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Economic
Review
FEDERAL RESERVE BANK OF ATLANTA
APRIL 1982
OF
COMMERCE
Battle Over Banking
I
Economic
Review
FEDERAL RESERVE BANK OF ATLANTA
President:
William F. Ford
Sr. Vice President and
Director of Research:
Donald L. Koch
Vice President and
Associate Director of Research:
William N. Cox
Financial Stucture:
B. Frank King, Research Officer
David D. Whitehead
National Economics:
Robert E. Keleher, Research Officer
Stephen O. Morrell
Regional Economics:
Gene D. Sullivan, Research Officer
Charlie Carter
William J. Kahley
Database Management:
Delores W. Steinhauser
Payments Research Team
Paul F. Metzker
Veronica M. Bennett
Visiting Scholars:
James R. Barth
George Washington University
George J. Benston
University of Rochester
Robert A. Eisenbeis
University of North Carolina
Arnold A Heggestad
University of Florida
John Hekman
University of North Carolina
Paul M. Horvitz
University of Houston
Peter Merrill
Peter Merrill Associates
Communications Officer:
Donald E. Bedwell
Public Information Representative:
Duane Kline
Editing:
Gary W. Tapp
Graphics:
Susan F. Taylor
Eddie W. Lee, Jr.
The purpose of the E c o n o m i c Review is to inform the
public about Federal Reserve policies and the economic environment and, in particular, to narrow the gap
between specialists and concerned laymen.
Views expressed in the Economic Review aren't necessarily those of this Bank or the
Federal Reserve System. Material herein may be reprinted or abstracted if the Review
and author are credited. Please provide the Bank's Research Department with a copy of
any publication containing reprinted material. Free subscriptions and additional copies
are available from the Information Center, Federal Reserve Bank of Atlanta, P.O. Box
1731, Atlanta, Ga. 30301 (404/586-8788). Also contact the Information Center to
receive Southeastern Economic Insight, a free newsletter on economic trends
published by the Atlanta Fed twice a month and mailed first class to subscribers. Insight
is designed to give readers fresh and timely data, analyses and forecasts on the
Southeast's economy.
APRIL 1982, E C O N O M I C R E V I E W
To our readers:
Introduction
verview
The Legal a n d
sgislative History
[of the Line of Commerce
fin Banking
4
6
12
Regulatory Agencies' Approaches
7 the "Line of Commerce" . . .
20
'heoretical Review .
30
friKeview of
Empirical Literature
35
Hxth District Survey of
lall Business Credit
42
)o Banks Price
If Thrifts Matter?
49
Evidence from t h e
inking Side
54
Conclusion
59
Bibliography a n d Footnotes
63
Statistical S u p p l e m e n t
66
j
>
In the last 20 years this nation has seen a dramatic change in
the availability of financial services. In 1960, there was one
financial service office for every 3,000 people. By 1980,
consumers could find financial services not only at the
traditional brick and mortar banks, savings and loans and credit
union offices, but also at automatic teller machines, securities
dealers and life insurance agencies. In the future, interactive
cable television networks will carry banking packages into
consumers' homes. Bill-by-phone systems are already established
throughout the nation and personal computers are beginning to
be used for home banking. In the not-too-distant future,
perhaps within years, the concept of brick and mortar financial
outlets could, in fact, become obsolete.
The "financial supermarket," where a complete menu of
financial services may be obtained from a single source, is no
longer a theoretical notion but a present day reality. Creative
innovation and technological breakthroughs have spurred rapid
change in the financial industry, primarily at the expense of
regulated depository institutions. The industry which will evolve
during the next few decades is in its infancy today. As it
matures, competition will clearly increase.
We must recognize these onrushing changes and evaluate
the forces shaping the financial industry of the future. To help
our readers understand this changing financial environment, we
have gathered some of the finest scholars and researchers in the
field, including several members of our own research department
who will contribute to a series of special issues of our Review
charting the industry's future course.
In this issue, the first in the series, we look at whether courts
and regulators should continue to treat commercial banking as
a separate line of commerce for antitrust purposes. Application
of our antitrust laws to commercial banking is largely
responsible for our present, fragmented financial industry with
its 40,000 separate financial institutions. In a time of rapid
change in the financial marketplace and major new financial
legislation, is this treatment of commercial banking as a
separate line of commerce still relevant? If not, what are the
likely consequences of changing our regulatory approach? This
special issue focuses on these vital questions.
Sincerely,
Donald L Koch
Senior Vice President and
Director of Research
>
V O L U M E LXVII, N O . 4
V
INTRODUCTION
In the financial services industry, major changes
more than 40,000 suppliers of various types of
in legislation usually follow convulsion or revolution
financial services.
from within the industry. The industry's convulsion
The purpose of this issue of the Economic
during the Great Depression of the 1930s brought a
Review is to summarize and evaluate a longstandwave of federal legislation establishing a set of
ing controversy—do commercial banks offer a
specialized financial institutions which were segproduct unique enough to require different treatmented by product and by geographic markets.
ment from other financial service suppliers for
Today this product and market
antitrust purposes? Should comsegmentation still exists, but a
mercial banks be treated as a
new revolution within the finanseparate industry rather than
cial services industry has stimuas part of the much largerfinanlated the passage of new federal
cial services industry for antitrust
legislation and the introduction
purposes? The answers will deDo commercial
of still more legislation with the
termine how the financial inpotential to eliminate the segbanks offer a
dustry is likely to evolve in this
mented structure of the industry,
country during the next few
product unique
established five decades ago.
decades.
enough to require
Demanders of financial serIf the courts continue to treat
different treatment
vices are pushingsuppliers into
commercial banking as a sepaexpanding the services they prorate line of commerce, w e will
from other
vide, and into finding new and
see a continuation of our fragfinancial service
innovative means to supply
mented financial services inthose services. The new services
suppliers for
dustry. O n the other hand, if
demanded generally cannot be
the courts decide that comantitrust purposes?
provided by any single supplier
mercial banks produce a prounder regulations established
duct which is not unique, but
in the 1930s. As a consequence,
P
1
l'
rather is available through many
financial suppliers are revolting I
I other types of financial firms,
against the product constraints
the result will be a broadening
imposed by outdated regulations.
of the product definition.
Antitrust laws have allowed the courts to
Ultimately this would reduce substantially the
further shape the financial services industry into
number of financial institutions, with each of the
an industry segmented by types of products. A
future institutions potentially offering the same
key to this segmentation was the Supreme Court's
array of services. This development may come
1963 decision establishing commercial banking
either through new legislation or through redefias an industry offering a unique product, a line of
nition of the line of commerce by the courts, or
commerce separate and distinct from that proby some combination of the two.
duced by any other suppliers of financial services.
The passage of the Monetary Control Act of
Commercial banking, in other words, was a
1980 ( M C A ) is evidence that Congress perceives
separate "line of commerce." Then, through
a need to reevaluate the existing statutory restricapplication of the antitrust laws, the courts were
tions on financial service suppliers in light of
able to mandate that there would be a large
changing market forces. Legislation passed in the
number of competitors not only within the
next few years will shape the financial services
commercial banking segment, but within each of
industry, perhaps for decades into the future.
the other segments as well. Today w e find
The relevance of commercial banking as a separate
4
APRIL 1982, E C O N O M I C REVIEW
Horowitz, Graduate Research Professor of Management at the University of Florida, evaluates
the theoretical foundations for defining banking
as a separate line of commerce. The courts'
definition hinges on the fact that third party
transactions accounts are a monopoly product
offered in a clustered group of products. Horowitz
concludes that the courts were on firm theoretical
grounds, if banks in fact tie a group of services
together.
B. Frank King, research officer at the Federal
Reserve Bank of Atlanta, reviews the economic
literature on whether or not these clusters of
services actually exist. Although much existing
evidence is dated, economists increasingly are
recognizing the significance of
non bank alternatives for each
kind of financial service offered
Section one reviews the legal,
by commercial banks. CompeIf the courts
legislative, and regulatory history
tition between banks and nonbank suppliers has intensified.
of the line of commerce apdecide that
proach. DougAustin, president
Evidence on the "clustering"
commercial banks
issue, however, is just beginof Financialysts, Inc., traces the
concept back to 1963, when
ning to come in.
produce a product
the Supreme Court surprised
Section three presents three
which is
the financial world by applying
new studies aimed at the crucial
not unique, . . .
antitrust laws to commercial
"clustering" question. An Atbanking. Since then, the Court
lanta Fed survey of small busthis would reduce
has held fast to the idea that
inesses indicates that small bussubstantially the
the "cluster" of services offered
inesses do indeed perceive the
number of
by commercial banks was sufcommercial bank product as a
ficient to separate commercial
cluster of services. Bill Cox, asfinancial
banking's product from the prodsociate director of research at
institutions.
ucts of other financial service
the Atlanta Fed, approaches
suppliers.
l'~
'l
the question differently with a
survey of price competition beRobert Eisenbeis, Wachovia I
tween southeastern banks and
Professor of Banking, University
thrift institutions. His study suggests that banks
of North Carolina at Chapel Hill, and Visiting
do not price their N O W accounts, six-month
Scholar at the Atlanta Fed, outlines the slightly
money market certificates, or small savers certifidifferent approaches taken by the various regulatory
cates as if thrift competition matters.
agencies on the line of commerce question.
line of commerce stands at the center of the
struggle.
Federal Reserve Bank of Atlanta senior financial
economist David Whitehead begins with a brief
overview of the important forces which have
shaped the financial services industry during the
past five decades. H e also sets the stage for the
current controversy by describing the major
forces changing the industry today. George Benston,
economics professor at the University of Rochester and Visiting Scholar at the Atlanta Fed, offers
an intriguing alternative to the standard explanation for the wave of financial legislation in the
1930s. This legislation was not so much a result
of fears about the financial system's safety, Benston
argues, as it was a product of
the self-interest of the suppliers
of financial services.
Despite the recent "revolutionary" changes in the
financial marketplace, Eisenbeis concludes that,
for commercial customers, commercial banks'
cluster of services is as unique today as it has ever
been. Thus, as long as the courts continue to
direct antitrust action toward the protection of
customer classes rather than toward competitors,
they are not likely to change their basic opinion
on the uniqueness of the commercial banking
product.
In section two, w e examine the economic
rationale for the line of commerce argument. Ira
FEDERAL RESERVE BANK OF ATLANTA
In the third article, Cynthia Glassman, economist with the Federal Reserve Board, reports on
an interagency survey of lending officers at
commercial banks. The survey's findings suggest
that nonbank suppliers of financial services are
becoming more important and competition is
intensifying, but that banks generally do not
perceive nonbank sources to be active lenders
to small businesses.
A concluding article presents policy recommendations based on the evidence compiled in
this special issue of the Review.
5
The Line of Commerce Issue
in Commercial Banking:
An Overview
In 1933 and 1935 Congress passed Banking
Acts which still influence the structure of the
financial services industry. These acts were
not contrived in haste but had been debated
for years prior to the Great Depression.
Partly as a result of the large number of bank
failures occurring during the depression,
Congress was placed under severe pressure
to restructure this country's financial system.
As a first priority, Congress was determined
to ensure the survival of a large number of
independent banks.
The Federal Deposit Insurance Corporation
was formed to provide deposit insurance
intended to renew public confidence in the
banking system, thereby reducing the probability of massive withdrawals by the public
which caused many bank failures during the
late 1920s and early 1930s. The establishment
of the FDIC implicitly assured that almost all
banks would come under some type of
federal regulation. In addition to insuring
deposits, Congress moved to reduce competition among banks by prohibiting the
payment of interest on demand deposits.
This, in combination with entry regulation by
the Federal Deposit Insurance Corporation,
assured to an extent the stability of the
commercial banking system.
Perhaps more important to the structure of
the financial services industry that w e see
today, Congress during this period strengthened
the McFadden Act of 1927 and passed, as
part of the Banking Act of 1933, the GlassSteagall Act. Congress strengthened the McFadden Act by prohibiting interstate banking
"[After the bank failures of the 1930s,]
Congress was determined to ensure the
survival of a large number of
independent banks."
6 APRIL 1982, E C O N O M I C REVIEW
and giving states the discretion to dictate
intrastate branching for national banks as
well as state chartered banks. This was
another way to ensure small bank survival,
through reduced competition from large outof-state banking organizations. The GlassSteagall Act placed product constraints on
banks by separating commercial banking
from the securities business, prohibiting commercial banks from dealing in corporate
securities. Investment banks also w e r e prohibited from offering deposit services.
Essentially, commercial banks w e r e intended to serve the short-term credit needs
of consumers, business, and agriculture. Investment banks served the long-term financing needs of business and government. In
addition to this division, financial institutions,
such as savings and loan associations, w e r e
given separate chartering authorities, regulatory frameworks, and insurance agencies. In
effect, the congressional concern for the
safety and soundness of the commercial
banking system reflected the more basic
concern of ensuring the stability of the
nation's payment system.
At the time, commercial banks w e r e the
only type of financial institution capable of
offering third party transaction a c c o u n t s d e m a n d deposits—to individuals and business. This unique function differentiated
commercial banks.from all other types of
financial service firms. It also provided the
rationale through which Congress accorded
commercial banking a separate position in
the financial services community. To protect
the payments system, Congress differentiated
the product of commercial banks from that
of all other suppliers of financial services.
Congress clearly v i e w e d the various types
of financial institutions as serving different
sectors of the economy. Commercial banks
accepted d e m a n d deposits and provided
commercial and agricultural loans. Savings
and loans associations and mutual savings
banks specialized in savings deposits and
h o m e mortgages, while investment companies pooled capital and invested in securities.
Even the division of regulatory responsibility
among the numerous agencies implied a
degree of separability among the financial
institutions. To name a few, w e have tri-party
federal regulation of commercial banks (the
Federal Reserve System, the Federal Deposit
Insurance Corporation,and the Comptroller
of the Currency); the Federal H o m e Loan
WHY D I D CONGRESS PASS NEW FINANCIAL SERVICES LAWS IN THE 1930s?
AN ALTERNATIVE O P I N I O N
The rationale for Congress' passage of legislation is
very difficult to establish. Nevertheless, it is important that we attempt to understand the circumstances surrounding the passage of the banking
and securities legislation of the early 1930s so that
we can assess its contemporary relevance. In
particular, if the McFadden Act's restrictions on
branch banking were enacted to ensure small
banks' survival, would the repeal of the act mean
that the financial system would be dominated by
nation wide giant banks? If investment banking was
separated from commercial banking by the GlassSteagall Act because the combination of services
resulted in fraudulently and unsafely run banks,
might not this situation occur again were the
statute changed?
Was the fact that the Banking Act of 1933 and the
subsequently enacted legislation and regulations
establishing and reinforcing a specialized financial
FEDERAL RESERVE B A N K O F A T L A N T A
services system a reaction by Congress to the
failure of many banks and thrift associations in the
early 1930s? If it was, should we be concerned that
the repeal of the legislation and the removal of
restrictions on the services that chartered financial
institutions can provide might not result in a future
wave of failures?
These questions can be answered from two
perspectives. One is careful study of the causes of
bank failures and frauds. Some research on this
question has been done. Little, if any, identifies
branch banking, the combination of commercial
and investment banking, or the offering by thrifts of
traditional commercial banking services as causes
of failures*. Indeed, the evidence points to limitations
on branching as a major cause of bank failures,
since very few branch banks (particularly large
'See George J. Benston, Bank Examination, The Bulletin, 1975.
7
"[Since Congress obviously intended to segment the financial
industry,] perhaps it should have come as no surprise when the
Supreme Court declared in 1963 that commercial banking was in
fact a separate line of commerce."
Bank System; the Securities and Exchange
Commission; and the National Credit Union
Administration.
Each agency has responsibility for groups
of institutions that provide various types of
services. But the point is there is not just one
agency that oversees the entire financial
services industry. There are many with divided
lines of responsibility. The legislative segmentation of the financial services industry
encouraged Congress to fragment regulation
of the industry.
The legislative intent was obviously to
segment the financial services industry.Therefore, perhaps it should have c o m e as no
surprise w h e n the S u p r e m e Court declared
in 1963 that commercial banking was in fact
a separate " l i n e of commerce." This decision
banks) failed.
Unfortunately, the effect on bank safety of commercial banks offering investment banking services
was not similarly studied. But there is good reason
to doubt a causal relationship because very few
large money market banks, the banks that tended
to offer investment banking services, failed. Since
thrifts only recently could offer commercial banking
services (and still cannot serve most business
customers), we cannot look to the past for guidance.
But we can acknowledge that commercial banks
that offered mortgages and savings deposits were
not more prone to failure for that reason.
The other perspective from which the possible
effects of repeal of the Great Depression legislation
can be assessed is an analysis of the reasons for
these laws having been passed. As an alternative to
the bank safety, small-bank-survival hypothesis
explaining congressional intent put forth above, I
would like to propose a producer self-interest,
8
set a precedent that is still used today by
defining the product of commercial banks as
a special cluster of services. This cluster of
services was unique to commercial banks
because, by legislation, they w e r e the only
financial institutions that could offer d e m a n d
deposits to individuals and businesses and
make commercial loans. Therefore, the Supreme Court defined the product of commercial banks to be very narrow—the cluster of
services only commercial banks could offer.
Either of t w o events could possibly cause
the courts to change their v i e w of the
product offered by commercial banks. First
w o u l d be solid evidence that the array of
financial services provided by commercial
banks is not provided as a bundle or that at
horse-trading explanation. If this latter hypothesis
were correct, repeal of the legislation is unlikely to
result in failures, since it essentially was not passed
to prevent failures.
Furthermore, since the legislation no longer benefits the institutions, they and the public would be
better served by a repeal of legislation that keeps
them from changing to meet present demands.
And, if concern for the safety of the banking system
were not an important reason for the congressional
action of the 1930s, there is less reason to fear a
repetition of that unhappy time should the laws be
repealed.
The 1930s was a time of great financial distress.
