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November 19, 1982

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Banking Structure in the West
Banking is more decentralized in the U.S.
than in any other developed country because
of restrictions on interstate branch i ng and the
power of states to make their own banking
laws. Such a combination can influence market structure and the level of competition in
banking which in turn affect prices, profits,
and offerings of financial services.
The nine western states of Alaska, Arizona,
California, Hawaii, Idaho, Nevada, Oregon,
Utah, and Washington, make up the Federal
Reserve System' 512th District. These western
states, in general, have not embraced
extremely. restrictive banking laws. They also
share the experience of rapid economic
growth. Combined, these legislative' and
economic characteristics have given these
states distinctive banking structures. A comparison of their banking structure with that of
the rest of the country therefore might shed
light on the effects of current legislative and
economic changes on the national banking
structure.

Branching: u.s. ersusthe West
v

method to circumvent restrictions on branching outside a bank's home office area. As a
result, these states have large numbersof
multi-bankholding companies. In fact, while
the average state percentage of deposits held
by multi-bank holding companies in 1980
was 33 percent in the West as a whole, itwas
67 percent in Utah and 80 percent in Oregon.
In Washington, there historically have been
restrictions on bank holding company formation as well as on branching, although
branch-swapping has allowed some banks to
enter each other's territories.
Such methods of circumventing branching
restrictions prevail in restrictive states outside
the 12th District as well. On average, however, the restrictions elsewhere appear to
have been more effective than they were in
the West. Banking organizations operated an
average of 3.8 offices in 1980 in the U.5. as a
whole; they operated an average of 12.7 in
the West in the same year.

Westerneconomic growth

A major difference between banking laws in
the West and those in the United Stateshistorically has been the extentto which branching
was permitted. In about a quarter of the fifty
states, only un·it banks (banks with one full
service office) were allowed in 1980. About
the same number of states limited the maximum distance bank branches could locate
from their main office. The remaining states,
including all the western states, permitted
some form of statewide branching.

Throughout its history, the West has also
been distinguished by rapid economic
growth. In the last decade alone, its population surged 23 percent and its personal
income jumped 66 percent. The respective
growth rates for the U.S. were only 11 and 48
percent. Such rapid growth has probably
contributed to the continued permissive
western attitudes toward new bank entry and
branching as both present less of a perceived
threat to established organizations in good
economic times.

The few branching limitations thatdid exist in
the last decade in some western statescould
be circumvented, albeit at a cost, through the
formation of bank holding companies. These
companies geographically expanded by
acquiring or establishing banks in other
areas. In Utah and Oregon, for example,
where de novo (new) bank formation is not
restricted, bank holding companies used that

Liberal regulations resulting from this environment in the West have not led to the
inefficient, grossly concentrated markets
feared by some opponents of national financial market.deregulation. Instead, the combined evidence from western patterns in new
bank entry, branching services, deposit
shares, and non-bank competition suggest
little that is consistent with this view.

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Opinions expressed in this newsletler do not
necessarilv
ilH-:'view.:, of the rnanagel'nent
of the Federal Reserve Bank of San Franci'i CU,
or of Ihe: 80ard ,Jf COvc':Twrs oft! w Federal
Re';ervt=' Systern.

New bank entry

have lower branch-to-population ratios than
Idaho and Alaska where the percentages of
people living in metropolitan areas are small.

During the last decade, the formation of new
banks has led to only a slight (7 percent)
increase in the total number of banks in the
(after taking account of all mergers and
acquisitions). In contrast, the number of
Western banks increased at a much faster
rate, from 421 to 817 -a 94-percent jump.

u.s.

Deposit shareconcentration
The existence of some economies of scale in
branch banking is more firmly corroborated
by evidence on bank market shares in the
West. If there were economies of scale in
branch services, liberal branching regulations should be associated with higher concentrations of deposit shares per banking
organization because they permit banks to
reach larger, and presumably more efficient,
scales. For example, the share of deposits
owned by the top three banks in each of the
Western states in 1 980 was 70 percent on
average, while the share for ali SO states was
only 42 percent.

