services under certain
circumstances, these customers
probably would prefer using alter-

native banks closer to their places
of business."
Conclusion
Banking markets are difficult to
define, as market areas usually
extend beyond the service areas of
individual banks. For antitrust
purposes, the Justice Department,
FDIC, and FRS define banking
markets by taking into account the
area from which individual banks
currently draw the bulk of their
business, along with other supply
and demand factors regarding the
financial services used by local customers. In contrast, the CC tends to
rely primarily on the service areas
of the merging banks; the boundaries of these service areas can
vary wi th the type of service and
volume requirements.
10. To ascertain probable, rather than possible,
banking alternatives, researchers should determine what circumstances would cause customers
to seek alternative banking sources. Researchers
should also identify specific locations of these
alternative banking sources. Because our small
business survey focused primarily on the product
rather than the geographic market, such questions were not included.

Federal Reserve Bank of Cleveland
Research Department
P.O_ Box 6387
Cleveland, OR 44101

Customer surveys are very helpful in determining geographic
boundaries of banking markets.
According to a survey of small
businesses in Ohio, firms usually
obtain banking services locally,
depending on such things as the
type of service and the customer.
The survey results showed that
loans were held at banks farther
away from a place of business than
deposit accounts. Manufacturing,
suburban, and larger firms generally acquired all types of banking
services from institutions located at
greater distances from their place of
business than did non manufacturing,
nonsuburban, and very small firms.
Since size and type of output influence a firm's choice of banking
locations, it is important that the
sample of firms in a survey represent the population in the area being
analyzed. It also is essential to
ascertain not only where firms and
individuals currently are banking,
but the specific locations of their
practical banking alternatives.
NOTE: The last issue of the Economic
Commentary was published July 5, 1983.

BULK RATE
U.S. Postage Paid
Cleveland, OR
Permit No. 385

Economic Commentary
ISSN 0428-1276

Geographic Banking Markets
by Paul R. Watro

r.==~ arious

U.S. regulatory
agencies are responsible for
preventing bank mergers
and acquisitions that would
have substantially negative
effects on banking competition. Regulatory agencies identify
relevant product and geographic
markets to assess the competitive
impact of proposed mergers and
acquisitions. Supreme Court decisions indicate that commercial
banking generally should be
considered as a separate line of
commerce, or product market, for
antitrust purposes.' Commercial
banks traditionally offered customers a unique cluster of products
that were not available from other
institutions. Because of expanded
powers, thrift institutions now
operate more like commercial banks,
becoming increasingly important
suppliers of a wide range of
financial services.
Like the line-of-commerce issue,
the framework for defining the
geographic area pertinent to a bank
merger is also open for debate, even
though the Supreme Court has provided some conceptual guidelines for
delineating geographic market
areas. The court has recognized, for
example, that the type of bank customer would alter the pertinent
geographic area." A market consist-

===

1. See United States v. Philadelphia National
Bank, 374 U.S. 321 (1963); United States v.
Phillipsburg National Bank and Trust Company,
399 U.S. 350 (1970); and United States v.
Connecticut National Bank, 418 U.S. 666 (1974).

Address Correction Requested: Please send corrected mailing label to the Federal
Reserve Bank of Cleveland, Research Department, P.O. Box 6387, Cleveland, OR 44101.

September 12,1983

2. See United States v. Philadelphia National
Bank, 374 U.S. 361 (1963).

ing only of the largest corporations
could be national or international in
scope and thereby make the competitive effects of most bank mergers
insignificant. In contrast, a market
defined only in terms of very small
businesses could be so narrow as to
exclude competing banking institutions from the merger analysis.
According to the Supreme Court,
competitive assessments should
focus on the class of customers,
such as individuals and small
businesses, that would be most
affected by bank mergers. Market
boundaries should be thought of as
encompassing the area in which the
bank to be acquired offers its
services, as well as the area in
which local customers could practicably turn for banking services.
Definitions of banking markets
are often disputed by economists,
attorneys, and regulators alike,
Whether a proposed merger is
approved or denied may ultimately
depend on the geographic boundaries of a particular banking
market. This Economic Commentary
discusses the fundamental differences between service areas and
market areas and reviews methods
used by regulatory agencies to
define geographic markets. The
article also examines the areas in
which a sample of Ohio's small
businesses acquires services from
commercial banks.
Economist Paul R. Watro researches issues in
banking for the Federal Reserve Bank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal Reserve System.