Over a third (9,096) of the commercial banks failed
between 1930 and 1933. Most of these were small,
unit banks. The survivors quite reasonably feared
that the people would shift their funds to the larger
branch banks, since few of these failed. Hence, the
small banks wanted federal deposit insurance. The
APRIL 1982, E C O N O M I C REVIEW
least consumers of these services view each
service as a separable product. If this could
be s h o w n — a n d if it could be shown thatthere w e r e significant alternative suppliers of
each service other than commercial b a n k s then the courts possibly w o u l d broaden the
narrow product definition to include other
types of financial institutions.
Yet, convincing empirical evidence has not
been forthcoming that banks do not package
their services as a bundle or that customers
in fact view these services as independent
and available through significant alternative*
sources. And, as long as commercial banks
w e r e protected by legislation from competition from alternative suppliers and w e r e
allowed the unique offering of demand deposits,
it was very unlikely that sufficient evidence
could be found to reverse the court's bundle
of services definition.
The second event which has the potential
for at least forcing the courts to reexamine
their stand on this question is new financial
legislation which expands the array of services
potentially provided by alternative suppliers.
This latter event may have occurred in 1980
with the passage of the Monetary Control
Act ( M C A ) . The emphasis is on the " m a y "
because only in part did this act w i p e out
the unique position accorded commercial
banks within the financial services industry.
large banks, particularly those in the money centers,
didn't need deposit insurance. But they did want to
outlaw the payment of interest on demand deposits.
The New York banks in particular had tried, at least
since 1905, to establish cartel agreements that
restricted payments on deposits, particularly those
of country banks. But these agreements didn't
stick, as some bank or other broke ranks to attract
deposits from its competitors.
At the same time, investment bankers were
suffering from competition from banks that were
offering investment services. The more prestigious
brokerage houses also suffered from competition
from other, lower quality brokers, most of whom
didn't follow the older houses' standards for prospectuses. Add to this the public's apparent (and
mistaken) beliefs that the stock market crash of
1929 and shady dealings of the brokers and
bankers had caused the depression, and we have
the makings of a big horse trade.
FEDERAL RESERVE BANK O F ATLANTA
Prior to the M C A , commercial banks w e r e
virtually the only financial institutions that
could offer third party transactions accounts to
consumer or business firms and that could
offer commercial loans. This unique ability to
offer d e m a n d deposits and make commercial
loans in large measure was the basis for the
courts separate treatment of commercial banks.
Since the passage of the M C A , the only
unique service allowed to commercial banks is
the offering of third party transaction accounts
to commercial customers. Thrift institutions
may offer third party transaction accounts,
N O W accounts and share drafts to noncorporate customers. These institutions within
rather narrow limits are also able to offer
commercial loans and other services. 1
In effect, thrift institutions may now offer
the same range of consumer services as
commercial banks, and, on the asset side of
The small unit banks (which, being numerous,
carried political clout) won strengthened McFadden
Act prohibitions against branching. More importantly,
they gotthe FDIC, which was paid for principally by
the large banks. (The FDIC insured deposits up to
$5,000 per account but assessed premiums on all
deposits.) The large banks got a prohibition against
interest payments on demand deposits. The brokers
got the commercial banks out of the investment
business. They also didn't fight passage of the
Securities Act of 1933, which imposed prospectus
requirements on all but small issuers of securities
(but which exempted banks). And the Roosevelt
administration received the credit for taking aggressive legislative action that presumably corrected
the alleged abuses of the financial system while
preserving capitalism.
The savings and loans are another story. The
administration wanted to channel funds into the
housing industry. But 526 savings and loan associa9
"[Beyond the MCA,] the financial services market place has seen
an explosion of new services . . . [that] provide . . . an attractive
alternative to commercial banks."
the balance sheet, thrifts may offer an array
of commercial services. It appears to be only
on the liability side, providing third party
transactions accounts to commercial customers, that thrifts may be different from
commercial banks.
The M C A did blur the distinction among
classes of financial institutions, making these
institutions more homogeneous in their ability
to provide financial services. It is now
appropriate, therefore, to restudy the significance of viewing commercial banks as unique
providers of a specified cluster of consumer
and corporate financial services.
A d d e d to the legislative changes w e have
just mentioned, the financial services market
place has seen an explosion of new financial
tions had failed. First the administration tried to get
the mutual savings banks to expand out of the
Northeast. But the savings banks refused; they had
survived the depression with hardly a failure (only
10 went under) and were not disposed to taking on
new responsibilities. Nor were many commercial
banks in a position to expand.
Agents of the newly established Federal Home
Loan Bank Board then went to communities and
offered savings and loan charters to home builders,
lumberyard dealers, real estate lawyers, and others
who might benefit from starting an association that
would channel funds into their businesses. Bankers
couldn't benefit from this coincidence of interest
since such related dealings were not considered to
be consistent with sound banking practices. Thus
many specialized thrift associations were established
and, having been given subsidies by way of tax
exemptions and having been well-positioned to
10
services and instruments offered by both
financial and nonfinancial concerns. In large
part, these services provide customers with
an attractive alternative to commercial banks.
For corporate customers, the growth in the
number of alternatives has not been so great.
Still, commercial finance companies, captive
finance companies, leasing companies and
inventory financing by suppliers all provide
alternatives to commercial banks as a source
of funds.
These burgeoning alternatives call for a
new look at whether or not commercial
banking may realistically be v i e w e d as a
separate line of commerce.
—David D. Whitehead
1
take advantage of savings during World War 1 and
of the post-war housing boom, they prospered.
But today changes in consumer demands, unexpectedly high interest rates, and improved technology have served to make the 1930s laws punitive.
The acts and regulations have prevented or restrained
financial chartered institutions from changing effectively. Consequently, other suppliers of financial
services have been organized to meet consumer
demands and to take advantage of the technology.
Whether or not a repeal of the 1930s laws and
changes in the regulatory structure are desirable
pose important questions that have been much
debated. In any event, if this explanation for the
1930s legislation is correct, there seems little
reason to fear that changes would result in an
unsafe financial system.
George J. Benston
APRIL 1982, E C O N O M I C REVIEW
Section I
LEGAL AND
LEGISLATIVE
HISTORY
As we have seen, Congress, reacting to the financial upheavals of the
Depression, segmented the financial services industry in the 1930s. In
this section, Doug Austin focuses on the specific legislative and legal
developments leading to the separate treatment of commercial banks by
regulators for antitrust purposes.
When the Supreme Court in 1963 applied antitrust laws to banking,
it ensured the continuation of a fragmented financial industry. Why did
the Court rule that commercial banking was a separate line of
commerce? And why, despite increasing pressures from regulatory
agencies, lower courts, banks, and academics, has the Court held fast to
that ruling ever since 1963?
The interpretation is still under attack in the courts, but no cases are
now pending at the Supreme Court level which are expected to change
this definition.
Also in this section, Robert Eisenbeis examines how the regulatory
agencies have approached the line of commerce question. Regulators,
which must decide whether to allow mergers and acquisitions of
financial institutions, generally have applied the concept of banking as
a separate line of commerce. Regulatory treatment has varied, however,
from case to case and from agency to agency.
Do the regulatory agencies still believe that the cluster of services
offered by commercial banks is unique and that banks therefore should
be treated separately? Eisenbeis surveys the agencies' dilemma.
FEDERAL RESERVE BANK O F ATLANTA
11
The Legal and Legislative History
of the Line of Commerce in Banking
T w o decades ago the Department of Justice
shocked the commercial banking industry by
filing a civil antitrust action against the approved
merger of the Philadelphia National Bank and
the Girard Corn Exchange Bank, both of Philadelphia. U p until the filing of this suit in 1961,
the bankers had felt they w e r e i m m u n e from
antitrust law, their confidence stemming from
the language of t h e antitrust statutes and other
statutes as well.
The Philadelphia case proved not to be an
aberration, however, as t h e Justice Department
has filed over 60 suits since then attacking
various bank mergers. T h e possibility that bank
mergers or acquisitions may result in antitrust
violations has b e c o m e very real, a n d as such the
standards laid d o w n by the S u p r e m e Court and
lesser courts n e e d to be examined closely by
merger applicants prior to entering into a merger.
The purpose of this analysis is to focus upon
the c o n c e p t of the relevant " l i n e of c o m m e r c e "
as related to commercial banking, which is
important for reasons of determining the effect
the pending merger will have on competition in
the particular geographical area. As will be seen,
the original S u p r e m e Court definition of the line
of c o m m e r c e as d e c i d e d in t h e Philadelphia
case has " w e a t h e r e d the storm" for the 20 years
that have passed since. D u e to some recent
statutory developments and some recent District
Court opinions, though, a change may be on the
horizon.
12
Statutory History
of Bank Antitrust Law
The line of commerce as related to commercial
banking stems from Sections 1 and 2 of the
Sherman Act of J u l y 2, 1890. As stated in the
Sherman Act:
. . . Every contract, combination in the form of
trust or otherwise, or conspiracy, in restraint of
trade, or commerce, among the several states or
foreign nations, is declared to be illegal. Every
person who shall make any such contract or
engage in any such combination or conspiracy
shall be deemed guilty of a misdemeanor and,
upon conviction thereof, shall be punished by a
fine not exceeding $50,000 or by imprisonment
not exceeding one year.2
N o t e that there is no analysis here of t h e line of
commerce. Section 2 reads:
... Any person who shall monopolize, orattempt
to monopolize, or combine or conspire with any
other person or persons to monopolize, any part
of the trade or commerce among the several
states or with foreign nations, shall be deemed
guilty of a misdemeanor and, on conviction
thereof, shall be punished by a fine not exceeding
$30,000 or by imprisonment not exceedingone
year, or by both said punishments, in the discretion
of the court.3
Section 2 does not describe the definition of
commerce, nor does it delineate what the relevant
APRIL 1982, E C O N O M I C REVIEW
product line w o u l d be for any possible violation.
I t w a s not specific as to w h e t h e r t h e r e could b e a
multi-product or single product line of commerce.
T h e 1950 a m e n d m e n t s to Section 7 of the
Clayton A c t w e r e far more specific. Clauses 1
and 2 of Section 7 stated:
. . . No corporation engaged in commerce shall
acquire, directly or indirectly, the whole or any
part of the stock or other share capital, and no
corporation subject to the jurisdiction of the FTC
shall acquire the whole or any part of the assets
of another corporation engaged also in commerce
where in any line of commerce in any section of
the country the effect of such acquisition may be
substantially to lessen competition.4
W h e n the Cellar-Kefauver Amendment to Section
7 of the Clayton Act passed, neither commercial
bankers nor regulatory authorities believed that
Section 7 applied to commercial banks since
commercial banking was not " c o m m e r c e . " As
late as 1955, the antitrust division of t h e Department of Justice did not believe that commercial
banking was affected by Section 7 for the same
reason, and also because commercial bank mergers or consolidations w e r e neither an asset
acquisition nor a stock acquisition, but w e r e in
reality a hybrid.
The Bank Merger Act of 1960, which preceded
commercial bank merger litigation, did not incorporate any of the more pervasive language of the
a m e n d e d Section 7 of the Clayton Act. The Bank
Merger Act, which a m e n d e d Section 18 of the
Federal Deposit Insurance Act, reads, in relevant
part, as follows:
. . . In the case of a merger, consolidation,
acquisition of assets, or assumption of liabilities,
the appropriate agency shall also take into
consideration the effect of the transaction on
competition (including any tendency toward
monopoly), and shall not approve the transaction
unless after considering all such factors, it finds
the transaction to be in the public interest.5
Commercial bankers and their trade associations felt that the omission of the relevant line of
c o m m e r c e clause from the Bank Merger Act of
1960 further insulated the banks from any
Sherman or Clayton Act antitrust adjudication.
Commercial bankers w e r e shocked w h e n less
than 1 1 /2 years later the antitrust division of the
Department of Justice filed a Clayton Section 7
(and Sherman Sections 1 and 2) action against
the Philadelphia National Bank-Girard Trust Corn
Exchange Bank merger.
FEDERAL RESERVE BANK OF ATLANTA
IOJ
a
Case History
of Bank Antitrust Law
A. Philadelphia National Bank—
The Single Product Doctrine
Judge Clary, speaking on behalf of the District
Court for the Eastern District of Pennsylvania,
dismissed the Department of Justice's antitrust
suit against the Philadelphia National Bank-Girard
Trust Corn Exchange Bank merger. H e felt that
Section 7, as amended, did not apply to commercial banking because the commercial banks
w e r e not under the FTC jurisdiction and because
it was neither a pure stock nor pure asset
acquisition.
The Supreme Court, on June 17,1963, reversed
Judge Clary and remanded the case back to the
District Court for redetermination of its potentially
anti-competitive effects upon applicability of
Section 7. The S u p r e m e Court did agree with
Judge Clary's determination that the relevant
product line was commercial banking; the bundle
of services or mutually interdependent services
offered by commercial banking made commercial banking itself a unique line of commerce. As
stated by the Supreme Court:
. . . W e have no difficulty in determining the 'line
of commerce.'... W e agree with the District court
that the cluster of products (various kinds of
credit) and services (such as checking accounts
and trust administration) denoted by the term
'commercial banking,' composes a distinct line of
13
commerce. Some commercial banking products
or services are so distinctive that they are entirely
free of effective competition from products or
services of other financial institutions; the checking account is in this category. Others enjoy such
cost advantages as to be insulated within a broad
range from substitutes furnished by other institutions.6
Thus, the Supreme Court in its initial test accepted
one major economic theory as to the operation
of a commercial bank as a line of commerce.
T w o theories have b e e n available for a period
of time; summarily they are stated as t h e bundle
of goods, or mutually interdependent services
single line of c o m m e r c e theory, and the multiproduct department store of finance theory. The
latter was the alternative rejected by Judge
Clary's District Court and by the S u p r e m e Court
in 1963. O n c e the Supreme Court had determined
the relevant line of c o m m e r c e to be commercial
banking, the resultant concentration ratios included commercial bank competition only, and
other non-bank financial institutions w e r e excluded from consideration.
B. Lexington, Continental,
and Manufacturers-Hanover
O n April 6, 1964, the S u p r e m e Court ruled
against a consummated merger of the First National Bank & Trust Company and the Security Trust
Co., both of Lexington, Kentucky. The merger,
approved by the Comptroller of the Currency,
had been attacked in 1961 by the Justice Department. After consummation by the parties, the
Justice Department sued for divestiture under
Section 1 of t h e Sherman Act.
This case is the only instance in which the
Department of Justice sued and w o n under
Section 1 of the Sherman Act, alleging restraint of
trade in commercial banking and trust business.
The Justice Department w o n both at the District
Court and the Supreme Court levels against the
banks. The line of commerce was in this particular
"By 1966, the Justice
Department had won five suits
either in the courts or by the
abandonment of the merger."
14
case being stipulated as commercial banking for
both Section 7 of the Clayton Act and Section 1
of the Sherman Act.
T w o other major antitrust cases w e r e filed in
1961, against the Continental Illinois National
Bank & Trust-City National Bank & Trust merger in
Chicago and the Manufacturers Trust-Hanover
Bank litigation in N e w York. Continental Illinois
National Bank and City National Bank & Trust of
Chicago had received approval to merge in July
1961, but the Justice Department filed suit the
following month against said merger on grounds
of both Section 7 and Section 1. Again, commercial
banking was defined as the single line of commerce, with emphasis being on demand deposits
and business loans.
Almost simultaneously, the Justice Department
moved against the combination of Manufacturers
Trust Company and the Hanover Bank in N e w
York City. This merger had been consummated,
and, as in Lexington, the Justice Department
d e m a n d e d divestiture as the remedy for the
anticompetitive combination. In that case, for
the first time, the relevant line of c o m m e r c e was
altered. The Justice Department alleged, and the
District Court agreed, that the relevant line of
c o m m e r c e was commercial banking, but that
commercial banking was segregated into both
wholesale and retail. This was important primarily
for the relevant geographic market, to be discussed
later. But it also revealed that there w e r e at least
different product lines within the unique single
line of commerce.
In review, the first four cases filed w e r e all w o n
by the Justice Department. O n e other case not
discussed above, the proposed merger of the
Calumet National Bank of Hammond and Mercantile National Bank of H a m m o n d , was abandoned
after suit by the Justice Department. Thus, by
1966, the Justice Department had w o n five suits
either in the courts or by the abandonment of
the merger. Notice that all w e r e horizontal market combinations, and the line of commerce was
specifically tied to such combinations.
C. Crockei^Anglo—
The First Potential Competition Case
O n October 8,1963, the Department of Justice
filed a suit against the combination of the Crocker
Anglo National Bank (San Francisco) and the
Citizens National Bank (Los Angeles) 7 on Section
7 grounds, alleging the proposed combination
w o u l d violate antitrust laws. The suit alleged that
APRIL 1982, E C O N O M I C REVIEW
the proposed merger w o u l d be potentially anticompetitive. At the time of the proposed merger,
the t w o banks did little business in each other's
service areas and had no branches located within
each others home office counties. In fact, Citizens
National Bank had no offices in northern California,
whereas Crocker-Anglo had branches only in the
suburban counties surrounding Los Angeles.
The most relevant aspect of the Crockei^Anglo
National Bank case was that the District Court
found that the line of commerce was not only
commercial banking but other types of financial
institutions as well. The District Court enlarged
the relevant product line to include savings and
loan associations, commercial finance companies,
Morris Plan banks, and insurance companies
within the state of California. This permitted a
decrease in the amount of concentration, and
thus had some impact upon the competitive
aspects of the case.
The decision in the Crocker-Anglo case was
rendered in 1967, after passage of the Bank
Merger A c t of 1966. Thus, by the time the 1966
act was considered, all five cases reaching adjudication had utilized "commercial banking" as the
definition of the line of commerce.
