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FRBSF
WEEKLY LETTER
Number 94-04, january 28, 1994
Banking Market Structure in the West
Over the past decade, consolidation has led to
changes in the banking landscape. In the West,
mergers such as those between Wells Fargo Bank
and Crocker National Bank and between Bank of
America and Security Pacific National Bank, as
well as many less dramatic combinations, have
changed names on bank branches from Alaska to
Arizona. This Weekly Letter looks beyond these
name changes to determine if consolidation has
had a more fundamental impact on the structure
of banking markets in the West. This is important
because market structure has the potential to affect the cost of banking services.
and results in an HHI of at least 1800 would raise
competitive concerns. (In the competitive evaluation of bank mergers, the deposits of savings
institutions are included with a weight of 50 percent in the calculation of the HHI.) While the
guidelines are not hard and fast, their use has led
to the denial of merger applications and, more
often, to requirements that a merged bank divest
banking offices to third parties to reduce the effects on market concentration. As a result, the
guidelines have helped contain the adverse effects of individual mergers on competition.
Changes in structure
Market structure
Two dimensions of market structure are the number of banks competing in a region and the degree to which market shares are concentrated
in a few banks. Structure is important because, in
theory at least, more banks and lower concentration can mean more competitive pricing of bank
services.
Because many banking services are supplied
locally, and many bank customers find it very
costly to look for alternatives outside their local
area, the antitrust analysis of bank mergers focuses mainly on the effects of the structure of
local banking markets. The measure of structure
used by the federal bank regulatory agencies
and the Department of justice (DOj) is the
Herfindahl-Hirschman Index (HHI). The HHI is
computed as the sum of the squares of the percent market shares of bank deposits of the competitors in the local market. For example, if a
market has only one firm, then the HHI is 100
squared, or 10,000, and it decreases as the number of competitors increases.
For evaluating individual mergers, the DOj
guidelines indicate that a bank merger that increases the HHI in a local market by 200 points
WESTERn BAnKinG
However, the DOj guidelines do allow for small
changes in the HHI, and it is possible for the distribution of shares in local banking markets to
shift over time in such a way that, even with antitrust laws, concentration increases. To see if this
has happened in the West, I looked at changes
in the structure of local banking markets in the
Twelfth Federal Reserve District states of Alaska,
Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington between 1982 and
1992.
For purposes of this study, I delineated 243 local
banking markets, comprised of 65 metropolitan
markets and 178 nonmetropolitan (rural) markets. Metropolitan markets are defined by Rand
McNally's "RaNally Metropolitan Areas;' or
RMAs. Rural markets are approximated as counties without any portion of an RMA in them; there
are 178 in the Twelfth District. (These definitions
mean that the non-RMA parts of counties that
have a portion of an RMA in the county are excluded from the analysis.)
Statewide average HHls were calculated by multiplyingthe HHI in each market (metropolitan and
rural) by a market-specific weighting factor and
adding up all of the weighted HHls for the state.
Western Banking is a quarterly review of banking
developments in the Twelfth Federal Reserve District. It is published in the Weekly Letter on the fourth
Friday of january, April, july, and October.
FRBSF
The weighting factor for the statewide averages is
the deposits in that market divided by the sum of
all deposits in all local markets in the state. A
similar scheme was used to calculate separate
metropolitan and rural averages.
The figure shows that, in most states in the West,
local market concentration has been fairly stable,
or has even declined. The two most striking declines have been in Arizona and Nevada, where
the HHls declined by 370 points and 989 points,
respectively. The two states showing increases in
the HHI were Alaska and Hawaii. Alaska saw an
HHI increase of 183, mostly because the largest
bank's acquisitions of several of the mid-sized
banks in the state were allowed due to consideration of the acquiree banks' financial conditions.
Hawaii had an increase in the average HHI of
709, in part because the largest bank in the state
acquired a fairly large savings and loan.
Average Concentration Indices (HHls)
4000
[]I 1982
3500
.1992
3000
2500
2000
1500
1000
500
Thus, for most of the West, bank consolidation
has occurred along with stable or decreasing local market concentration. For the most part, this
also holds true when attention is confined to just
metropolitan or just rural markets. Even California, with two of the biggest bank mergers in
history, has had a net decline in weighted average HHls.
A stable or declining average HHI in most of the
western states reflects at least a couple offactors.
One is the increase in the number of banks in
some local banking markets, both through the
establishment of new banks and the branching
of existing banks~ From 1982 to 1992, 67 local
banking markets saw increases in the number of
banks. For example, new entry played an important role in the decline in the HHI in both Arizona and Nevada. Another factor is the dynamics
among existing competitors in local markets. A
decline in concentration means that, over time,
market shares tend to "even out:' as banks with
smaller market shares gain ground and banks
with larger shares lose ground. This suggests that
smaller banks may provide a competitive check
on larger banks.