The faster growth trend in the 12th District
appears to contradict the notion that entry of
new banks will be stifled in states where the
expansion of existing banks can be achieved
through branching. Although it is true that
new entry was greater in percentage terms in
the more restrictive branching states of Utah,
Washington, and Oregon than in the liberal
branching states, there has been active foreign and domestic de novo entry throughout
the District. Over 200 new banks have
opened for business in California in the last
decade, for example.

State concentration ratios within the West
also tended to vary inversely with the degree
of branching restriction. The more restrictive
states of Utah, Washington, and Oregon had
the lowest three-bank concentration ratios in
the West of 60, 58, and 62 percent in 1980,
respectively. This suggeststhat the removal of
branching restrictions would indeed lead to
greater shares of deposits held by large banks
and raises the issue of the consequences of
such increased concentration for the effectiveness of competition'. However, the effect
of liberal banking laws on effective competition is more complex than the preceding
comparisons suggest.

Branchingservices
Another distinctive feature of western banking concerns the prevalence of branching
services. It is commonly argued that there are
economies of scale in providing branch services and that restrictive branching laws
restrain the exploitation of such economies.
Thus, one would expect states with liberal
branching laws to have more bank branches
per capita than other states. Western states,
however, have lower branch-to-population
ratios than other states. The number of
branches per 100,000 people in the West is
less than 21; in the U.S., it is 25.

Effective competition
First, the usual measure of concentrationthe deposit share held by the top few banksmay not reflect adequately the effective level
of competition. This is because it does not
'distinguish between the case where a few
large banks exist without any small-bank
rivalry and the case in which there are numerous small rivals. A more complex index, the
Herfindahl index, attempts to distinguish
between such cases on the grounds that even
a small bank can be an effective actual or
potential threat to a large institution. Using
such a measure, the liberal branching states

This apparent paradox can be explained by
the high concentrations of population in
urban areas in the West. Eighty-six percent of
Westerners live within metropolitan areas,
whereas only 74 percent do so nationwide.
Individual western branches can, therefore,
serve a greater number of customers. A comparison of branch-to-population ratios in
states within the 12th District support this
explanation. California, Nevada, Arizona,
and Hawaii, all with very high percentages of
the population living in metropolitan areas,
2

A COMPARI SON OF U.S. AN D WESTERN STATE B AN KS
(1970·1982)
Change(%)

o

20

40

r'-'--------,

60

80

100

o

Net growth in number
of banks

5

10

15

Offices per Bank

f..--'--'---.....,

Bank shares of depository
institution assets

CJ U.S.
D Western

State deposit share of
top 3 banks

2025

States

effective and sophisticated competition for
the domestic banks.

of the West differ little in competitiveness
from their less liberal counterparts. Indeed,
California, a liberal branching state, has been
as "competitive" as its traditionally more
restrictive counterparts-Oregon, Utah, and
Washington.

Implications
An evaluation of the western banking experience provides several possible (although
ambiguous) lessons for national banking
policy. First, although liberalizing branching
restrictions (on a state-by-state or national
basis) would very likely raise national and
state deposit share concentration levels, by
some measu res effective competition at the
local market level may not be severely compromised. (In addition, there appear to be
economies of scale in banking that might
otherwise go unexploited.) Evidence for this
conclusion lies in the poor correlation
between state and metropolitan levels of
concentration in the West. The poor correlation reswlts because as banks expand their
branching networks outside their home territory, they face more metropolitan competitors. National statistics already reflect this
situation. While the state market shClreof the
top five banks in the fifty states has increased
only 0.1 percent on average in the last
decade, the average metropol itan share of the
top five banks has fallen between 3 and 7
percent in every state.