The Bank Merger Act of 1966
By 1966, the commercial banking industry had
regrouped its forces and legislation passed through
Congress amending the Bank Merger Act of
1960. The major import of the Bank Merger Act
of 1966 was to strengthen " t h e competitive
aspects" language of the 1960 act. Specifically,
Section C(5) of Section 18 of the FDI Act was
a m e n d e d to read as follows:
(A)any proposed merger transaction which
would result in a monopoly, or which would be
in furtherance of any combination or conspiracy
to monopolize or to attempt to monopolize
the business of banking in any part of the
United States, or
(B)any other proposed merger transaction whose
effect in any section of the country may be
substantially to lessen competition, or to tend
to create a monopoly, or which in any other
manner would be in restraint of trade, unless it
finds that the anticompetitive effects of the
proposed transaction are clearly outweighed
in the public interest by the probable effect of
the transaction in meeting the convenience
and needs of the community to be served.8
FEDERAL RESERVE BANK OF ATLANTA
"In 1966, the commercial
banking industry regrouped
its forces . . . "
Careful reading of the revised Bank Merger Act
of 1966, Section C(5), shows that there is no
mention of any relevant line of commerce, whether phrased in the terminologies of Sections 1 and
2 of the Sherman Act or the stronger interpretation
of the a m e n d e d Section 7 of the Clayton Act. It is
to be assumed that this was deliberate, not
accidental, and was intended to alleviate the
problem of the line of c o m m e r c e being strictly
interpreted to be commercial banking only.
Furthermore, the intent of the entire act was to
bring the commercial banking industry out from
underneath Sections 1 and 2 of the Sherman Act
and Section 7 of the Clayton Act. The purpose
was to replace them with primary jurisdiction by
the regulatory authorities following the concepts
and disciplines of the antitrust laws in general.
From the standpoint of the relevant line of
commerce, however, it is important that the
singular lack of attention to this particular ingredient has to be interpreted as being deliberate
rather than a legislative oversight That's especially
important since the single product unique line of
c o m m e r c e doctrine had b e e n firmly established
by the previous litigation from 1961 to 1966.
Post-Bank Merger Act
of 1966 Litigation
The major feature of the antitrust litigation
from 1966 to 1970 was the number of banks that
withdrew from previously approved mergers
w h e n sued by the Department of Justice. From
1966 to 1970, eight of the nine cases filed by the
Department of Justice precipitated almost immediate withdrawals by the banks involved, although
some preliminary litigation was carried on prior
to abandonment by several of the litigants. For
example, major cases in Houston, St. Louis, and
Pennsylvania w e r e abandoned after litigation
was instituted by the Department of Justice.
15
The most interesting case during this period
was the Provident National Bank-Central Penn
National Bank merger. T h e Justice Department's
original suit was dismissed by the District Court
without trial. The Supreme Court, though, reversed
the decision and remanded it back to the District
Court in 1967. In 1968, the District Court found
the merger unlawful and the banks did not
appeal. In its ruling, the District Court extended
the line of c o m m e r c e to include not only commercial banking but also mutual savings banks
within the Philadelphia area. This case, known
familiarly as Philadelphia II, extended the commercial banking line of c o m m e r c e in the same
community w h e r e the original line of c o m m e r c e
was drawn.
Thus, by 1970, t w o lower court cases, in
Crocker-Anglo and in Provident, had extended
the line of c o m m e r c e to be more than simply
commercial banking. Furthermore, the regulatory
authorities and bank applicants w e r e utilizing
lines of c o m m e r c e b e y o n d those of commercial
banking in determining the competitive aspects
of proposed mergers during the same period.
The honeymoon, however, was short; the Phillipsburg case brought the commercial banking line
of c o m m e r c e back to a more strict standard.
A. Phillipsburg—Back to the
Single Line of Commerce Test
O n June 27,1970, the Supreme Court reversed a
District Court determination that the proposed
merger b e t w e e n the Phillipsburg National Bank
and Trust Company and the Second National
Bank of Phillipsburg was not violative of the
antitrust laws. The District Court, had dismissed
the Justice Department's complaint, finding no
violation of Section 7. The Supreme Court reversed
the District Court on both the relevant line of
com m e ree an d re I e van t geograp h i c market tests,
thus remanding the case back for retrial on the
needs and convenience issue. The Supreme
Court stated that the District Court had erred in
finding no violation of the antitrust clause because
of erroneous use of their relevant line of commerce
and relevant market area tests. The Supreme
Court stated firmly and simply that the relevant
product line for commercial banking was commercial banking. As the Court stated:
. . . Indeed, competitive commercial banks, with
their cluster of products and services, play a
16
significant role in a small community unable to
support a large variety of alternative financial
institutions. If anything, it is even more true in the
small towns.9
The District Court had relied upon the relevant
product market being divided into sub-product
markets due to the competition b e t w e e n the
commercial banks and non-bank financial intermediaries. Furthermore, the District Court felt
that the commercial banks operated more like
savings institutions than like big city commercial
banks. The Supreme Court rejected the contention stating:
. . . The District Court erred. It is true, of course,
that the relevant product market is determined
by the nature of the commercial entities involved
and by the nature of the competition that they
face
But sub-markets are not a basis for the
disregard of a broader line of commerce that has
economic significance.10
The Supreme Court again reiterated the Philadelphia standard that a clustering of services
delimits commercial banking:
The clustering of financial products and services
in banks facilitates convenient access to them for
all banking customers
Moreover, if commercial
banking were rejected as the line of commerce
for banks with the same or similar ratios of
business as those of the appellee banks, the
effect would likely be to deny customers of small
banks—and thus residents of many small towns—
the antitrust protection to which they are no less
entitled than customers of large city banks.11
Thus, after seven years of litigation, the lower
court's attempts to expand the relevant line of
commerce to include more than commercial
"The honeymoon, however,
was short; the Phillipsburg
case brought the commercial
banking line of commerce
back to a more
strict standard."
APRIL 1982, E C O N O M I C REVIEW
banking were foiled. The Supreme Court returned
to its Philadelphia National Bank test of a single
product cluster of services approach.
B. The Relevant Line of Commerce—
The Potential Competition Cases,
1970-1976
Following Phillipsburg, two aspects of the relevant line of commerce doctrine are in evidence.
The District Courts have continued to expand
the relevant line of commerce to include nonbank financial institutions. For example, in the
First National Bank of Jackson-Bank of Greenwood,
Mississippi case, the relevant line of commerce
was determined to be financial institutions, including commercial banks, cotton exchanges, and
savings and loan associations.12 Furthermore, in
the Idaho First National Bank of Boise-Fidelity
National Bank, Twin Falls case, Judge Bouldt also
included as competitive financial institutions
savings and loan associations, trust and savings
banks, credit unions, the Production Credit Association, the Federal Land Bank, life insurance
companies, and mortgage companies. 13
Thus, in both the Jackson and Idaho cases, the
District Court enlarged the relevant line of commerce to include other deposit and non-deposit
financial intermediaries in addition 10 commercial
banks. Potential competition cases have been
characterized as market extension or product
extension combinations rather than horizontal
market combinations, as in the earlier actual
competition cases. Both in the Jackson and
Idaho cases, potential competition was alleged
to be a market extension merger (acquisition),
thus possibly (or probably) resulting in a violation of
Section 7 of the Clayton Act.
Thus, not being a product extension merger,
expansion of the relevant line of commerce by
District Courts to include more than commercial
banking was a significant change. In all fairness,
though, it should be noted that the District
Courts' actions preceded the Phillipsburg decision.
Following the Phillipsburg case, the commercial
banking line was restored in some lower court
district cases. The prevalent behavioral pattern
during 1970-1976 was abandonment of proposed
mergers and acquisitions by either banks or
holding companies.
FEDERAL RESERVE B A N K O F A T L A N T A
a
fp2
C. The Two Supreme Court Cases—
Marine Bancorporatipn and Connecticut
The first case to go to the Supreme Court
under the potential competition theory was the
Greely case; the per curiam opinion of the
Supreme Court affirmed on a four-to-four vote
the District Court's opinion that the proposed
acquisition by a registered bank holding company
was not a violation of Section 7 on potential
competition grounds. By the time the Supreme
Court heard the Marine Bancorporation and
Connecticut cases in 1974, the Justice Department
had lost all of its seven potential competition
cases brought before the federal courts.
O n June 17,1974, the Supreme Court remanded
the Marine Bancorporation and Connecticut cases
back to the District Court for further adjudication,
especially disintegrating the attempts by the
Justice Department to utilize potential competition
as a means of thwarting commercial bank acquisitions and/or mergers. O n c e again, the Court gave
the green light to the single product line of
commerce argument of the Philadelphia National
Bank case 11 years previous.
In both the Marine Bancorporation and Connecticut cases, District Courts had expanded the
line of commerce beyond commercial banking.
In Marine Bancorporation, the line of commerce
was increased to include savings and loan associations and mutual savings banks, and in the
Connecticut case, mutual savings banks were
17
T R A C I N G T H E LINE O F C O M M E R C E
July 2, 1890: S h e r m a n A c t
Prohibits any trust or contract
restraining
1950: C l a y t o n A c t
Prohibits acquisition which would
in any line oi
commerce.
1960: The Bank M e r g e r A c t
Does not identify banking
commerce.
lessen
as a separate
trade.
competition
line
June 17, 1963: Philadelphia N a t i o n a l Bank —
C i r a r d Trust C o r n Exchange Bank
Declare s that commercial
banking's cluster of
is a distinct line of
commerce1 9 6 7 : C r o c k e r - A n g l o N a t i o n a l Bank
justice Department
filed suit on grounds
proposed
merger would be
potentially
anti-competitive.
1 9 6 6 : Bank M e r g e r A c t
Omits any mention
commerce.
of banking
oi
products
that a
as a separate
1 9 7 0 : P h i l l i p s b u r g N a t i o n a l Bank
Supreme Court reverses District Court and
banking as a separate line of
commerce.
1974: M a r i n e B a n c o r p o r a t i o n and C o n n e c t i c u t
Court rejects potential
competition
as a basis
blocking mergers and reaffirms single line of
commerce
rule.
1 9 8 0 : N e w Jersey a n d U t a h
District Courts consider
considered as competitive substitutes and alternatives to commercial banks. In the Connecticut
case, one reason for reversal by the Supreme
Court was the District Court's erroneous drawing
of the relevant line of commerce. 14
Thus, after 18 years of litigation, the Supreme
Court has held fast to the relevant line of commerce being that of commercial banking. It has
resisted pressures placed upon it by the regulatory
agencies, the lower courts, merger applicants,
and academia in general. All have pushed for
expanding the relevant line of commerce from a
single product unique line of clusters of services
to a multi-product mutually independent bundle of
services.
However, since there has been no litigation in
this area at the Supreme Court level fora number
of years, and there have been some relatively
18
thrifts
in bank merger
line
of
reaffirms
for
cases.
recent case law and statutory developments in
the banking industry, w e may see some changes in
the standard.
Recent Legal
and Legislative Developments
Certain developments that have taken place
on both the legal and legislative fronts may signal
that a change is forthcoming in the definition of
the relevant line of commerce. It is becoming
increasingly apparent that the legal distinctions
that existed among the various financial institutions at the time of the Philadelphia decision no
longer conform to reality. This has been a result
of both a conscious effort on the part of the
federal government, and of private competitive
forces.
APRIL 1982, E C O N O M I C REVIEW
The most important statutory development
has been the passage of the Depository Institutions
Deregulation and Monetary Control Act of 1980.
That act greatly increased the powers of federally
chartered thrifts, and at the same time narrowed
the distinctions b e t w e e n the thrifts and the
commercial banks. O n e major provision calls for
the phase-out and elimination of the limitations
on deposit interest rates eliminating the existing
differentials that thrifts may pay over the commercial bank rate. The act also permits all depository institutions to offer N O W accounts to
individuals, which will accelerate the trend of
depository institution de-specialization.
Further, the "cluster of services" that the Philadelphia court attributed to commercial banking
is becoming increasingly permissible for thrifts.
Federally chartered thrifts may exercise trust and
fiduciary services, issue stock, and offer credit
card services. All thrifts may employ remote
service units similarto those utilized by commercial banks. Further, federally chartered mutual
savings banks may now hold up to 5 percent of
their assets in commercial, corporate or business
loans - a lending power previously denied them.
Finally, the uniform reserve requirements imposed
on all depository institutions by the 1980 act will
also reduce distinctions among them.
Federal courts have begun to take note of the
changes in the depository institution industry. In
some districts at least, the courts are starting to
reassess the Philadelphia standard as it applies to
new economic realities. In t w o major instances
recently, District Courts considered t h e impact
of the thrifts in cases involving commercial bank
mergers.
In the first case, decided in 1980, the Justice
Department brought suit to enjoin the proposed
merger of two of N e w Jersey banks. First National
State Bank of Central Jersey and the First National
Bank of South Jersey. Violation of the Clayton Act
was charged, and the Justice Department's basis
was that the merger w o u l d substantially lessen
both actual and potential competition. The District
Court of N e w Jersey affirmed the Comptroller's
approval of the merger, however. Although the
court did in the e n d utilize commercial banking
as the relevant line of commerce, its decision
apparently was influenced by the presence of
thrifts in the area The defendants had introduced
FEDERAL RESERVE BANK O F ATLANTA
substantial evidence showing the scope and
impact of all banking alternatives in the area to
prove that competition w o u l d not be affected,
and the court remarked in agreement:
The overwhelming weight of the evidence
establishes that each of the markets is competitive.
This ultimate finding stems from numerous subsidiary findings regarding the reliability of concentration ratios as evidence of the competitiveness of
markets, the historical trend toward déconcentration in the relevant geographic markets, competition from the thrifts, . . .(etc.)15
The court further recognized that the 1980
legislation had lessened distinctions b e t w e e n
commercial banks and thrifts. The presence of
these essentially similar institutions resulted in
the court's finding that competition w o u l d not
be affected by the merger.
The second instance involved the 1980 merger
of Zions First National Bank and the First National
Bank of Logan, both of Utah. There the Justice
Department claimed that the merger w o u l d
lessen potential competition. As in the N e w
Jersey case, the defendants presented e v i d e n c e
of non-bank alternatives that w o u l d absorb any
possible anti-competitive effect that the merger
could create. A n d as its N e w Jersey counterpart
had done, the District Court of Utah considered
the thrifts in its ruling:
All of these enterprises have an offer of some
kind that affects this commercial banking market.
And that is just as much a part of the factual
backdrop in which these commercial banks compete as is the population or the number of
commercial banks.16
The court proceeded to approve the merger,
thus keeping intact t h e Justice Department's
string of defeats in the area of potential competition.
Although both the N e w Jersey and the Utah
courts have specifically retained the Philadelphia
definition of the relevant line of commerce,
there is no denying that the standard is again
under attack. The potential success of this trend
is enhanced by the legislative and private market
developments of late. At present, no cases are
pending at the Supreme Court level, however, so
it will be some time before the issue is resolved.
—Douglas V. Austin
19
Regulatory Agencies' Approaches
to the "Line of Commerce"
The Supreme Court defines commercial banking
as th e re I e van t " I i n e of co m m e rce" fo r e val uati n g
the competitive effects of proposed bank mergers
and bank acquisitions by bank holding companies.17
That definition has remained virtually unchanged
since it was first articulated in the 1963 Philadelphia
National Bank ( P N B ) decision. 18 Subsequently,
the banking agencies have generally adhered to
the Court's cluster of products and services
definition of commercial banking as the line of
commerce.
However, recent legislative and competitive
changes are radically alteringtraditional financial
arrangements and the ways services are being
provided. As more depository and nondepository
financial institutions have begun to offer closer
substitutes for bank services, applicants increasingly have argued that the traditional definition
of commercial banking as the relevant line of
commerce fails adequately to capture market
realities. As a result of these changes, their
arguments are generally falling on sympathetic
ears; the agencies seem willing to move in the
direction of modifying their method of analysis
and/or the line of commerce definition. Certainly,
there is now ample evidence that the agencies
are giving more and more weight to competition
20
provided by thrifts and to other market developments in certain types of cases.
This article reviews the product line concepts
applied by the banking agencies in their case
analysis and briefly discusses some policy issues
the agencies face in significantly broadening the
traditional definition. Interestingly, as the next
section shows, the concept
of commercial
banking as a line of commerce did not originate
in the P N B case. Moreover, the problem of the
appropriate way to consider competition by
nonbanks is not a new issue, and the willingness
of the agencies to address this issue on a case by
case basis is not a recent development.
Agency Actions Prior
to the PNB Case
As Shay and Yingling (1981) indicate in their
survey article, use of commercial banking as the
line of commerce in bank acquisition cases was
not originated by the Supreme Court in the 1963
P N B case. Rather, the concept can be traced to
previous agency actions dating back as early as
the 1952 divestiture decision by the Federal
Reserve Board in the Transamerica Corporation
APRIL 1982, E C O N O M I C REVIEW
case.19 In that case, the Board reviewed the
consequences of Transamerica's bank stock acquisitions on structure and competition in commercial banking. Three reasons were cited for
focusing on only commercial banks, reasons
similar to the Supreme Court's findings in PNB.
The Board noted that commercial banks were
unique suppliers of money-payment and moneycreation services and, in addition, were the
dominant suppliers of short-term business credit
The Board recognized, but explicitly rejected,
the need to consider competition provided by
other depository and nondepository financial institutions in certain other service lines. Two reasons
were cited. First, these other institutions—such
as life insurance companies, S&Ls, production
credit associations, finance companies and personal loan companies—all depended upon commercial banks both for short term credit and to
carry out their business. Second, none offered
services that were effective substitutes for the
three major bank functions of money creation,
payments services, and business credit.
Despite the analysis in the Transamerica case, the
Board did not take a static approach to the line of
commerce issue. In a series of at least five
subsequent decisions—all involvingacquisitions
in N e w York or N e w England-increasing consideration was given to competition provided by
mutual savings banks.