An additional aspect of the dynamic is a tendency for some acquiring banks to Jose some of
the combined market share of the merged firms
following an acquisition. This mitigates against
any initial concentrating effects of mergers. For
some in-market mergers, acquiring banks have
been required to divest branches in specific markets, often to banks not already operating in
those markets. Sometimes, competitors have
been able to attract customers from merged institutions because they closed branches or otherwise changed bank practices. This has happened
in some interstate as well as intrastate acquisitions. Following some of the larger mergers in
particular, competitors have even mounted aggressive promotional campaigns aimed at attracting the customers of merged or acquired
institutions.
Conclusion
Despite widespread consolidation in banking between 1982 and 1992, local banking markets in
the West have generally witnessed either relatively stable or declining levels of concentration.
This has been due to several factors, including
the establishment of new banks and branches
and the tendency of smaller competitors in local
markets to gain market share, thereby providing
a competitive check on larger institutions.
Elizabeth Laderman
Economist
REGIONAL BANK DATA
SEPTEMBER 30, '993
(NOT SEASONALLY ADJUSTED, PRELIMINARYOATA)
DISTRICT ALASKA
--ASSETS
LOANS
SECURITIES
LIABILITIES
DEPOSITS
TOTAL
FOREIGN
DOMESTIC
REAL ESTATE
COMMERCIAL
CONSUMER
AGRICULTURAL
OTHER
328,769
28,319
300,450
158,655
60,335
TOTAL
U.S. TREASURIES
U.S. AGENCIES
OTHER SEC.
60,976
25,262
54,242
5,981
2',238
41,807
1~,909
TOTAL
DOMESTIC
456,462
TOTAL
FOREIGN
DOMESTIC
DEMAND
NOW
MMDA & SAVINGS
SMALL nME
LARGEnME
OTHER
397,550
26,006
424,302
369,542
96,386
41,241
140,608
63,279
27,703
326
33,502
LOAN COMMITMENTS
LOANS SOLD
202,923
CALIF.
HAWAII
2,650
20,294
5
2,645
0
20,294
1,311
790
365
4
155
7,871
2,471
6;726
343
2,662
217,286
13;926
26,907
1,391
12,535
7,511
3,079
190,379
112,194
37,742
24,054
2,976
13,412
1,071
1,811
NET CHARGEOFFS,
REAL ESTATE
COMMERCIAL
CONSUMER
AGRICULTURAL
PAST DUE & NON·ACCRUAL, TOTAL
REAL ESTATE
CONSTRUCTION
COMMERCIAL
FARM
HOME EQUITY LINES
MORTGAGES
MULTI·FAMILY
COMMERCIAL
CONSUMER
AGRICULTURAL
No~Accrualloan
4,363
1,455
2,073
636
3,469
713
1,652
1,104
4,234
23,666
23,665
13,570
13,550
37,ooe
36,993
11,024
34,012
64
10,959
33,936
1,509
517
32,365
32,365
300,301
270,179
20,367
16,366
9,811
14,792
9,611
14,792
3,743
1
3,142
29,076
0
266,827
26,127
240,700
66,473
24,180
7,949
9,952
',138
0
0
29,076
12,414
2,427
1,453
7,949
1,528
1,052
93,769
36,402
19,657
199
5,043
2,ooe
2,716
2,090
563
0
9,952
2,794
1,362
4,037
13,411
27,635
7,296
5,405
1,735
1,705
225
114
108,255
22,182
8,052
61
0.092
0.126
0.Q78
6,356
3,334
1,402
0
3,446
2,121
467
2,331
2,361
433
2,107
1,301
204
2,144
3,653
614
3,047
22
15,129
12,681
96
205
6,937
79
18,077
254
0.105
0.096
0.149
0.104
0.130
0.125
0.073
0.115
0.073
0.162
0.112
0.121
0.083
0.147
0.066
0.093
0.118
0.064
5,269
506
365
191
16
367
16
452
49
265