Federal Reserve Bank of Cleveland
Bank Location
and Small Businesses
To individuals and small businesses, a banking market is generally local. A 1981 survey of over 500
of Ohio's small businesses ascertained the locations and distances of
the commercial banks that these firms
used." Small firms, for example, acquire financial services from commercial banks that operate near their
place of business. The responding
firms acquired over 80 percent of
the banking services from offices 10cated within the same comm uni ty and
within 5 miles of the firm (see table
and chart). The firms acquired an
additional 10 percent of their banking services within the same county
and within 10 miles of their offices.
Location and distance of the supplier varied according to the type of
service. Businesses tended to use
banks farther away for loans and
other services than for opening deposit accounts. Seventy percent of
the deposit accounts and loans were
held by banks within 3 miles of the
responding firm. Ninety percent of
the deposit accounts were within an
8-mile radius, whereas 90 percent of
the loans were from banks within a
12-mile radius. The larger an area,
the greater the probability of its
containing an array of feasible
sources for banking services.
Firm size, type of output, and location influence a small business'
choice of banks. Manufacturing, suburban, and large firms (assets between
$1 million and $5 million) generally
bank with institutions located at
greater distances from their offices
than do non manufacturing, nonsuburban, and small firms. Manufactur9. These small firms (less than $5 million in
assets) were selected randomly from the 1981
Ohio Industrial Directory and the yellow pages of
various Ohio telephone directories. The 528
respondents were located in 78 of the 88 counties
in Ohio, and two-thirds of the respondents
reported assets of less than $500,000.

ing and large firms acquired about
25 percent of their banking services
from banks located outside their
local communities, whereas 17percent
of the banking services acquired by
the total sample of firms came from
banks outside their local communities. Manufacturing and large firms
also obtained 15 percent of their
loans from banks located at least 15
miles from their offices. Firms operating in suburban counties used banks
outside the county for 12 percent of
their banking, whereas the total sample acquired 6 percent of banking
services outside the county. Suburban firms acquired 10 percent of
their loans from banks a t least 25
miles away. Indeed, suburban firms
involved in manufacturing used outof-county banks much more for all
their banking services, particularly
for acquiring loans.
When determining geographic
boundaries of banking markets, it is
necessary to investigate the alternative banking sources for local
customers. The firms that responded
to the survey indicated that they
would consider using banks at much
greater distances from their place of
business if they became dissatisfied
with their current financial services. Nearly one-half of the responding firms, for example, indicated
that they would consider acquiring
financial services from out-of-county
banks. Over 40 percent of the responding firms considered possible
banking alternatives more than 25
miles away. Moreover, a greater
percentage of the manufacturing,
suburban, and larger firms considered using alternative institutions
located farther away from their
businesses than did the total sample
of firms. While some firms might be
willing to travel greater distances
for banking services under certain
circumstances, these customers
probably would prefer using alter-

native banks closer to their places
of business."
Conclusion
Banking markets are difficult to
define, as market areas usually
extend beyond the service areas of
individual banks. For antitrust
purposes, the Justice Department,
FDIC, and FRS define banking
markets by taking into account the
area from which individual banks
currently draw the bulk of their
business, along with other supply
and demand factors regarding the
financial services used by local customers. In contrast, the CC tends to
rely primarily on the service areas
of the merging banks; the boundaries of these service areas can
vary wi th the type of service and
volume requirements.
10. To ascertain probable, rather than possible,
banking alternatives, researchers should determine what circumstances would cause customers
to seek alternative banking sources. Researchers
should also identify specific locations of these
alternative banking sources. Because our small
business survey focused primarily on the product
rather than the geographic market, such questions were not included.