In the 1958 Baystate-Springfield case and in
two N e w Hampshire cases explicit mention was
made of the fact that mutual savings banks
competed for some, but not all banking services;
however, in the 1960 Marine Midland and Baystate
cases, deposit shares were cited, first for commercial banks only and then for mutual savings
banks and commercial banks combined. Reading
between the lines in these latter two cases, w e
could interpret that the Board gave equal weight
to competition provided by mutual savings and
commercial banks. But in truth it is difficult to
determine from either of these cases, or the
previously cited cases, exactly how thrift competition was considered or how the relevant line
of commerce was defined. 20
The inclination on the part of the Board to
consider mutual savings bank competition in
cases in the Northeast did not carry over to the
evaluation of competition provided by savings
and loan associations. In 1960 and again in 1961
the Board denied acquisitions by two Minnesota
bank holding companies.21 Citing legislative history
FEDERAL RESERVE BANK O F ATLANTA
"[Even before the 1963 PNB
case, the Federal Reserve
Board gave] increasing
consideration . . . to
competition provided by
mutual savings banks."
and congressional intent as to the definition of
banking activities in the Bank Holding Company
Act of 1956, the Board rejected applicant's contentions that S&L competition should be considered
in evaluating the competitive effects of the
applications.
Like the Federal Reserve Board, the Comptroller of the Currency gave weight to thrifts and
other competitors on a case by case basis in
acting on proposed national bank mergers. Yingling
and Shay (1981) indicate a number of decisions
in which competition from an array of both
depository and non-depository institutions was
considered. 22
Decisions Subsequent to PNB
The problem of how much weight to afford
thrifts and other institutions in evaluating the
effects of bank acquisitions apparently was resolved in the PN B case, when the Supreme Court
held that the cluster of products and services
known as commercial banking constituted banks'
relevant line of commerce. 23 This definition was
reaffirmed in several cases,24 including the Phillipsburg National Case, and was refined in the more
recent Connecticut National Bank case.25
The Court recognized in the Connecticut case
that thrifts were fierce competitors with commercial banks for many services. Yet it found that
commercial banks were still sufficiently unique
suppliers of services to commercial enterprises
to continue to constitute a separate line of
commerce.
Two aspects of the Connecticut definition are
worth emphasis. First, as has been the pattern in
21
both nonbanking and previous banking cases,
the Court focused on the classes of customers
most affected by the proposed acquisition and
on the competitive implications for prices and
availability of the group of services demanded by
the affected customers. The Court chose not to
focus on the implications for the merging banks
and the variety of competitive forces affecting
them. Second, the key class of customers in the
Connecticut case was the commercial customer,
and, more specifically, the locally limited commercial customer.
This series of Supreme Court decisions has
clearly constrained the agencies from making
significant modifications to the line of commerce.
However, these decisions have had relatively
little impact on the agencies' practice, established
prior to PN B, of selectively considering thrift and
other competitors where they believed appropriate.26 Moreover, even the explicit findings in
the Connecticut case have not significantly affected the agencies' analytic process, which on
occasion has been inconsistent with that employed
by the courts. Consideration of thrift and other
competitors has not only tended to enter the
agencies' analysis in different ways, but also has
varied from case to case, both among agencies
and within agencies over time.
For example, the F D I C was the first agency
"Consideration of thrift and
other competitors has not
only tended to enter the
[regulatory] agencies' analysis
in different ways, but also
has varied from
case to case..
22
whose decisions began to contain explicit references to the Connecticut National decision. In
approving the 1976 merger of two mutual savings
banks in Maine, the F D I C cited recent changes in
state law permitting mutuals to offer personal
demand deposits, N O W accounts, certain types
of commercial loans, and credit cards. The F D I C
concluded that commercial realities transcended
the Connecticut case—that the increased parity
of powers for depository institutions in Maine
require a viewing of a combined bank-thrift
institution market, as well as the traditional
separate (thrift) market, when determining the
competitive impact of any proposed mergers in
Maine. 27
In two subsequent cases—one a year later
involving two Maine mutual savings banks and
one in 1980 involving two Maine commercial
banks—the F D I C again analyzed the proposed
mergers in first a narrower market and then in the
combined bank-thrift market. 28 W h i l e the F D I C
did treat all three cases in a parallel fashion,
certainly its twin market analysis did not match
that suggested by the courts.
Moreover, the FDIC's finding that there was
parity of powers was based upon a service by
service comparison rather than on the ability to
offer a package of services to particular customer
classes. Only one of the products mentioned in
the FDIC decision—the limited ability of mutual
savings banks to offer commercial loans—would
have enhanced the ability of mutual savings
banks to service commercial enterprises, the key
customer group in the Connecticut National
Case. All of the other services mentioned by the
FDIC were available only to consumers.
Following the Supreme Court's remand of the
Comptroller7s approval in the Connecticut National
Case, there have been several other important
cases in which the Comptroller considered thrift
competition. In each instance, the approval decision made broad reference to the competitive
influence of thrifts and other types of competitors
without concern for particular classes of customers. 29
Yet the Comptroller did consider the ability of
thrifts to serve commercial and other specific
customer segments in a 1980 denial of the
merger between two Maine banks, Northern
National Bank of Presque Isle and Merchants
APRIL 1982, E C O N O M I C REVIEW
National Bank of Bangor. In that case, the Comptroller specifically cited both changes in Maine
law giving state-chartered mutual savings banks
virtually identical powers to commercial banks
and changes in federal law due to the Monetary
Control Act giving broader powers to federal
thrifts.
The Comptroller concluded that the overlap of
services made thrifts significant actual or potential
competitors...for almost all consumer financial
services and an ever increasing number of commercial services.30 More importantly, it was argued
that a more realistic approach to merger analysis
should include a disaggregation of the line of
commerce into a number of product clusters and
should reflect the degree to which thrifts and
other financial institutions may compete in certain
clusters and not in others. W h i l e the Comptroller
did not actually apply such a
disaggregate
product line in the Maine case, it seemed to be
attempting to lay the foundation for such an
analysis in a future case.
The Supreme Court's decision in the Connecticut National case had little noticeable impact on Federal Reserve analysis for several
H O W THE FEDERAL HOME LOAN BANK BOARD
HANDLES SAVINGS AND LOAN ASSOCIATIONS' MARKETS
Like the bank regulatory agencies, the
Federal Home Loan Bank System must
approve or deny combinations of the
institutions that it regulates. Unlike the
banking agencies, the Bank Board has
no court precedent defining either the
geographic market or the line of commerce of these organizations. The Federal Home Loan Bank must apply competitive standards very similar to those
that the commercial bank regulators
apply; thus, it must decide on an approach to define relevant geographic
and product markets.
The Home Loan Bank System's approach to the product of savings and
loan associations contrasts sharply with
that of the bank regulators and the
courts. The intellectual basis for this
approach dates to the early 1970s
(Kaplan, 1970; Kaplan, 1971); even
the Bank Board's most recent amendments to its merger regulations indicate
FEDERAL RESERVE BANK OF ATLANTA
its continued adherence to that approach
(Federal Home Loan Bank Board).
The Bank Board's approach views
savings and loan associations as primarily
two-product firms. They offer insured
savings instruments of small denominations and residential mortgages. Other
savings and loan products have not
been considered important in the past
but may well be later. Since savings and
loans are not viewed as having a special
monopoly on any service (such as banks
at one time had on checking accounts)
and since they are not viewed as offering a special or unique cluster of services,
the Bank Board has not tied the two
products of savings and loans together
in its analysis of mergers (Kaplan).
The Bank Board analyzes two markets:
the market for small denomination
(under $100,000 insured) savings instruments and the market for residential
mortgages. Both markets are considered
local. Newly amended Bank Board regulations delegating merger approval authority to the Regional Home Loan Banks
are written in terms of county market
concentration. Suppliers in the savings
market include all insured depository
institutions with offices in the local
market: commercial banks, thrift institutions, and credit unions. Residential
mortgage suppliers include all mortgage
lenders making loans in the market.
The Home Loan Bank Board, thus,
follows a different method of analysis
from the banking agencies by identifying separate products and analyzing
competition in each product market.
Presently the two major markets in
which savings and loan associations
operate are given primary consideration.
As these institutions expand the range
of their services, questions of competition involving other products are likely
to occur.
23
years. Prior to December 1979, the Board continued to follow the pattern it established in its
1974 approval of the merger of Northeast Bancorp
Inc, New Haven, Conn, with The First Connecticut
Bancorp, Inc., Hartford. In each instance, the
Board evaluated the acquisitions using commercial
banking as the line of commerce and proceeded
to considerthe impact of thrifts.31 Such consideration usually consisted of noting (1) the size and
number of thrifts in the area and (2) that thrifts and
banks competed in many service areas, including
consumer transaction deposits.32 These factors
were then used implicitly to discount the competitive significance of the proposed acquisition
by an unknown weighting factor. As distinct from
earlier cases, no combined commercial b a n k thrift deposit shares were computed.
Not until December 1979, in a reconsideration of
its earlier denial of an application by United Bank
Corporation of N e w York to acquire the Schenectady Trust Company, did the Board refer to the
Connecticut case. In the original application
United Bank Corporation argued that N e w York
thrifts had powers and provided services sufficiently
similar to commercial banks to be included in
the relevant product line. The Board noted that
thrifts in N e w York could offer certain transactions
accounts to consumers, but concluded that the
cluster of products offered by commercial banks
was still sufficiently distinct to constitute a separate
product line.34
The applicant pressed the point in its request for
reconsideration, citing additional changes in N e w
York state law authorizing depository institutions
to offer N O W accounts and prohibiting director
interlocks. It also suggested that even if thrifts
were not considered full competitors, commercial
bank deposit market shares "...should be 'shaded'
downward to account for direct competition
between thrift institutions and commercial banks in
certain product lines, and for competition from
large out-of-market-based organizations whose
small market shares do not adequately reflect
their competitive influence in the relevant banking market." 35
The Board recognized that thrift powers had
expanded in many product areas and even the
Supreme Court had recognized that the point
would be reached where it would be appropriate to
modify the line of commerce. The Board went
further to indicate that thrifts and commercial
banks might be grouped together for certain
competitive analyses, but suggested that commercial banking might still be a relevant product
24
line for smaller commercial enterprises. In the
end, however, the Board rejected the applicant's
arguments to include thrifts in the product line.
The rationale is found in a footnote in the
decision. The critical fact was that, while N e w
York thrifts had been granted expanded powers,
the range of permissible activities (and the extent
they had been exploited) were not significantly
different from the powers of Connecticut thrifts
"[In a 1980 case,] the
Comptroller concluded that
the overlap of services made
thrifts significant actual or
potential competitors for
almost all consumer financial
services and an ever increasing
number of commercial services."
in 1974 when the Supreme Court refused to
expand the product line definition. Thus, the
Board concluded that N e w York thrifts were not
yet significant competitors in offering services to
commercial enterprises.
Despite this negative conclusion, however,
the Board still seemed to struggle for a way to
give some weight to thrifts. In this regard, it
embraced the concept of "shading," or discounting market shares, as the applicant suggested a
means to "consider" the competitive thrust of
thrifts.36 W h i l e "shading" was not sufficient to
carry the day in that case, the Board did begin to
employ the methodology in subsequent cases.37
Conceptually, "shading" is not significantly different from the other methods the Board used to
"consider" the role of thrifts.38 The important
point, however, is that such a methodology does
not focus on the commercial customer, the key
customer class in the line of commerce; rather, it
focuses on the broader competitive forces affectingthe merging banks and customers not considered users of the critical product line.
Passage of the Monetary Control Act of 1980
and the broadening of investment and commercial lending powers of federal thrifts has heightened
applicants' pressures on all the agencies to broaden
APRIL 1982, E C O N O M I C REVIEW
the line of commerce. The Board addressed the
issue of whether passage of the M C A was sufficient
to broaden the line of commerce in its order
approving Fidelity Union Bancorporation's acquisition of the Garden State National Bank. In
essence, the answer was "maybe, but not quite
yet." The Board then followed its previous methodology of subjectively recognizing the presence of
thrifts without references to the cluster of services
provided for commercial enterprises. 39
The Board was bothered by the Fidelity Union
decision and the dilemma it faced in deciding
whether the M C A broadened thrift institution
powers enough for thrifts to be included in the
line of commerce. The Board clearly felt constrained by the Connecticut National case but
wanted to give more weight to thrifts in its
merger analysis. In B H C Letter-198 of June 25,
1980 it instructed the Federal Reserve Banks and
their staffs on how thrifts should be "considered." It
indicated that the analysis should first look at the
effects in "commercial banking" as traditionally
defined, but then the staff was to collect data and
other information to help determine the extent
to which other financial institutions were also
important competitors in providing transaction,
credit and other services. These factors would be
considered by the Board in making its final
decisions.
Pressures for Change 40
As the previous analysis shows, the federal
banking agencies and the courts have had a
difficult time defining the relevant product line
"Despite this negative [1979]
conclusion, however, the
Board still seemed to struggle
for a way to give some
weight to thrifts."
FEDERAL RESERVE BANK OF ATLANTA
to use in bank mergers and acquisition cases. The
agencies have never been particularly comfortable
with the Supreme Court's delineation in the PN B
and subsequent cases. The agencies have always
attempted—both before and after PN B—to take
into account thrift and other competition, sometimes within, but more often than not outside,
the constraints imposed by the Supreme Court
decisions. 41
Since the Supreme Court last addressed the
issue seven years ago, pressures on the agencies
to modify the line of commerce have heightened
substantially. Numerous financial innovations
and structural changes in financial markets are
eroding the uniqueness of commercial banks as
suppliers of demand deposits and the cluster of
services that had traditionally set these institutions
apart.
Moreover, these developments have reduced
banks' cost advantages, and high interest rates
have altered consumer preferences which had
previously isolated banks from competition. The
Monetary Control Act significantly broadened
the deposit and asset powers of federal thrifts
and authorized N O W accounts nationwide which
has served to make banks and thrifts more
homogeneous; legislation introduced during 1981
suggests that the realignment of thrift powers is
not completed yet.
As interest rates have remained high, both
consumers and businesses have also become
more sophisticated in unbundling their use of
financial services to earn the highest yields on
their invested funds and to obtain credit at the
most favorable rates. The growth of money
market mutual funds has enabled smaller depo25
sitors to realize market rates on their savings. But
the greater importance of money market funds
may ultimately lie in their role in breaking down
the dependence of locally limited consumers on
local banks and thrifts for savings and transactional
services, thus broadening the geographic scope
of consumer financial markets.
The last two years have also witnessed the
rapid spread of symbiotic financial arrangments
in which independent firms cooperate to provide a
service that could not legally or economically be
offered by either firm separately. The best known
example is Merrill Lynch's Cash Management
Account. It combines a Merrill Lynch margin
account, a Visa debit card and service arrangement
provided by BancOne of Columbus, Ohio, and
Merrill Lynch's money market mutual fund.
More recently, we've seen the creation of new
types of financial institutions resulting from combinations of brokerage firms and other financial
institutions, such as American Express-Shearson
and Bache-Prudential. These institutions not only
have institutionalized certain symbiotic financial
arrangements, such as cash management services;
they also are positioning themselves to take
advantage of their freedom from reserve requirements and other regulations to offer a wide range
of consumer and corporate financial, brokerage
and insurance services. 42
Whether these new institutions will be successful remains to be seen. They are, however, able to
offer potentially superior substitutes to traditional
banking services and can capitalize on the fact
that many bank customers have learned it can be
both convenient and cost effective to obtain
"But the Supreme Court has
already indicated that Tierce'
competition in [retail banking]
submarkets isn't sufficient to
cause it to change the line
of commerce definition."
26
financial services from nonlocal and nontraditional
firms. It is important to realize that these recent
financial innovations and competitive structural
changes which have so concerned depository
financial institutions affect primarily the types of
services and alternatives available to consumers.
For example, Bleierand Eisenbeis (1981) argued
that the M C A granted thrifts few, if any, significant powers to enable them to offer services
to corporate customers; this is especially true for
S&Ls. The act does grant slightly broader authority
to the few federally chartered mutual savings
banks to offer certain commercial services, but
even here quantitative limitations have been
imposed. These limitations coupled with thrifts'
present financial difficulties and the problems of
acquiring the necessary management expertise
should limit the overall competitive significances
of these changes. Similarly, the cash management
and money market fund services are also directed
at consumers and not to the corporate customers.
Thus, many of the events now being cited by
the applicants and regulatory agencies as the
rationale for a re-examination of the line of
commerce issue are occurring in the retail banking submarkets. But the Supreme Court has
already indicated in the Connecticut National
case that "fierce" competition in such submarkets
isn't sufficient to cause it to change the line of
commerce definition. Thus, to base a case for a
change on the need to recognize the market
realities of thrift competition in consumer markets
is unlikely to be particularly persuasive. In fact,
the Court might be convinced that the emphasis
it placed in the Connecticut National case on the
cluster of services provided to commercial customers is as relevant today as it was then,
especially if the Court continues to direct antitrust to the protection of affected customer
classes rather than looking at competitors.
So it is tempting to cling to the more traditional
line of commerce and to focus on commercial
customers. Yet there are also broader policy
issues, as well as some potential pitfalls, in
clinging too long to such a product line definition
in today's changing financial environment, when
the product constitutes a decreasing portion of
many banks' business.
First, what happens as bank dependence on
liability management and access to purchased
monies expands as the primary source of bank
funding? As commercial lending to small commercial enterprises declines as a portion of
lending to consumers and large businesses, it
APRIL 1982, E C O N O M I C REVIEW
may pay many banks to abandon the smallcommercial segment of their business. That's
especially true if the result is to escape—or at
least reduce—antitrust scrutiny. Thus, continued
reliance on the traditional antitrust approach
focusing on protecting affected classes of customers in a financial environment where funds
are increasingly fungible, handicaps those firms
whose services happen to be included in the
relevant product line.
The traditional approach provides incentive
for aggressive, expansion-minded banks to abandon their activities in the relevant product lines.