23
734
75
171
68
456
32
60
51
71
246
461
130
153
1
177
257
93
57
7
99
684
217
167
22
256
41
20
37
70
143
77
115
29
55
176
3.51
26.99
7.33
69
6
509
6,686
2,578
2,315
730
3,075
76
25
26
1
24
476
169
134
13
162
5,764
1,971
333
140
67
27
76
12
24
71
75
517
769
59
1.18
1.92
14.66
5.07
0.06
0.95
0.01
0.53
2.65
-0.35
·0.06
0.65
0.00
4.44
2.58
1,647
1,566
576
10
0.87
9.19
11.04
1.06
13.62
4.04
1.42
18.72
4.52
0.56
0.21
-0.54
1.66
1.13
1.30
0.52
3.60
-0.36
1.16
0.10
3.67
0.67
0.35
0.34
0.Q7
1.10
0.25
·0.02
5.36
7.30
2.60
2.65
1.36
1.60
8.60
1.61
10.46
1.21
5.64
1.63
0.26
2.79
3.18
5.65
0.65
15
eoo
3.96
ao.44
4.63
970
766
2
ee
2.67
0.18
-5.06
4.77
0.03
6.16
3,342
1.76
1.48
16.76
4.67
1.75
16.26
5.13
0.35
0.06
0.26
1.12
0.55
·0.04
·0.03
·0.56
0.56
-0.40
0.29
0.08
0.13
1.01
·0.90
1.66
2.36
6.22
1.59
1.72
0.97
3.64
15.28
0.59
1.05
0.04
1.79
1.30
1.61
2.60
2.73
4.07
8.67
0.00
1.30
3.48
1.01
24.33
0.60
24.55
10.13
9.14
1.43
1.62
1.73
2.60
2.66
0.00
1.60
1.12
4.67
2.71
2.43
4.19
10.07
4.55
3.11
3.06
2.66
1.16
2.66
2.63
20.66
0.00
1.34
1.22
1.32
6.76
25.32
7.22
0.00
0.76
3.92
2.13
6.54
5.69
1.20
6
2,733
37
19,557
429
155,547
17
6,707
20
4,727
20
48
6,506
16,465
7.46
3.97
2.69
2.90
715
242,975
1.11
92
4.96
6.02
3.50
1,546
3,682
19.56
19.24
8.10
6.07
76
721
5
6;260
756
13.24
2,518
1,456
1,222
1,556
2,485
3
0.061
49
20,813
4,568
13,362
7,790
7,043
1,125
1,146
646
16
1,481
0.123
0.146
194
20.815
2
1,609
30,477
11
30,466
6,553
4,606
12,319
6,621
1,772
62
0.223
507
4
16,064
1$,839
5,200
0.211
0.96
4,366
',641
2,247
476
4,343
4,342
0.127
4.64
'5
267
426
729
656
10,914
7,067
40,659
'3
40,845
2,591
154
512
1,911
1,167
18.0ge
14,871
20
14,851
WASH.
7,616
5,146
2,721
361
1,269
435
472
36
26,226
2
26,226
UTAH
4,606
3,629
436
1,596
45,690
13,563
14,152
OREGON
6,623
0
6,623
.3,956
25,311
6,816
926
ROA ('16 ANNUALIZED)
ROE ('16 ANNUALIZED)
NET INTEREST MARGIN ('16 ANNUALIZED)
9,680
0
9,660
2,394
773
6,231
6,151
30,128
1,453
431
0
16,913
10,053
2,393
0.126
0.079
TAXES
NET INCOME
1,474
2,313
16,913
1,643
694
512
437
0.099
TOTAL
INTlEREST
SALARIES
LOAN LOSS PROVISION
OTHER
2,438
669
617
16
23,111
7,544
0
7,544
37
636
2,394
3,246
9,923
INTEREST
FEES & CHARGES
NUMBER OF SANKS
NUMBER OF EMPLOYEES
NEVADA
IOAHO
560
655
43
43,907
nERl CAPITAL RATIO
TOTAL CAPITAL RATIO
LEVERAGE RATIO
• Past Due and
ARIZ.
ASSETS AND LIABILITIES - S MILLION (ALL COMMERCIAL BANKS)
500,369
4,998
35,631
326,137
22,121
10,612
32,159
30,122
2,001
1
0
0
468,210
35,631
4,997
296,015
20,120
10,612
TOTAL
FOREIGN
DOMESTIC
OTHER BORROWINGS
EQUITY CAPITAL
LOAN LOSS RESERVE
EXPENSES
---
3.41
6.21
0.37
1.16
0.45
1.23
1.23
4.67
50
7,644
2.52
3.27
11.57
2.85
3.60
1.60
1.33
1.51
2.56
1.44
2.62
ee
21,087
figures are revised and are not consistent with previous values.
Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor or to the author. ... Free copies of Federal Reserve publications can be
obtained from the Public Information Department, Federal Res~rve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 974-2246, Fax (415) 974-3341.