Federal Reserve Bank of Cleveland
Research Department
P.O_ Box 6387
Cleveland, OR 44101

Customer surveys are very helpful in determining geographic
boundaries of banking markets.
According to a survey of small
businesses in Ohio, firms usually
obtain banking services locally,
depending on such things as the
type of service and the customer.
The survey results showed that
loans were held at banks farther
away from a place of business than
deposit accounts. Manufacturing,
suburban, and larger firms generally acquired all types of banking
services from institutions located at
greater distances from their place of
business than did non manufacturing,
nonsuburban, and very small firms.
Since size and type of output influence a firm's choice of banking
locations, it is important that the
sample of firms in a survey represent the population in the area being
analyzed. It also is essential to
ascertain not only where firms and
individuals currently are banking,
but the specific locations of their
practical banking alternatives.
NOTE: The last issue of the Economic
Commentary was published July 5, 1983.

BULK RATE
U.S. Postage Paid
Cleveland, OR
Permit No. 385

Economic Commentary
ISSN 0428-1276

Geographic Banking Markets
by Paul R. Watro

r.==~ arious

U.S. regulatory
agencies are responsible for
preventing bank mergers
and acquisitions that would
have substantially negative
effects on banking competition. Regulatory agencies identify
relevant product and geographic
markets to assess the competitive
impact of proposed mergers and
acquisitions. Supreme Court decisions indicate that commercial
banking generally should be
considered as a separate line of
commerce, or product market, for
antitrust purposes.' Commercial
banks traditionally offered customers a unique cluster of products
that were not available from other
institutions. Because of expanded
powers, thrift institutions now
operate more like commercial banks,
becoming increasingly important
suppliers of a wide range of
financial services.
Like the line-of-commerce issue,
the framework for defining the
geographic area pertinent to a bank
merger is also open for debate, even
though the Supreme Court has provided some conceptual guidelines for
delineating geographic market
areas. The court has recognized, for
example, that the type of bank customer would alter the pertinent
geographic area." A market consist-

===

1. See United States v. Philadelphia National
Bank, 374 U.S. 321 (1963); United States v.
Phillipsburg National Bank and Trust Company,
399 U.S. 350 (1970); and United States v.
Connecticut National Bank, 418 U.S. 666 (1974).

Address Correction Requested: Please send corrected mailing label to the Federal
Reserve Bank of Cleveland, Research Department, P.O. Box 6387, Cleveland, OR 44101.

September 12,1983

2. See United States v. Philadelphia National
Bank, 374 U.S. 361 (1963).

ing only of the largest corporations
could be national or international in
scope and thereby make the competitive effects of most bank mergers
insignificant. In contrast, a market
defined only in terms of very small
businesses could be so narrow as to
exclude competing banking institutions from the merger analysis.
According to the Supreme Court,
competitive assessments should
focus on the class of customers,
such as individuals and small
businesses, that would be most
affected by bank mergers. Market
boundaries should be thought of as
encompassing the area in which the
bank to be acquired offers its
services, as well as the area in
which local customers could practicably turn for banking services.
Definitions of banking markets
are often disputed by economists,
attorneys, and regulators alike,
Whether a proposed merger is
approved or denied may ultimately
depend on the geographic boundaries of a particular banking
market. This Economic Commentary
discusses the fundamental differences between service areas and
market areas and reviews methods
used by regulatory agencies to
define geographic markets. The
article also examines the areas in
which a sample of Ohio's small
businesses acquires services from
commercial banks.
Economist Paul R. Watro researches issues in
banking for the Federal Reserve Bank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal Reserve System.