The long run effect may be to drive out suppliers
and reduce the numberof effective competitiors
for those very customers and in those markets
the policy seeks to protect. In effect, w e are
forced back to one of the key public policy issues
addressed in the P N B case of whether the
antitrust laws should apply to banking and, if so,
how?
Second, even within the traditional approach,
almost any broadening of the line of commerce
would have the practical effect of liberalizingthe
range of acquisitions that would pass muster
under the antitrust laws; the broader the line of
commerce, the lower the estimated concentration ratios and the lower the probability of
finding a Section 7 violation. Thus, changing the
line of commerce definition has the potential to
precipitate a consolidation of the banking system.
At the root then, of the line of commerce issue,
are three questions: What type of a consolidation
movement do w e want to promote, how do w e
want it to proceed, and what role is antitrust to
play?43,44 To illustrate the potential problems,
suppose the arguments of many applicants are
accepted and thrifts are included in the line of
commerce. Because of the present difficulties
of merging banks with thrifts due to statutory
prohibitions and because operating a thrift is not
a permissible activity for bank holding companies,
the main impact of the broader definition would
be to accommodate consolidations among banking organizations. But at a time when thrifts are in
such financial difficulty, do w e want, as a matter
of public policy, to rationalize a further skewing
of the relative size distribution of the financial
industry in favor of banks?
Third, the policy problems are not eased if one
follows the path recommended by the Comptroller in the Northern National Bank of Presque
Isle case in which multiple "product line" clusters
would be analyzed. 45 Such an approach may
FEDERAL RESERVE BANK OF ATLANTA
result in a tightening rather than a loosening of
merger policy since a violation in any one of a
number of relevant products lines would result
in an antitrust violation. Perhaps, more importantly,
however, is the increased regulatory burden that
would be associated with such an approach.
Data would have to be organized and collected
on all the relevant product lines, not only from
the merging banks, but also from all other institutions in the affected markets. At present, the only
reliable data that can be organized on an approximate market basis are the F D I C Summary of
Deposit data. Comparable data are not only
costly to provide, but also are difficult to collect
and process.46 The problems and costs of extend-
"Yet there are . . . broader
policy issues, as well as
some potential pitfalls, in
clinging too long to such a
. . . definition . . . "
ing such data to more than just deposits and to
broaden classes of reporting institutions should
not be taken lightly.
Finally, if one were to focus procedures of the
F D I C and Federal Reserve Board on the competitive forces affecting banking organizations, rather
than looking at affected product markets and
classes of customers, the result would be a
radical redirection of antitrust law from its traditional focus for all industries. In view of the large
number of conglomerate acquisitions successfully
evaluated usingthe traditional methodology, it is
difficult to argue that banking is so unique and
presents such difficult public policy issues as to
warrant a rethinking and reorientation of antitrust
policy.
The analysis of agency decisions indicated that
they wrestled with the problems of delineating
the relevant line of commerce long before the
27
Supreme Court did in the PNB case. The agencies
have never truly been comfortable with the
Courts finding in that and subsequent cases.
They have continually sought to take thrift and
other competitors into account, even when such
institutions were not significant suppliers of services to the relevant affected classes of customers.
At the root of their difficulty is the problem of
dealing with financial conglomerates which operate in many different product and geographic
markets and are subject to a variety of competitive
forces. As a result, the analysis they have employed
has not always been consistent with that employed
by the Supreme Court. The dilemma the agencies
have faced has become more significant as
banks have diversified into more product lines
and markets, as financial innovations have broken
down traditional customer relationships and de-
"We should be careful not
to take the redefinition of
the line of commerce too
lightly . . "
pendence upon banks as suppliers of clusters of
services, and as more and more diverse financial
institutions have begun to offer close substitutes
for banking services.
W e are now faced with the problem of how to
restructure the financial system and how w e
want the transition to that structure to proceed.
In that respect, antitrust policy is but one element
that needs to be considered. All the same, w e
should also be careful not to take the redefinition
of the line of commerce too lightly or view it with
the blinders of a narrow technical legal focus. For
to address the line of commerce issue without
regard to the broader policy issues could set the
financial system on an evolutionary path that
would be difficult to reverse and that might erase
the gains that increased competition has brought.
— Robert A. Eisenbeis
28
APRIL 1982, E C O N O M I C REVIEW
Section II
THEORETICAL
AND EMPIRICAL
EVIDENCE
Following the 1974 Supreme Court decision in the Connecticut
National Bank case the court narrowed, somewhat, its interpretation of
the relevant product of commercial banks. 47 Prior to the Connecticut
case, the Supreme Court had consistently ruled that the cluster of
services offered to both consumer and commercial businesses by banks
was unique enough to allow banks to be treated separately under the
antitrust laws.
Just prior to this case (May of 1973) the State of Connecticut passed
an act which would have allowed savings banks to offer NOW accounts.
Although the Supreme Court noted that the future ability of savings
banks to offer NOW accounts would increase competition between
savings banks and commercial banks, the court did not redefine the line
of commerce offered by commercial banks. 48 Commercial banking's
cluster of commercial services was sufficient, the court said, to establish
commercial banking as a distinct line of commerce. 49
The criteria for viewing a cluster of services as a separate product
seem to have been based on two characteristics; first, that banks were
the only suppliers of third party transaction accounts, a monopoly
product; and second, that bank services were offered as a package.
This section begins with a theoretical discussion of whether both of
these characteristics, monopoly service and a bundled package, are
necessary to differentiate banking from other financial service suppliers.
Ira Horowitz describes the economic logic of defining products and
markets. Focusing on the business of banking, he then reviews the
theoretical justification for the courts' and regulatory agencies' definition of
the product of commercial banks. B. Frank King follows with a review of
the empirical evidence on the question of whether or not banks offer a
unique cluster of services to commercial enterprises.
FEDERAL RESERVE BANK OF ATLANTA
29
Theoretical Review
From the time of Adam Smith down to the
present day, economists have been interested in
studying the economic behavior of markets. This
interest, however, has rather consistently failed
to prompt a corresponding interest in how one
recognizes or delineates a market. Those economists who have paid more than passing attention
to the issue have been motivated principally by
the practical need to define relevant markets in
order to permit the antitrust authorities and the
courts to implement antitrust policy. Specifically,
the courts have determined that the "lines of
commerce" and "sections of the country" referred
to in the antitrust statutes imply what economists
mean by "markets." Thus, for the first time,
economists have been asked to explain what
they mean by, and how they discover, the
"market." The explanation has not been wholly
satisfactory, but then the concept of a market is
more than somewhat ethereal.
In reviewing the history of the market-definition
issue, however, w e should not overlook the
contributions of Alfred Marshall and his followers.
Under Marshall's early twentieth-century impetus,
the field of industrial organization emerged wherein economists looked to the industry rather than
the market to find the forces of economic change.
Market Question Neglected
W h a t constitutes an industry still requires
some definition, but at least the industry con30
cept has some concrete natural characteristics that
make it less nebulous than the notion of a
market. Nevertheless, for almost fifty years now,
under the combined influence of E. Chamberlin's
theory of monopolistic competition, R. Triffin's
promotion of the cross-elasticity concept, and
the courts' awareness of both, the concept of an
identifiable market and identifiable submarkets
has been a matter of significant practical concern
and theoretical neglect.
On the one hand, the neglect is understandable,
because unambiguously
delineating markets is
hard and one needn't delineate a market in order
to intelligently discuss what would go on there
once it had been accurately identified. O n the
other hand, as the courts have recognized, if w e
are to be concerned with erosions of competition
and tendencies to monopoly, it seems appropriate
that w e know what it is that is about to be
monopolized, where the monopolist will reign,
and exactly who will be adversely affected by the
lessening of competition, as well as to what
extent and over what period of time. That is, a
non-passive antitrust policy demands that economists, whom one would expect to be best
positioned to study the matter, be concerned
with the market-definition issue. And, the market
and the industry are not necessarily, nor likely to
be, identical in structure.
An industry is essentially "a grouping of firms
on the basis of a similarity both of products and
of production processes. The products have to
be sufficiently substitutable to permit some
APRIL 1982, E C O N O M I C REVIEW
"For the first
time, economists
have been asked
to explain what
they mean by,
and how they
discover, 'the
l'
market' »
rough estimate of price and income elasticity of
demand. The production processes should be
sufficiently similar to permit us to make reliable
inferences regardingthe...relation of overhead to
variable costs, and the responsiveness of variable
costs to changes in factor prices." 50 In contrast,
the market, however precisely defined, is a
multidimensional construct that includes buyers
as well as sellers, and that has both product and
spatial connotations, in addition to an easily
overlooked time dimension. In the eighteenth
and early nineteenth centuries, the diverse possibilities that these various dimensions could create
would not necessarily leap to mind.
The early economists were principally concerned with studying the economic behavior of
the laborand agricultural commodity markets. In
the absence of unions, giant food packagers, and
large super-market chains, and given the difficulty
of travel during this period, both the labor and
commodity markets housed a fairly fixed set of
numerous buyers and sellers regularly exchanging
perishable and reasonably homogeneous goods
and services within a compact geographic area.
Or, in any event, that was the way reality was
perceived. That perception was translated into
one of the profound economic truths of the era,
notably, that there cannot be two prices for the
same good, at the same time, in the same market.
Assuredly, even the early economists weren't
sufficiently naive as to believe any of that, except
in the broadest terms of general tendencies.
Thus, from Smith forward it was recognized that
by organizing and regulating entry into the market,
and the terms under which they provided their
services, members of the various professions
FEDERAL RESERVE BANK OF ATLANTA
could distort the work of the invisible hand. It
was also apparent to these economists that the
lack of perfect knowledge could in fact lead to
the same product beingsold in agiven marketfor
different prices at the same moment of time, but
it was acknowledged that this difference could
not long persist. Still further, it was understood
that there were indeed large entities, in particular
firms engaged in foreign trade and transportation,
as well as some manufacturers, that held monopoly positions. Given the analytical tools available to them, however, the early economists
were unable to do much more than remark that
such monopolists could, and if left to their own
devices usually would, exploit their monopolies to
the detriment of the general public.
The economist's analytical attention was then
directed to the exchange of homogeneous products in the narrow class of well-defined competitive markets with numerous buyers and
sellers, each of w h o m is too small to be of interest
to the others, but each of w h o m is sufficiently
knowledgeable as to be aware of alternative
buying or selling options. Such markets, however,
did in fact encompass a critical part of each
(western) nation's economic activity so that the
economist's attention was not misplaced. Thanks to
the economists, w e now know what will happen
to the price of wheat and bread if the demand for
bread should increase or if a drought should
reduce the wheat harvest. W h e r e analytical complications arise is when the products are neither
homogeneous, nor perishable, nor traded among
unique groups of buyers and sellers, and when
each of us is not equally well informed and the
number of participants in the market, on either
side, is sufficiently small so as to lead the individual
members to recognize their interdependence.
Theorists Turn to
Imperfect Competition
Preceding Marshall, then, economic theorists
such as Cournot, Bertrand, and
Edgeworth
began to reorient the study of markets to consider the problems created when two-seller
duopolies initially, and several-seller oligopolies
subsequently, replace Smith's numerous-seller
markets. It became immediately apparentthat in
order to make any analysis tractable, one would
be forced to make some assumptions about the
interrelationships among the sellers, and in particular to provide each seller with some assumptions as to the behavior of the others.
31
Following Marshall, Joan Robinson from one
perspective and E. Chamberlin from another
focused attention on imperfect competition and
monopolistic competition. Broadly speaking, this
focus forced economists to study markets comprised of any number of sellers (or buyers) who
could operate with some degree of independence
of the others, but whose activities, and the
results of those activities, would be tempered by
other clearly identifiable
sellers (or buyers). This
focus in turn led to Triffin's interest in measuring
the degree to which a reduction in the price
charged by one seller would affect the quantity
demanded of another. Triffin's measure of the
cross-elasticity of demand, in this context defined
as the relative change in the quantity demanded
ofSellerB in response to a relatively small change
in the price charged by Seller A, at first has the
pleasant property of being easily interpreted:
notably, when a reduction in one seller's price
reduces the quantity sold by another, then the
sellers and their products are rivals; otherwise
they are independent. In practice, however, the
measure is not so easily interpreted.
The impact of one seller's price change on the
demand for another's products depends upon
the prices charged by each (and all other sellers
of all other products). Assuming that all sellers
have arrived at an "optimal" (for example, profit
maximizing) pricing policy that initially leaves all
sellers content with their lots, an unanswered
price reduction by one seller will shift consumer
demand away from many other sellers including
some sellers that never dreamt they were in
competition (except broadly speaking) with the
price cutter. The extent of the shift, as measured
by the cross elasticity of demand, can run a full
gamut.
In any case, the size of the cross elasticity is
necessarily limited by the seller's own-price
demand elasticity. For example, if via a price cut a
firm cannot increase the quantity demanded of
it, then anotherseller's price increase also should
not increase demand for the first seller's product.
Thus, when at existing prices the cross elasticity
between Seller A's product and that of Seller B is
unity, w e know that a 10 percent price reduction
by Seller A will effecta 10 percent loss in quantity
demanded of Seller B. But while w e also know
that the 10 percent loss is less than 20 percent
and greater than 5 percent, w e cannot know how
impressive is that 10 percent loss until w e know
how severely the demand for Seller B's product
would be affected by an analogous price increase
by Seller B. Moreover, the fact that the A-to-B
cross elasticity is unity does not necessarily mean
that the B-to-A cross elasticity will also be unity.
Finally, even if the data were available to permit
the accurate measurement of cross elasticities,
there is no reason to expect a single cross
elasticity to obtain between, say, Seller A's Brand
X and Seller B's Brand Y. Rather, the cross
elasticity will depend on the levels of all prices
for all products.
Nonetheless, industrial organization economists and the courts have looked to the cross
elasticity as a measure, however imperfect, that
would help them to group sellers of like products,
or, more accurately, group rival sellers. These
rivals, their products, their customers, and the
areas within which they sell, constitute the markets to be studied for given time periods. The
groupings are arbitrary, to be sure, because the
cut-off point on the cross elasticity and the
extent of interfirm rivalry that defines the group
Thus, the pertinent point. .
. is whether a sufficiently
narrow submarket can be
defined in which (market
power) abuses are likely."
O
32
APRIL 1982, E C O N O M I C REVIEW
is arbitrary. Indeed, any such grouping of buyers
and sellers, that is to say any market definition, is
arbitrary, whether it is effected through welldefined and historically accepted lines of commerce and geopolitical regions, or through allegedly clear-cut criteria such as unique sets of
customers, similar distribution systems, like prices,
and so forth. W h a t this in turn implies is that
markets can be broadly or narrowly defined, or
that there are arbitrarily-defined submarkets within
the arbitrarily-defined markets! The critical question for antitrust purposes is: Does this arbitrariness make meaningless an antitrust analysis of
any market that has been defined solely for
antitrust purposes? Given the appropriate caveats
and the need to deal with the realities of a now
very complex world, it does not.
The concern of the antitrust laws is whether
there exists a line of commerce in a particular
section of the country—that is, a market in the
legal sense—that has been or is likely to be either
monopolized or the victim of lessened competition
with the effect of giving one or a small number of
sellers market power (the power to raise prices
or exclude potential competitors). Thus, the
pertinent point for an antitrust court to settle is
not whether a sufficiently broad market can be
defined where these abuses are not likely to
occur. Rather, the point is whether a sufficiently
narrow submarket can be defined in which those
abuses are likely. Unfortunately, there is no
consensus on which data and arguments are
relevant.
Courts Stress Concentration Ratio
The general tendency in the courts (as well as
in the industrial organization literature) is to
place considerable if not overriding weight on
the sellers' concentration ratio and its trend.
Since the sellers' concentration ratio depends
upon how the market is defined, the litigants in
an antitrust case thus have the incentive to argue
for the market definition that provides them with
"the best" ratios. In practice, therefore, and
behind the scenes, the market definition and
concentration-ratio-computation processes ordinarily go hand in hand and involve considerable
feedback. Accepting the fact that the marketdefinition process is arbitrary, however, and then
drawing the logical inference that there can be
both actual and potential competition between
submarkets, reduces the role of the concentration
ratio as well as the dangers of working with
FEDERAL RESERVE BANK OF ATLANTA
"The convenience and
efficiency o f . . . a cluster of
services may differentiate the
product sufficiently for the
consumer to regard no single
p r o d u c t . . . as a viable
substitute."
arbitrary definitions.. Instead, it becomes necessary
to identify whether or not the delineated submarket, both product and geographic, should be
a matter of antitrust concern. O n e element of
that story is the economic performance of the
sellers in that market. A second element is the
real or apparent market power possessed by the
leading sellers in that market, as indicated, among
other things, by the extent to which a few sellers
hold a large market share. A third and related
element is the extent to which the behavior of
the leading sellers in the market is constrained by
their awareness of the sellers in other markets.
With specific respect to the "market for financial
services," for example, w e observe that a huge
but identifiable set of firms of various shapes and
sizes provide a wide array of financial services
within the United States. This market, the market
for financial services (the line of commerce) in
the United States (the section of the country), is
in little danger of being monopolized. Within this
market, however, there are clearly delineable
relevant submarkets that might conceivably and
in principle be monopolized.
W i t h particular respect to banking as a relevant
product market, there are two possible scenarios. In
one, commercial banks offer a cluster of services
any one of which is available elsewhere; in the
other, commercial banks offer one service, notably
demand deposits for commercial customers,
that is unique to banking.
In the first instance, the cluster of services is a
relevant product, and banks are the suppliers.
This is so since should these services become
33
SUPREME C O U R T :
Banking is a separate product line because:
E C O N O M I C THEORY:
Offers Unique Product
A unique product separates banking from
other financial service suppliers.
(3rd party transaction account)
Offers a Cluster of Services
Clustered services separate banking from
other suppliers not capable of offering the
same cluster.
Conclusion: Courts were on firm theoretical grounds
in defining banking as a separate line of commerce.
more costly, others cannot enter the market to
supply the cluster, nor will all customers desert
commercial banks in favor of individual suppliers.