Second, state-level concentration measures
may be less relevant to the assessment of
effective competition than the concentration
levels at the local level, where much of the
rivalry for consumer and small business customers takes place. There is mixed evidence
for this observation in the Twelfth District. In
1981, banks in California and Arizona (two
"liberal" branching states) actually faced
lower concentrations of bank power (by the
Herfindahl measure) in metropolitan areas
than banks in the more restrictive state of
Oregon. Although such comparisons do not
hold consistently throughout the District,
such a result would not be unexpected when
branching is limited to the county or metropolitan area in which the head office is
located. Such a restriction limits the number of potential entrants from outside the
market and may limit the effectiveness of
branching restrictions in preserving effective
competition.
Moreover, as an adjunct to liberal branching
laws, the West has encouraged non-bank and
foreign bank competition, further promoting
vigorous competition in financial markets.
The strength of non-bank competition may be
responsible for the smaller share of total
financial institution deposits held by banks in
the West compared to banks in the U.S.
Whereas banks nationwide owned 68 percent of all depository institutions' assets in
1980, banks in the West could claim only 61
percent.

Second, we can find no evidence that the
entry of new banks is foreclosed by liberal
branching legislation. Throughout the West,
there has been active entry of new, small
banks even in those states where such entry is
not simply a vehicle to circumvent branching
restrictions.
Finally, non-bank depository institutions
have shown themselves to be effective
market participants in the West, even in the
earlier decade when their deposit taking and
lending activities were more constrained
than they are today. On balance, further
liberalization of branching, and assetand
deposit-taking powers seems unlikely, therefore, to lead to overly concentrated banking
markets and the poor quality banking services many fear.

Foreign banks have also been aggressive in
Western banking through branch bank networks and active agency and representative
offices. Although 95 of the 130 major foreign
banks in the u.S. in 1981 had established
New York as their home state, 11 others
chose western locations. These, too, provide

Randall Pozdenaand KarenVangsgard
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BANKINGDATA-TWELfTH FEDERAL
RESERVE
DISTRICT
(Do!lar amounts.inmillions)

Selected
Assets nd Liabilities
a
largeCommercial
Banks
Loans(gross,adjusted)and investments*
Loans(gross,adjusted)- total#
Commercial and industrial
Realestate
Loansto individuals
Securitiesloans
U.s. Treasurysecurities*
Other securities*
Demand deposits - total#
Demand deposits- adjusted
Savingsdeposits- total
Time deposits total#
Individuals, part. & corp.
(LargenegotiableCD's)

Weekly
Averages
of Daily Figures
MemberBankReserve
Position
Excess
Reserves + )/Deficiency (- )
(
Borrowings
Net free reserves )/Net borrowed(- )
(+

Amount
Outstanding
11/3/82
161,741
142,149
45,518
57,534
23,414
2,278
6,648
12,944
42,165
28,658
32,545
100,496
90,215
37,596
Weekended
11/3/82
81
39
42

Change
from
10/27/82

Changefrom
year ago
Dollar
Percent

322
252
99
16
21
+
30
30
+
100
+3,433
+ 654
+ 824
+ 406
+ 337
+ 121

+
+
+
+
+
+
+

-

+
+
+
+
+
+

Weekended
10/27/82
123
3
120

8,304
9,603
5,316
2,431
102
441
1,061
2,360
789
445
2,726
15,295
12,920
5,051

-

5.3
7.2
13.2
4.4
.4
24.0
19.0
15.4
1.9
1.6
9.1
18.0
16.7
15.5

Comparable
year-agoperiod
62
50
12

* Excludestrading account securities.
# Includes items not shown separately.

Editorial
comments beaddressed theeditoror to theauthor.... Free
may
to
copies thisandotherFederal
of
Reserve
publications be obtained callingor writingthe PublicInformation
can
by
Section,
Federal
Reserve
Bank San Francisco, Box7702,San
of
P.O.
Francisco
94120.Phone
(415)544-2184.

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