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PERCENT OF COMBINED MARKET TOTAL FOR NOVEMBER 1993. BY REGION
DISTRiCT
ALASKA
----
ARIZONA
CALIF
HAWAII
---- ----
DEPOSrrTYPE
CB
SL CU
CB
SL CU
CB
SL CU
CB
SL CU
TOTAL DEPosrrs
DEMAND
NOW
SAVINGS & MMDAS
SMALL TIME
LARGE TIME
55 3B 7
90 7 4
64 28 8
61 30 10
31 65 4
43 47 11
72
98
60
56
75
25
2
35
40
17
3
91
97
88
89
94
91
1
0
0
0
1
1
49
B9
58
57
22
35
45 6
7 4
35 7
35 8
74 4
53 12
95
CB = COMMERCIAL BANKS;
B
3
12
11
5
8
CB
SL CU
64 2B 8
91 4 5
65 31 4
56 33 11
53 44 3
75 17 8
NEVADA
IDAHO
CB
SL CU
91 5
96 0
89 4
91 4
87 11
89 6
4
4
7
6
2
5
SL = SAVINGS & LOANS AND SAVING BANKS; CU = CREDrr UNIONS;
CB
78
98
78
77
47
87
SL CU
18
2
14
15
48
13
OREGON
CB
SL CU
80 10 9
95 2 3
83 8 9
76 10 14
75 18 7
75 13 12
---UTAH
CB
SL CU
79 5 15
89 6 5
B3 2 16
73 3 24
80 11 B
68 11 21
MAY NOT SUM TO 100% DUETO ROUNDING
NOV
1991
TYPE OF RETAil DEPOSIT ACCOUNT OR LOAN
FEB
1992
MAY
1992
AUG
1992
NOV
1992
FEB
1993
MAY
1993
AUG
1993
NOV
1993
SAVINGS ACCOUNTS AND MMDAS
U.S
DISTRICT
4.64
4.68
3.78
3.81
3.57
3.67
3.14
3.29
2.90
3.05
2.80
2.96
2.65
2.78
2.55
2.67
2.48
2.58
92 TO 182 DAYS CERTIFICATES
U.S
DISTRICT
4.89
4.76
4.00
3.85
3.82
3.76
3.36
3.34
3.14
3.14
3.08
3.01
2.98
2.88
2.96
2.85
2.92
2.81
2·1/2 YEARS AND OVER CERTIFICATES
U.S
DISTRICT
6.02
5.71
5.36
5.03
5.45
5.17
4.87
4.75
4.70
4.49
4.59
4.41
4.45
4.27
4.40
4.19
4.2B
4.09
COMMERCIAL SHORT TERM FIXED"
U.S
DISTRiCT
6.09
7.01
5.18
6.50
4.87
6.26
4.42
4.86
4.17
5.35
4.16
5.21
3.91
4.84
4.02
4.78
3.95
5.53
COMMERCIAL SHORT TERM FLOA TlNG"
U.S
DISTRiCT
7.83
9.08
6.47
7.66
6.56
7.34
5.95
8.37
5.91
7.23
5.85
8.26
5.58
8.09
5.53
8.54
5.56
8.02
COMMERCIAL LONG TERM FIXED"
U.S
DISTRICT
7.82
10.10
6.33
7.70
7.27
8.68
6.28
8.28
5.97
6.44
6.43
9.19
6.02
10.86
6.21
8.05
5.38
6.62
COMMERCIAL LONG TERM FLOATING"
U.S
DISTRICT
8.14
8.89
6.95
8.10
7.06
7.38
6.60
7.63
6.53
8.11
6.38
8.43
6.47
8.55
6.05
B.77
5.70
7.68
CONSUMER. AUTOMOBILE
U.S
DISTRICT
10.61
IO.BO
9.89
9.90
9.52
9.67
9.15
9.39
8.60
8.76
8.57
8.98
8.17
8.23
7.98
8.09
7.63
7.70
CONSUMER, PERSONAL
U.S
DISTRICT
14.88
13.59
14.39
13.64
14.28
13.80
13.94
13.68
13.55
12.83
13.57
12.67
12.00
13.87
13.45
12.69
13.22
13.00
CONSUMER, CREDIT CARD
U.S
DISTRiCT
18.19
18.41
18.09
18.51
17.97
18.52
17.66
18.46
17.38
18.29
17.26
17.76
17.15
17.60
16.59
17.58
16.30
17.00
SOURCES; MONTHLY SURVEY OF SELECTED DEPOSITS. SURVEY OF TERMS OF BANK LENDING, AND TERMS OF CONSUMER CREDIT
MOST COMMON INTEREST RATES ON RETAIL DEPOSITS. WEIGHTED AVERAGE INTEREST RATE ON LOANS
" DATA ARE COMPOUNDED ANNUAL RATES
WASH
CB Sl CU
57
85
.66
56
39
10
2
12
18
56 5
44 54 2
33
13
22
26
@FedFRASER