The fact that the latter option exists constrains
any power that one or more commercial banks
might have in a particular geographic market.
That is, the existence of submarkets reflects on
the market power and potential competition
issues, but not on the relevant market definition.
In the second instance, once banks are the sole
suppliers of demand deposits for commercial
suppliers, then the latter becomes the relevant
product irrespective of whether banks bundle
their services. Again, the criteria are that no one
else can supply the unique service nor do customers have access to an equivalent substitute.
Hence, should the service become more costly,
no new suppliers will be attracted to bid the
price of the service down, nor will customers
desert banks en masse to take their business
elsewhere. A single commercial bank, however,
has good reason to cluster its services. Since the
law prohibits interest on commercial demand
deposits, banks must compete on a nonexplicit
price basis, i.e., offering greater convenience or
reducing prices for other services. Thus, reducing
the price of at least some services in the cluster
implicitly reduces the cost to the customer of a
commercial demand deposit account.
Conclusion
W h a t w e may conclude from this is that
clustering of services is sufficient to differentiate
the product of a group of suppliers from the
product of any other supplier not capable of
34
offering the same cluster of services. Therefore,
the courts were on firm theoretical grounds in
differentiating the product of commercial banking as a separate line of commerce, or separate
product, if in fact banks are effective in clustering
their financial services. The fact that banks offered
all their services at one location may be sufficient
for this finding if a combination of convenience
and efficiency are considered. The ability to
obtain most of one's financial services at a single
location drives down search and transportation
costs for the consumer. At the same time, the
ability to offer an array of financial services may
allow the firm to offer any or all of those services
at a substantially reduced price as compared to a
supplier of only one or two of these services.
The combination of convenience and efficiency
of offering a cluster of services may differentiate
the product sufficiently for the consumer to
regard no single product or nonclustered product
as a viable substitute for the clustered services.
In addition, the fact that banks, at one time, were
the only institutions to offer third party transaction
accounts to both consumer and commercial customers gave commercial banks a unique position.
This unique service is sufficient in and of itself to
allow the courts to define the product offered
by commercial banks as being different from that
offered by any alternative financial supplier.
Therefore, the court's decision to define commercial banking as a separate line of commerce
is consistent with the theoretical economic rationale for defining products and markets.
—Ira Horowitz
APRIL 1982, E C O N O M I C REVIEW
Review of Empirical Literature
Having reviewed the theoretical justification for
viewing commercial banking as a separate line of
commerce, w e are still left with two empirical
questions. First, do banks in fact offer a monopoly
product and second, do banks in fact clustertheir
services? Or alternatively, do bank customers
view the services offered by commercial banks
as a package instead of a set of separable
independent products? Since the enactment of
the Monetary Control Act of 1980, the uniqueness of the array of services offered to consumers
is highly questionable.
W h a t is not questionable, however, is the fact
that commercial banks are still the only suppliers
of third party transaction accounts for commercial
customers. The courts have repeatedly emphasized that as long as commercial banks are the
only significant suppliers of a product, a financial
service or an interrelated group of services, to a
significant group of consumers they would continue to be viewed as offering a separate product
from that of all other suppliers of financial services.
Therefore, the question of whether or not commercial banking is a separate line of commerce
hinges on the empirical question of the existence of
significant alternative suppliers of financial services
offered to commercial consumers by commercial
banks. This article reviews the empirical literature
on this question and assesses the evidence.
If local commercial banks currently offer any
services that customers cannot get elsewhere at
reasonable cost, these must involve services to
local businesses. Individuals, nonprofit institutions, and governments all have local sources of
financial services other than banks in most areas.
FEDERAL RESERVE BANK OF ATLANTA
The characteristics of businesses' relations to
banks and other financial institutions have been
studied in the past in connection with attempts
by regulatory agencies to define banking markets
and with attempts to determine the adequacy of
business financing. Three groups of studies provide most of the systematic empirical evidence
that w e have about the sources of financial
services to small businesses. The largest portion
of this evidence comes from a group of surveys of
businesses. Only the latest of these covers a
broad range of financial services (including trade
credit and factoring) or the location of nonbank
providers of financial services. Only half cover
nonbank providers of financial services at all.
"The question of whether or
not commercial banking is a
separate line of commerce
hinges on . . . the existence
of significant alternative
suppliers of financial services
35
However, these studies do provide some evidence on many of the characteristics of the
market for business financial sen/ices.
The second group of studies originates from
surveys of commercial banks about their business
lending. Along with other information, these
surveys developed data on the location of bank
customers. Thus, they provided evidence on the
local nature of banking markets. Like the business
surveys, they were done mainly in the 1960s. A
similar study, grouped with these for convenience,
is the recent study of nonlocal competition
commissioned by the American Bankers Association. The final type of study uses available aggregate
balance sheet data from businesses to paint a
picture of the borrowing alternatives of businesses.
The single study in this category deals in aggregates
and averages.
"Local banks were the
predominant suppliers of
most services at the time of
these studies, but a significant
proportion of businesses used
both nonlocal banks and
nonbank financial services."
Business Surveys
Only three of the business surveys were national.
The others dealt with smaller areas such as
towns, metropolitan areas, or states. The areas
were quite diverse, ranging from smallertowns in
Indiana and Florida to suburbs of N e w York City
to the state of Ohio. The general conclusions of
these studies on the extent of the geographic
market for financial services produced by banks
were, however, quite similar. Much less information
about the importance of alternatives to banks as
sources of financial services is to be found in
them.
Of the rather broad set of topics covered by
business surveys, the most relevant to the question
36
of line of commerce and geographic market
were number and location of banks used by the
firm and other financial institutions used by the
firm. This latter topic was covered in seven of the
thirteen studies reviewed. The results of the
survey related to location of banks and use of
nonbank institutions for loans are summarized in
Table I.
The model for business surveys, a study done
in 1957 by George Katona, deals with very large
firms, but its findings are quite consistent with
later studies with high concentrations of small
firms. Katona's sample of firms generally used
more than one bank, but more than half used a
bank located in their headquarters city as their
primary bank. Katona found also that the number of
banks used and the likelihood of using nonlocal
banks was lower for smaller firms. A second
survey of the Fortune 500 industrial corporations
found results similar to Katona's. This study
(Staats), however, found that a majority of these
large corporations had primary banks in areas in
which the companies had branches as well as in
their headquarters area and that they obtained
credit as well as deposit services from these
banks.
The business survey studies of the late 1960s
and early 1970s generally found strong evidence
that businesses chose a primary bank located in
their own town and that they acquired most of
their financial services from that bank. For example,
in the first of two surveys conducted in Elkhart,
Indiana, by the Federal Reserve Bank of Chicago,
95 percent of businesses used primary banks
with Elkhart locations; in the second study, 94
percent used Elkhart banks (Kaufman 1967b,
1969). Similar results were found in the other
studies that dealt with small businesses (Kaufman
1967b, King, Stiles) except for two studies of
suburban areas close to large cities. In each of
these studies—one of Central Nassau County,
N e w York, and the other of Bucks County,
Pennsylvania—only two-thirds of businesses used
local primary banks (Kildoyle, Bowers). Most of
the other businesses dealt with primary banks in
N e w York City and Philadelphia, respectively.
Both of Ware's studies of a sample of all sizes of
Ohio businesses found slightly less than 90
percent of the businesses sampled using a local
bank as their primary bank. These percentages
fall between those of small businesses and those
of large businesses.
A single study involving businesses in a large
city—St. Louis—(Luttrell) had findings on the
APRIL 1982, E C O N O M I C REVIEW
"The surveys . . .
reinforce the
evidence that
convenience is the
most important
factor in choosing
a lending bank."
number of banks used that were consistent with
other studies but found more businesses borrowing from nonbank financial institutions. This
survey covered large and small businesses. Most
of the larger businesses used more than one
bank; most of the smaller did not. Of the large
firms, some 32 percent borrowed from nonbank
financial institutions; of the small firms, 25 percent
did. These percentages exceed those found in
studies of small town and suburban firms, which
found from 16 to 20 percent of the firms used
nonbank financial institutions.
The two most recent business surveys were
conducted by the National Federation of Independent Businesses in April of 1980 (Zayas) and
the Federal Reserve Bank of Cleveland in the
spring of 1981 (Watro). Questions in the former
dealt only with the most recent business loan of
the businesses surveyed. Consequently, the survey did not cover the volume of loans supplied
by various sources, the location of loan sources,
and the use of other financing methods. Despite
these missing pieces, the surve/s results suggest
that banks are still important sources of business
credit. The firms surveyed reported that banks
had provided their most recent business loan in
83 percent of the cases. They named no other
lender in more than 5 percent of the cases.
The Cleveland survey (Watro) was broadly
based in that it dealt with deposit and credit
services and with a broad spectrum of financing.
This survey of small businesses (assets less than
$5 million) in Ohio found commercial banks to
be the almost exclusive source of transactions
accounts, coin and currency, lock box, night
depository, cash management and trust services.
FEDERAL RESERVE BANK OF ATLANTA
Savings and loans and other institutions supplied
business time and savings accounts for almost
thirty percent of the businesses. The survey
results cast serious doubts on banks' dominance
as a source of credit. Respondents indicated that
suppliers of goods and equipment were the
most widely used source of credit. Banks ranked
second but were used by only 56 percent of the
firms. Only one sixth of borrowing firms had all
their debt with commercial banks.
The business surveys bring out several characteristics of businesses' use of firms providing
financial services. Local banks were the predominant suppliers of most services at the time of
these studies, but a significant proportion of
businesses used both nonlocal banks and nonbank financial institutions. Convenience was
evidently a strong motivating factor in the choice
of primary bank and alternative banks. Small
firms generally relied on one bank while larger
firms used two or more banks more often.
Alternative banks were more often found outside the firm's local area. The surveys of business
lending by banks reinforce the evidence that
convenience is the most important factor in
choosing a lending bank, although the surveys
did not attempt to uncover price differences
among banks.
These business surveys have similar strengths
and limitations. Except for the Zayas and W a t r o
surveys, each presents evidence on the local
nature of small business-bank relationships. Although only two surveys deal with a national
sample, the combination of evidence from the
other studies presents a convincing picture of
business-bank relationships of the 1960s and
early 1970s. The findings of each of these studies
are quite consistent. Each study concluded that
most small businesses used local banks. Whether
local banks held a dominant place in supplying
all business financial services, however, was not
nearly so well covered. Only half of the studies
asked businesses about any kind of nonbank
services that they used. All but one of these dealt
only with loans; consequently, trade credit and
equity financing sources and all other financial
services were ignored. In addition, it is difficult to
determine whether respondents included secured loans on equipment and real estate in their
definition of loans. The recent Cleveland study is
the exception to the others in its combination of
timeliness and breadth. Its results indicate that—
at least in Ohio—although small businesses remain
37
tied closely to banks for transactions accounts
and related services, they use other sources for a
significant portion of their time deposit and
credit services. These results cast serious doubts
on whether businesses treat banks as providers
of an inseparable cluster of services.
Bank Surveys
In addition to evidence from the recent interagency survey of banks about small business
lending (summarized below), there are three
other studies that develop evidence on characteristics of markets for business financial services
from surveys of banks. The earlier two of these
were based on a 1955 survey of business loans
carried out by the Federal Reserve System (Lozowick, Steiner, and Miller; Eisenbeis). These studies
dealt only with the question of the geographic
extent of the loan market. Analyzing data on
distance between banks and borrowers, the
authors of each concluded that businesses, generally, limited their bank borrowing to the S M S A
in which they were located. The local limitations
were stronger for smaller businesses and smaller
loans.
M u c h more recently, the American Bankers
Association sponsored a study of nonlocal competition for banks located in large metropolitan
areas (Merrill). Information for the study came
from interviews with banks and other institutions
The study found that there were many nonlocal
banking competitors of local banks in the large,
rapidly growing metropolitan areas of the Sun
Belt. These competitors apparently concentrate
mainly on providing financial services to middle
market business customers. It further concluded
that the nonlocal competitors generally shun
smaller towns, smaller businesses, and more
slowly growing or declining areas.
The studies based on the Federal Reserve's
Business Loan Survey deal exclusively with the
geographic nature of bank-business loan relationships. They do not explore either the existence
or the location of nonbank suppliers of financial
services. Their results are also based on data
collected in 1955, before the last quarter century
of financial developments. The Merrill study, on
the other hand, is current but limited to a few
large metropolitan areas. Its conclusions are
based on a survey of bank and nonbank sources;
thus, they eliminate biases based on banker
knowledge alone. The conclusions of the Merrill
study are of unknown applicability in smaller
metropolitan areas or towns. They also touch the
issue of services to small businesses only peripherally.
Aggregate Data
A further recent piece of research uses aggregate data from several government agencies to
paint a broad picture of the sources of small
business financing in the late 1970s (Andrews
and Eisemann). This study, like Watro's recent
work, casts substantial doubt on banks' present
dominance as sources of credit for small business and on the proposition that businesses
treat banks as offering a cluster of services
rather than individual services.
From the perspective of alternative sources
of business financial services, the most important conclusion of this study is that trade credit,
finance company credit, and government credit
rival bank credit in importance as sources of
financing for small businesses. These three
'
3
'
I,
"The results cast serious
doubts on whether businesses
treat banks as providers of
an inseparable cluster of
services."
sources are covered in only one of the surveys
reviewed above so that w e do not know if most
businesses responding to them followed the
same pattern found in the study by Andrews
and Eisemann. In the study that did cover these
sources (Watro), results are similar to those of
Andrews and Eisemann. It is clear from the
aggregate evidence, however, that businesses
have important financing sources other than
banks and that they use these sources despite
their continued dependence on banks for demand deposit services. Another important finding of Andrews-Eisemann is that secured loans
either based on commercial real estate or from
finance companies based on equipment provide
•
M
38
I
\
r
38
APRIL 1982, E C O N O M I C REVIEW
substantial sources of financing for small businesses also. The study points out that although
trade credit and secured loans may seem to
involve directly use of credit for the purchase
of a specific item, the funds acquired by these
means may be used for any business purpose.
This means that these financing sources are as
general in their uses as unsecured credit typical of
commercial banks.
The Andrews-Eisemann study adds breadth
to our knowledge of sources of small business
financing. It explicitly considers financing secured by real estate and equipment, and trade
credit as business financing sources. Its use of
dollar value rather than number of relationships
provides an alternate measure of the importance
of various financing sources. In addition, it is
more current than most of the other studies
cited here. This study leaves some gaps in our
knowledge of small businesses' use of financial
services. It does not cover nonbank services
other than financing, and it does not say anything
about the geographic extent of the business
services market.
Conclusion
The evidence that has been gathered in
these studies of sources of business financial
services indicates that substantial changes may
have taken place in these sources in recent
years, at least in some geographic markets. The
business survey studies (all but two performed
before 1974) uniformly indicated that markets
for these surveys were local so far as small
businesses were concerned. The pre-1974 studies
uncovered evidence of use of nonbank loan
sources by about one-fifth of small businesses
and by a larger proportion of larger businesses.
A recent business survey indicates that nonbank
deposit and loan sources have become more
important over time both as exclusive and
additional sources of financial services to small
businesses. A recent survey of financial institutions indicates that in some markets—fastgrowing relatively large ones—nonlocal institutions are becoming important suppliers of financial services at least to middle market businesses
and that these institutions are not necessarily
commercial banks. Finally, aggregate data on
sources of small business financing indicate
that banks are not now the dominant source of
financing, but are part of a more extensive
FEDERAL RESERVE BANK OF ATLANTA
"Equity, trade credit, finance
company credit, and
government credit rival bank
c r e d i t . . . as sources of
financing for small businesses"
menu including trade credit, governments, finance companies, and other mortgage lenders.
This recent evidence on nonlocal and nonbank
sources of financial services for small businesses
casts doubt on the generally accepted conclusion that these businesses depend exclusively
or dominantly on local commercial banks and
on whether they treat banks as providers of a
group of services from which they cannot pick
and choose. The limited nonbank competition
found in early studies is also in part a result of
their concentration on loans and of the exclusion
of trade credit and equity as financing sources.
Limited use of nonlocal banks and nonbank
lenders found in the studies done in the 1960s
and early 1970s may also have expanded.
While no such dramatic changes as the Monetary Control Act of 1980 have taken place in
markets for business financial services, many
subtle changes in these markets along with
evidence of recent studies lead one to question
the importance of commercial banks in offering
many businesses individual services and as the
source of a cluster of these services. Trade
credit provides a large proportion of financing
for small businesses. Commercial finance, captive finance, and leasing companies offer businesses financing secured by equipment or real
estate but not necessarily used to buy equipment or real estate. Savings and loan associations
may finance noncorporate business and, if real
estate is the security, corporate business. Banking organizations headquartered outside local
markets provide financing through nonbank
subsidiaries and loan production offices and
calling officers.
To conclude, the previous empirical work is,
39
Table 1
Summary of Business Survey Results
(Percentage of Firms)
Survey
Large Businesses
Katona
"
Smaller Town,
Smaller Business
Kaufman
1967a
Kaufman
1967b
Kaufman
1969
King
Stiles
Mixed Location
and Business
Ware 1969
Ware 1973
Suburb, Mixed
Business Size
Bowers
Kildoyle
Large City
Luttrell
"Not available
"Checking accounts
"""Large firms/small firms
Using Only
One
Bank
Using More
Than
One Bank
Using Local
Primary
Bank
21
78
54
Using Local
Secondary
Bank
Using Nonbank
Financial
Institution
65
35
94
50
47
20
49
95
18
70
67
70
29
33
30
42
94
95"
99
56
19
58
64
58
36
42
87
70
59
30
41
66
66
32/76"*
68/23*
90"
60
47
16
20
32/25*
Note: Data reported in Staats and Watro do not fit the categories of this table.
by and large, dated, but existing evidence
supports the following conclusions. First, small
businesses seem to be constrained to local
sources of financing, as the courts assumed.
Second, commercial banks are and have b e e n
a major source for financial services to businesses,
especially small businesses. Third, alternatives
to banks for commercial loans and other financial services do exist and are becoming more
significant. Perhaps most important, recent
studies indicate that businesses make substan-
tial use of non-bank sources of financial services
despite their dependence on banks for demand
deposits. Although this does not provide evid e n c e that clustering exists or does not exist,
the fact that small businesses are obtaining
financial services from non-bank sources casts
doubt on their viewing the services provided by
commercial banks as clustered.
—B. Frank King
40
APRIL 1982, E C O N O M I C R E V I E W
Section III
NEW
EMPIRICAL
EVIDENCE
Whether commercial banks should be treated for antitrust purposes as
offering a product separate from that of other financial service suppliers
is an empirical issue. The key questions are whether small businesses
view the services provided by commerical banks as clustered or
unclustered, and how they view these services compared to those
provided by other suppliers.
From a theoretical standpoint, we have seen that if commercial banks
in fact offer a unique service of significance to small businesses or if they
offer a cluster of services for which there are no significant alternatives,
then the product of commercial banks may reasonably be viewed by the
courts as separate from that offered by other types of financial service
suppliers. Since the financial services industry has undergone explosive
changes in the last couple of years, and since much of the empirical
evidence on this question is now dated, it seems advisable to take a new
look at the situation.
This section pulls together the evidence from three recent surveys
aimed at the line of commerce question. First, David Whitehead reports
on a survey of small businesses in the Southeast which was initiated by
the Federal Reserve Bank of Atlanta's Research Department This survey
gathered evidence on where small businesses obtain financial services
and what actual and potential sources for these services they perceived.
The second survey, described by Bill Cox, was also initiated by the
Federal Reserve Bank of Atlanta's Research Department, and gathered
evidence on the pricing of NOW accounts by commercial banks and
savings and loan associations. The objective of this study was to assess
the extent to which commercial banks and savings and loans compete
through pricing for NOW accounts. Federal Reserve Board economist
Cynthia Glassman presents the third survey, initiated by an interagency
task force and aimed at establishing what alternative sources exist for
financial services used by small businesses. This survey questioned
senior loan officers at commercial banks throughout the country. Each
of these surveys offers a new perspective on an old issue.
FEDERAL RESERVE BANK OF ATLANTA
41
The Sixth District Survey of
Small Business Credit
Since little current evidence is available on
sources of small business financing, in October
1981, the Federal Reserve Bank of Atlanta sponsored a survey of small businesses located within
the six states which comprise the Sixth Federal
Reserve District:
Alabama, Florida, Georgia,
Louisiana, Mississippi and Tennessee. 51 The survey questionnaire and sample population were
designed by the research staff of the Federal
Reserve Bank of Atlanta, with the assistance of
members of the staff of the Board of Governors
and the staff of the University of Florida's Bureau
of Economic and Business Research. 52
Survey Results
The survey supports the court's insistence that
small commercial businesses tend to be limited
to their local community for financial services.
Local banks dominate the supply of every service
(except leasing and trade credit). The vast majority of businesses which obtained the following
types of services, received those services from
their local bank: unsecured personal loans, secured
personal loans, unsecured business loans, loans
secured by real estate, loans secured by business
inventory, loans secured by business equipment,
loans secured business receivables, business
checking services, night depository facility, and
lock box services. Local banks are active in
providing business trust services, payroll services,
cash management and to a lesser extent leasing
facilities.
Small businesses in small communities tend to
be more dependent on banks as a source of
financial services than are small businesses in
larger communities. In nine out of the ten financial
service categories listed above, banks in small
and/or medium size communities supplied these
services to a greater degree than banks in large
communities. This fact, in concert with the extremely high percentages in each of these categories, indicates that the Supreme Court's assertion in the Philadelphia case tends to be
correct: small businesses tend to be constrained
to local sources for financial services and banks
are a major supplier of these services at least for
small businesses (see Table 1).
The survey found that commercial banks are
the major source for most financial services used
by small businesses. Table 2 shows that 584 of
the 612 small businesses used business checking
42
APRIL 1982, E C O N O M I C REVIEW
Table 1
Percentage of Firms Which Obtained the Given Services
Through a Local Commercial Bank
Unsecured
Personal
Loans
Secured
Personal
Loans
Unsecured
Business
Loans
Loan Secured
by Real
Estate
76.8
87.5
91.7
94.2
91.5
89.6
83.5
87.5
91.8
64.7
74.5
70.9
282
287
283
237
Loan Secured
by Business
Inventory
Loan Secured
by Business
Equipment
Loan Secured
by Business
Receivables
Leasing
78.7
71.4
82.3
69.9
83.8
79.5
City
Size
Large
Medium
Small
Number of
Firms
Large
Medium
Small
Number of
Firms
88.2
81.0
73.6
2.9
4.0
17.6
161
187
99
15
Trade Credit
Large
Medium
Small
Number of
Firms
Business Checking
Account
Business Night
Depository
Lock Box
Service
14.1
93.9
94.8
96.7
95.3
28.6
100.0
96.4
93.6
94.4
92.8
28
583
194
138
Payroll
Service
Business Trust
Services
Other
37.5
46.2
63.6
55.0
56.3
85.7
76.2
25.0
25.0
50.0
23
47
31
13
13.1
Cash
Management
Large
Medium
Small
Number of
Firms
38.5
100.0
accounts obtained from a local commercial bank;
that's better than 95 percent. Only 5 businesses
responded that they obtained business checking
sen/ices from savings and loan associations. Commercial banks, local and nonlocal, supplied 635
of the 655 business checking services provided,
or better than 97 percent. Some small businesses
used more than one source for a given service;
business checking accounts w e r e no exception.
The evidence on this single service is overwhelming. Commercial banks as a group hold an
effective monopoly providing checking accounts
services to small businesses. In terms of perceived
potential sources for business checking account
services, 99 percent of the respondents indicate
only commercial banks as a potential source for
this service. Therefore, the empirical results indiFEDERAL RESERVE BANK OF ATLANTA
cate that commercial banks do hold a monopoly
over at least o n e significant product, checking
services, w h i c h is sufficient to differentiate commercial banking from all other types of financial
service suppliers.
Local commercial banks also supply significant
amounts of other services (Chart 1). In the loan
categories, these percentages range from 69
percent to 91 percent indicating that commercial
banks are a significant source for small business
borrowings. Commercial banks are not a significant supplier of leasing services, accounting for
only 9 percent of those using this type of service.
Better than 93 percent of the local businesses
using lock box services or night deposit facilities
use local commercial banks. A n d in the remaining
categories of services, a significant percentage of
43
T a b l e 2 . Preliminary S u m m a r y of Survey Results
Chart 1.
P e r c e n t a g e of Business Firms
Using a Given Service
O b t a i n e d f r o m a Local B a n k
Personal
H B 86%
U n s e c u r e d Personal Loan
• 191%
g 189%
i
] 69%
S e c u r e d Personal Loan
U n s e c u r e d B u s i n e s s Loan
Loan S e c u r e d by R e a l E s t a t e
B180%
L o a n S e c u r e d by Inventory
H
Loan S e c u r e d by Equipment
78%
Ï Î 7 6 % L o a n S e c . by Bus. R e c e i v a b l e s
g 19%
Leasing
SERVICES
Unsecured personal
loans
Secured personal
loans
Unsecured business
loans
Loan secured by
real estate
Loan secured by
business inventory
Loan secured by
business equipment
Loan secured by
business receivables
Leasing
Local
bank
Local office of
nonlocal but
In-state bank
Bank within
state with no
local area office
85
21.3
282
70.5
9
2.3
7
1,8
17
4.6
288
78.3
11
3.0
5
1.4
50
13.4
284
76.3
17
4,6
6
1.6
17
3.8
237
53.4
27
6.1
10
2.3
8
3.5
161
71.2
9
4.0
4
1.8
8
2.9
187
67.0
14
5.0
4
1.4
2
1.4
100
71.9
10
7.2
1
0.7
4
2.3
15
8.6
Trade credit
4
1.9
28
13.5
I
Business checking
account
Business night
depository
Lock box service
6
0.9
584
89.2
34
5.2
2
1.0
194
94.2
8
3.9
Cash Management
H 1 5 %
—
Payroll S e r v i c e
139
90.8
7
4.6
Cash management
1
1.9
23
42.6
3
5.6
—
Payroll service
2
2.1
47
48.5
1
1.0
1
1.0
Business trust
services
Other
1
2.1
31
64.6
3
6.3
2
4.2
z
13
39.4
—
Trade Credit
1 9 5 %
n
H
H I 52%
H
"141%
70%
9
7 %
93%
B u s i n e s s Checking
B u s i n e s s Night Depository
L o c k Box S e r v i c e
B u s i n e s s Trust S e r v i c e
Other
businesses using these services obtain the service
through their local bank.
Evidence on Clustering of Services
The basic question approached in this section
is: do small businesses perceive commercial
banks as offering a set of independent services or
"Commercial banks are the
major source for most
financial services used by
small businesses."
44
—
—
—
5
0.8
_
—
—
—
—
as providing these services in clusters? Our survey
suggests that small businesses use a variety of
services of local banks, and that they perceive
the local bankstobeofferingaclusterof services.
Only 59 firms used a single financial service
while 642 firms used multiple financial services.
Better than 67 percent of the firms which used
financial services used between two and six
services. The average number of financial services
used was 4.78 (Table 3). Thus, the question of
whether or not banks cluster services for small
businesses is indeed a relevant one.
A second important finding is that there are
significant alternative sources for some of these
financial services. Quite obviously for business
checking services, business night depository and
lock box services, there are no significant alternatives to commercial banks; less than five perAPRIL 1982, E C O N O M I C
REVIEW
SOURCES
Out-of-state
bank with
local office
Out-of-state
bank
Total
sources
selected
Savings
and loan
association
Commercial
finance
company
Mortgage
company
-
5
1.3
1
0.3
1
0.3
-
2
0.5
10
2.7
18
4.9
5
1.4
3
0.8
6
1.6
2
0.5
1
0.3
Factor
—
321
—
—
19
4.3
444
100.0
342
3
1.3
1
0.4
9
4.0
2
0.9
7
3.0
226
100.0
202
17
6.1
7
2.5
—
11
4.0
279
100.0
241
—
129
5
1.8
1
0.4
19
6.8
1
0.4
3
1.1
1
0.7
4
2.9
1
0.7
5
3.6
2
1.4
6
4,3
—
4
2.3
—
14
8.0
—
—
1
0.5
4
1.9
_
4
1.9
—
2
0.3
10
1.5
5
0.8
1
0.2
2
6.1
0.7
5
3.6
139
100,0
6
3.4
12
6.8
174
100.0
161
10
6.3
4
1.9
141
68.1
3
1.4
5
2.4
207
100.0
183
_
2
0.3
2
0.3
—
1
0.2
3
0.5
655
100.0
612
—
1
0.5
206
100.0
201
2
1.4
153
100.0
149
—
24
44,5
54
100.0
51
2
4.2
3
9.1
1
1
0.7
119
68.4
1.9
—
36
8.1
—
1
0.5
1
2.1
1
0.3
—
2
0.7
—
329
1
0.2
—
12
5.3
2
2.1
400
100.0
315
2
0.9
5
5.2
5
1.3
372
100.0
6
2.7
1
1.0
I
368
100.0
2
0.9
—
Valid
cases
4
1.1
1.6
2
3.7
Total
response
7
1.1
2
0.5
—
Other
1
0.3
87
19.6
I
Consumer
finance
company
2
0.5
—
7
—
Inventory
suppliers
2
0.5
3
0.8
1
0.2
.
Leasing
company
Total
samples
selected
this
service
3
2.0
2
1.3
—
1
—
—
1
1.0
—
1
3.0
—
—
1
3.0
—
—
37
38,1
97
100.0
91
—
—
—
1
2.1
7
14.7
48
100.0
44
1
3.0
I
1
3.0
11
33.4
33
100.0
32
Note: Top number in each row is the number of firms using a given service, (one firm may use more than one source.)
Bottom number in each row is the percent of firms that received a service from a given source.
cent of the businesses surveyed which used this
service obtained the service from nonbank sources
(Chart 2). As far as the loan categories are
concerned, the significance of nonbank suppliers of
secured personal loans, unsecured business loans,
loans secured by inventory and loans secured by
business receivables is questionable; more than
80 percent of all small businesses surveyed
which used these services obtain that service
from commercial banks. However, given that 20
or more percent of those businesses which
actually used one of the remaining categories of
loans obtained that service from a nonbank
source, it seems reasonable to assume that there
are significant alternative sources for these services.
Therefore, for at least some of the financial
services offered by commercial banks, nonbank
suppliers represent significant alternatives.
FEDERAL RESERVE BANK O F ATLANTA
4
Third, w e found strong evidence that businesses behave as if commercial banks are clustering their services. Only 35 of our sampled small
businesses used only the checking account ser-
"Our survey suggests that
small businesses use a variety
of services of local banks,
and that they perceive the
local banks to be offering a
cluster of services."
45
Table 3
N u m b e r of Businesses W h i c h Use
C h e c k i n g A c c o u n t s at Local B a n k a n d Obtain
All O t h e r F i n a n c i a l Services f r o m T h a t B a n k
Number of
Number of
Services Obtained
Businesses
Average Number of
Services Used: 4.78
Total: 701
Chart 2 .
P e r c e n t a g e of Business Firms
Using a Given Service
Obtained from a Nonbank Source
•
H
24.1%
14.1%
H
Unsecured Personal Loan
Secured Personal Loan
15.9%
Unsecured Business Loan
H | H b ^ 3 6 . 4 % Loan Secured by Real Estate
H
19.4%
Loan Secured by Inventory
^ • 2 4 . 1 % Loan Secured by Equipment
• 1 7 . 3 % L o a n S e c . by Bus. Receivables
39.1 %
|f|j 84.1%
Leasing
Trade Credit
3.0%
Business Checking
1.9%
Business Night Depository
J 4.6%
Lock Box Service
E l 48.1%
_ J 43.3%
H
22.8%
•
Cash Management
Payroll Service
Business Trust Services
51.5%
46
Other
vices of local banks or local offices of nonlocal
banks. N o business reported using only the
checking account service at the other three
types of commercial banks listed. Since only
commercial banks may offer checking accounts
to commercial consumers, commercial banks as
a group are monopoly suppliers of checking
account services. Each commercial bank, however, must compete with every other commercial
bank in its market for these deposits. Since
legislation prohibits the payment of interest on
demand deposit accounts, commercial banks
may not compete for customers through explicit
prices of their checking account services. Instead,
they compete on a nonprice basis, i.e. convenient
locations and competitive prices on other financial
services. In effect, the price charged commercial
customers for another financial service or for a
package of other services may partly reflect the
implicit price of the commercial checking account.
Thus, the lower the price for the other financial
service or for the package of services, the higher
the implicit price the bank is payingthe commercial customer for its demand deposit account.
Therefore, if a large number of firms held just
the exclusive service, it would indicate a lack of
effective clustering. Since less than 6 percent of
the businesses which held checking accounts
with local banks used only the checking account
services, this is consistent with the clustering of
services hypothesis.
In fact, 35 percent of the firms responded that
they obtained their checking account services
and all other financial services they used from a
local commercial bank. Fifty-one percent of the
firms holdingcheckingaccounts with local banks
obtained financial services from the local bank
and other sources. This indicates that even if
banks cluster their services, a significant number
of firms use not only the cluster, but nonbank
sources as well. Only 7 percent of firms holding
checking accounts at local banks used only
sources other than their local commercial bank
for other financial services, and each used only
one other type of service. Given the large number
of businesses using multiple financial services
and the large percentage of businesses sampled
holding checking accounts at local banks, the 7
percent obtaining other financial services from
sources other than their local bank gives strong
evidence that businesses behave as if commercial
banks are clustering their services. The commercial customer is either taking advantage of oneAPRIL 1982, E C O N O M I C R E V I E W
"We found that significant
nonbank alternatives exist
for a majority of the services
offered by commercial banks."
stop banking or is taking advantage of the package
of services.
Interestingly, 68 percent of the businesses that
did not hold checking accounts with a local bank
use financial services obtained from a local bank.
Of these, 70 percent use more than a single
service from a local bank. These businesses
represent twenty percent of all businesses in the
sample. This evidence indicates that local commercial banks may not be completely successful
in linking other services to checking. For a variety
of reasons, businesses may use nonlocal banks
The Sample Design
To choose our sample, w e took a slice of
cities in our District, then w e took a slice
of businesses within those cities. The
sample population consisted of all businesses listed on membership roles of all
chambers of commerce within the six
states. W e stratified the chambers into
three groups, depending upon the population size of their respective communities: greater than one million, less
than one million but larger than 250
thousand, and less than 250 thousand.
The population figures are based on the
1980 preliminary Census counts.
Within each of these strata, we drew
the sample population in the following
way. Only four Sixth District SMSAs contain populations greater than one million:
Atlanta, N e w Orleans, Tampa-St. Petersburg and Miami. For this reason, w e
included all four of these SMSAs. Then
we randomly selected ten counties each
from the second and third strata. The
number of counties selected from each
state was based on that state's portion of
the District's total population. Table A
presents a complete list of the chambers
of commerce included in the sample.
FEDERAL RESERVE BANK O F ATLANTA
for checking and local banks for other financial
services.
The preliminary results of the survey offer
consistent evidence that business firms use multiple services of local banks. This is consistent
with the view that businesses perceive commercial banks as offering a cluster of services. In
addition, w e found that significant nonbank
alternatives exist for a majority of the services
offered by commercia! banks.
Given the criteria set forth in the Connecticut
Case for evidence sufficient to broaden the line
of commerce definition for commercial banking,
the empirical evidence presented from this survey supports no change at the present time.
Although there were significant alternatives for a
number of the services provided by commercial
banks to small businesses, commercial banks still
maintain the exclusive ability to offer small
business checking accounts, and small businesses
tend to use the services offered by commercial
banks as if they were clustered.
From the membership roles of the
selected chambers of commerce, we
selected at random a sample of 5,031
businesses. W e took 40 percent of the
sampled businesses from strata one and
40 percent from strata two, with the
remaining 20 percent from strata three.
The number of businesses chosen from
each list was in proportion to the total
number of businesses listed on the chamber's membership role within each strata
Prior to the selection, w e eliminated all
professionals, financial institutions, clubs,
public service organizations and individuals, as well as all businesses employing more than 100 people.
For purposes of the survey, we defined a
small business as any business employing more than three and less than 100
employees. The selected sample included
both small and larger businesses because
in many cases no size measure was
included on the membership listing. Therefore, each firm surveyed was asked for
the total number of full-time employees
they employed. If their total was larger
than 100 or less than three, they were
asked to disregard the remainder of the
questions and return the questionnaire.
—David D. Whitehead
A total of 5,031 survey questionnaires
with stamped return envelopes and cover
letters were mailed during the first week
in November, 1981. By the end of November, 1,445 questionnaires were returned.
Of the questionnaires returned, 734 (51
percent) were small businesses, 426 (29
percent) were not small businesses and
285 (20 percent) were returned as undeliverable due to address changes or businesses which had gone out of existence.
Ail non-respondents who agreed in a
telephone follow-up to participate in the
survey and who qualified as a small
business were mailed a second questionnaire. As of this writing, 733 usable
questionnaires have been returned.
Description of Firms Surveyed
Over 27 percent of the firms responding
provided services, while 25 percent were
in the retail trades. Manufacturing and
wholesale firms accounted for 14 percent each of the responses. Financial
services accounted for 9 percent, transportation and communication for 4.6
and building materials for 4.6. Agricultural related firms represented the re-
47
maining 2 percent. The firms responding
to the questionnaire, therefore, cover a
broad product spectrum.
The geographic distribution of respondents based on state is heavily skewed
(50 percent) toward Florida. The recognition factor by businesses receiving the
questionnaires from the University of
Florida's Bureau of Economic and Business Research probably had a great deal
to do with the heavy response from
Florida businesses. Responses from Alabama numbered 102 (14 percent), 98
(13 percent) from Georgia, 97 (13 percent) from Louisiana, 44 (6 percent)
from Mississippi and 25 (3 percent) from
Tennessee.
In response to the question concerning
whether or not the responding firms
were affiliated with or a subsidiary of
another firm, 88 percent responded that
they were independent organizations.
In addition, when asked where within
their organization financial decisions were
made, 87 percent of those responding
asserted that financial decisions were
made locally, 5 percent said they were
made jointly with the home office, and
only 8 percent responded that financial
decisions were originated by the parent
organization. The vast majority of those
firms responding, therefore, are assumed
to be local operations.
As a relevant measure of firm size, we
chose to key on employment. The majority, 55 percent, of firms responding to
our survey employed ten or less employees. Thirty percent of the respondents employed between 11 to 30 employees, while nine percent employed
between 31 and 50. The remaining 6
percent employed from 51 to 100 employees. This tends to confirm that the
firms responding to the survey were
indeed small businesses. In addition,
most of these small businesses are apparently well established in that they
have been in business for five years or
longer. Over 88 percent of those responding to this question indicated that
their organization had been in business
for five years or more, 11 percent had
been in business from 1 to 5 years, while
only 1 percent had less than a year of
experience. Therefore, the firms which
comprise the respondent group were
not only small, but the large majority of
those firms had more than five years of
business experience.
48
Table A
Chambers of Commerce Included in the Sample
SMSAs More Than One Million
COUNTY
CHAMBER OF COMMERCE
Atlanta
Fulton
South Fulton
North Fulton
Rockdale
Conyers Rockdale
Walton
Walton County
Henry
Henry County
Fayette
Fayette County
Clayton
Clayton County
New Orleans
New Orleans Orleans
St. Tammany Covington
Tampa-St.
St. Petersburg
Petersburg
Pinellas
Hillsborough South Tampa
Pasco
West Pasco
Hialeah-Miami Springs
Miami
Dade
Coral Gables
North Dade
Latin
Miami Beach
Counties in SMSAs of less than one million
COUNTY
CHAMBER OF COMMERCE
STATE
Gadsden Metro
Alabama
Etowah
Huntsville/
Madison
Madison County
Florida
Leon
Alachua
Nassau
Polk
Georgia
Louisiana
Mississippi
Tennessee
Chatham
Calcasieu
Harrison
Sumner
Counties in Non-SMSAs
STATE
COUNTY
Alabama
Pike
Dale
Florida
Franklin
Calhoun
Appling
Georgia
Johnson
Louisiana
Plaquemine
Terrebonne
Mississippi
Franklin
Tennessee
Giles
Tallahassee Area
Gainesville
Fernandina Beach/Amelia
Island
Lakeland Area
Savannah Area
Greater Lake Charles
Biloxi and Harrison County
Hendersonville
CHAMBER OF COMMERCE
Pike County
Ozark-Dale County
Apalachicola
Calhoun County
Appling
Wrightsville-Johnson County
Plaquemine-lberville
Houma-Terrebonne
Franklin County
Giles County
APRIL 1982, E C O N O M I C REVIEW
Do Banks Price as if Thrifts Matter?
In the Philadelphia National decision, the
Supreme Court held that banking is "local, unique
and comprised of a cluster of retail financial
services," something like a financial department
store. In assessing the validity of the 1963 decision
in the deregulating financial world of 1982, one
of the aspects w e need to examine is the
competition between commercial banks and
thrift institutions in local retail markets. Beginning in
1980, savings and loan associations across the
nation were given expanded powers to compete
with banks in offering services such as interestbearing checking ( N O W ) accounts, consumer
loans, and credit cards, in addition to their
traditional offerings of consumer savings instruments and mortgage loans.
Do banks in markets where thrift institutions
are abundant set cheaper prices than banks in
markets where thrift institutions are scarce? If the
answer is yes, then it means the banks behave as
if the thrifts are competitors, and it would follow
that regulatory analysis of retail "banking" markets
should include the thrifts as well as the banks.
In this context, the banks are the key actors. It
is already evident that savings and loan associations in the Southeast themselves believe
they are in competition with the banks.53 Some
FEDERAL RESERVE BANK OF ATLANTA
customers, at least, regard similar products from
the two types of institutions as substitutes, for
they have signed up with the thrifts for N O W
accounts and for other services previously offered
by banks. But unless the banks make competitive
decisionsas if thrifts matter, orunless they can be
expected to do so in the future, there is reason to
question whether thrifts should be included in
the regulatory analysis of banking markets.
"Unless banks make
competitive decisions as if
thrifts matter, . . . there is
reason to question whether
thrifts should be included in
the regulatory analysis of
banking markets."
49
The simplest and best evidence comes from
pricing decisions of the banks. D o the pricing
patterns of banks in various geographic markets
of the Southeast suggest that banks respond to a
competitive presence from savings and loan
associations?
To find out, w e recognized that competition
b e t w e e n banks and thrifts is essentially local and
w e chose to define "local" as the standard
metropolitan statistical area 5 4 There are 43 SMSAs
within the six states of the Sixth Federal Reserve
District. W e selected 22 of t h e m to represent the
full variety of structural situations in the Southeast
Next, w e d e v e l o p e d a measure of the extent of
thrift competition in each market: the number of
thrift offices divided by the number of thrift and
bank offices in the market area. 55
W i t h i n each of the 22 markets, n o w characterized by a measure of thrift competition, w e
looked at the prices posted by banks on three
relatively n e w and important products offered
by both banks and thrifts in every market area:
(1) N O W accounts represent the entry by S&Ls
into the basic bank product of checking accounts.
As a "price," w e used the minimum balance
required for charge-free checking. (2) The smallsavers certificate (SSC), offered with a 30-month
maturity and no minimum balance requirement
by virtually all institutions, represents an offering
by banks in the more traditional territory of the
thrifts. For the price, w e chose the interest rate
offered at year-end 1981. 56 (3) For the six-month
" m o n e y market" certificate ( M M C ) , with a minimum balance of $10,000, w e chose year-end
interest rates offered by each bank as the relevant
price.
"On NOW account
minimums at banks, there
was no significant difference
between high thrift markets
and low thrift markets."
For each of the 22 southeastern market areas
selected, w e called several banks, calling one for
every $100 million in total bank deposits in the
market area. In all, w e called 85 banks, with the
number in each market area ranging from seven
in the M i a m i S M S A to t w o in the Gainesville
(Florida) S M S A .
W e analyzed these data two ways. First, w e
calculated correlation coefficients b e t w e e n the
bank prices and the percentage measure of thrift
offices, to see if banks adjusted prices w h e n they
faced a higher percentage of thrift offices. If
banks respond to thrift competition, in other
words, the coefficients should be negative for
N O W prices and positive for the M M C and S S C
rates. They are not:
N O W Minimum Balance vs. Thrift office percentage:
.22
(wrong sign)
SSC Rate vs. Thrift office percentage:
-.03
(insignificant)
M M C Rate vs. Thrift office percentage:
.00
(insignificant)
As a second w a y of assessing the same data, w e
ran standard statistical tests to see if bank prices
in the eleven markets with the highest percentages of thrift offices differed significantly from
bank prices in the eleven markets with the
lowest percentages:
On N O W account minimums at banks, there
was no significant difference between high thrift
markets and low-thrift markets. (Minimums in
50
APRIL 1982, E C O N O M I C REVIEW
Table 1
NOW Analysis by Market
(Minimum dollar b a l a n c e s for free N O W checking)
Market
Bank Average
S&L Average
1-1-81
Birmingham
Huntsville
Tuscaloosa
Daytona
Gainesville
Miami
Tampa
West Palm Beach
Atlanta
Augusta
Columbus
Savannah
New Orleans
LaFayette
Lake Charles
Baton Rouge
Biloxi
Jackson
Chattanooga
Kingsport-Bristol
Knoxville
Nashville
12-31-81
1-1-81
12-31-81
1417
1333
1500
1250
1000
1386
1036
1900
1143
900
1000
967
1429
800
2400
1700
1500
1500
1000
750
1125
1667
1417
1333
1500
1250
1000
1386
1036
1900
1071
900
650
967
1457
800
2400
1700
1500
1500
1000
625
1375
1667
513
50
400
450
300
3683
313
433
667
500
400
425
667
500
525
500
633
1050
300
350
533
150
275
50
275
450
300
3517
313
233
483
500
275
100
433
417
275
375
533
925
300
350
300
650
the high-thrift markets averaged $1,370; mimimums in the low-thrift markets averaged $1,173.
W e tested for a statistically significant difference
between the means at a 95% confidence level,
and found none.)
On Small Saver Certificate interest rates at
banks, there was no significant difference between
high-thrift markets and low-thrift markets.
On Money Market Certificate interest rates at
banks, there was no significant difference between
high-thrift markets and low-thrift markets. (Most
banks offered the maximum permissible rate, but
there were a significant number of offerings
below the maximum in four of the 22 markets
sampled. The proportion of banks offering less
than the maximum was also unrelated statistically to
the percentage of thrift offices.)
So in both the correlation tests and the highversus-low thrift percentage tests, there is no
support for the hypothesis that banks price as if
thrifts matter.
Banks, of course, respond to competition from
other banks. It is possible that more competition
among banks could be masking the price effects
associated with less thrift competition, and vice
FEDERAL RESERVE B A N K O F A T L A N T A
Bank average minus
S&L average
1-1-81
904
1283
1100
1100
700
-2297
723
1467
476
400
600
542
762
300
1875
1200
867
450
700
400
592
1517
12-31-81
1142
1283
1225
1225
700
-2131
723
1667
588
400
375
867
1024
383
2125
1325
967
575
700
275
1075
1017
versa. T h e conventional test for that possibility
w o u l d be a multiple regression of bank prices
on S&L presence and banking structure, with
each market contributing an observation. Instead,
w e substituted a simpler and equally adequate
test. Specifically, w e are interested in the case in
which the "banking structure effect" on bank
prices cancels or masks the actual "effect of S&L
presence" on bank prices.Such masking of the
genuine bank response to thrifts w o u l d produce
a false " n o response" signal, in our correlation
tests. For that to happen, S&Ls w o u l d have to
have a strong presence in markets which have
. . there is no support for
the hypothesis that banks
price as if thrifts matter."
51
Chart 1.
Spread* S u m m a r y
1/1/81 to 12/31/81
^s. ., WSffirA1
ill
:f!b
Spread
Rose
Spread
Fell
(12)
" •
.it
¡«1
3s
No
Change
(4)
(6)
•The bank average minimum balance for free NOW account service minus the savings and loan average.
less competition among banks. Assuming that
less competitive means more concentrated, w e
looked for such a systematic relationship in our
22 markets and found none. W e accordingly
reject the notion that interbank competition is
masking the bank response to thrifts.
N o n e of these tests lent any support to the
hypothesis that banks adjust their N O W prices
in response to S&L competition. However, this
cannot necessarily be taken as e v i d e n c e that
they do not. In search of a more conclusive
result, w e took a slightly different look at the
N O W accounts. In a competitive situation, products in the same geographic and product markets
should show little variance in price, or at least
their prices should be converging. This is one
statistical indication that competition exists.
W e took another look at our existing sample of
banks and savings and loans from the 22 markets.57
The first thing w e observed is that when compared
in either January or D e c e m b e r of 1981, bank
N O W minimums are at substantially higher levels
than those of S&Ls: Banks' charge-free minimums
averaged $1,305 and $1,292, respectively, for
the beginning and end of 1981. C o m p a r e this
with the $621 and $540 averages at S&Ls in the
same markets at the same times. ( S e e Table 1 for
a market-by-market breakdown.) Banks, moreover, held the line over the year, whereas the
average S&L minimum fell by 13 percent. So the
bank-thrift difference widened, rather than shrank
52
Next, w e looked at each of the 22 sample
markets individually to examine how the difference b e t w e e n the bank and S&L N O W minimum balances changed from the beginning to
the e n d of 1981. T h e difference increased in 12
markets, remained the same in six, and decreased
in four (chart 1). In fact, almost 30 percent of the
S&Ls cut their prices, while less than four percent
of the banks cut theirs (chart 2 ) . N o n e of these
observations support the hypothesis of bank-thrift
competition for N O W accounts.
The structure of banks and savings and loans
relative to N O W accounts at least outwardly
"Banks, however, make no
effort to match the S&Ls'
lower prices, being content
to keep their NOW minimum
balances at a high and
profitable level while their
advantage lasts."
APRIL 1982, E C O N O M I C R E V I E W
Chart 2. N O W Price C h a n g e s by Institution
1/1/81 — 12/31/81
93.0%
Hfl Banks
I
I S&Ls
65.2%
3.5%
4
-6%
3.5%
Raised
(3)
(3)
Unchanged
(79)
(43)
resembles a "dominant group" model of industrial
organization. Banks dominate the field of those
offering transactions services, of which N O W s are
one, because people have traditionally gone to
banks for this service. This traditional preference
for bank transaction accounts serves as a barrier
to entry to S&Ls trying to break into this field of
financial services with N O W s . Acting as a competitive fringe, the savings and loans enter the
field with N O W prices considerably lower than
those offered by the dominant group, banks, and
begin competing principally among themselves
to gain a larger share of the N O W accounts the
banks do not handle. Banks, however, make no
FEDERAL RESERVE BANK OF ATLANTA
effort to match the S&Ls lower prices, being
content to keep their N O W minimum balances
at a high and profitable level while their advantage
lasts.
O n e implication of this model is that if bank
and S&L N O W s are truly substitutes, the S&Ls
will eventually gain a large enough share to force
banks to cut their N O W prices. As S&Ls become
more acceptable as vendors of transactions accounts, the barrier to their entry into this market
will dissolve. Then banks would be forced to
compete with the S&Ls for N O W s o r f a c e losinga
significant portion of their market share.
In this analysis w e have used price data for
N O W s , six-month money market certificates
and small savers certificates to test the hypothesis
that southeastern banks adjust their prices for
these instruments in reaction to local savings and
loan competition. W e found that correlation
coefficients between the strength of S&L presence
in the 22 markets and bank prices for these
services did not have the expected signs and
were not statistically significant as would be
necessary if the banks were reacting to the thrifts.
W e found that there is no statistical difference
between the average prices of banks with many
S&L offices locally and those with few local S&L
offices. And w e found that banks price their
N O W s much more dearly than S&Ls and that this
gap appears to be widening. Our findings did not
support the hypothesis that banks in the Southeast
price as if thrifts matter.
—William N. Cox
and joel R. Parker
53
Evidence from the Banking Side
In deliberations as to whether commercial banking should continue to be treated as a separate
line of commerce, the product known as "smallbusiness financing" plays an important role. Lending to small businesses is one of the few—if not
only—remaining activities of commercial banks
for which there are considered to be very limited
alternatives. Changes in the financial environment stemming from deregulation or market
forces have resulted in growing competition for
the business of most other customers of commercial banks. For example, on the asset side,
banks compete with the commercial paper and
Eurodollar markets for larger-business loans and
with finance companies, credit unions, and credit
card companies for consumer loans. O n the
liability side, thrift institutions and money market
funds have become significant factors in the
market for savings and transactions accounts.
A recent nationwide survey of commercial
bank small-business lending practices sheds light
on the questions of whether nonbank sources of
credit are available to small businesses and, if so,
whether they are active in small-business lending.
The survey was conducted jointly by the Board of
Governors of the Federal Reserve System, the
Office of the Comptroller of the Currency, and
54
the Federal Deposit Insurance Corporation as a
part of a study on the extent to which commercial
banks are meeting the credit needs of small
businesses. 53
Survey Description
The survey, conducted in September 1981,
was a personal interview—by economists from
the Federal Reserve District Banks and the Washington, D.C. offices of the three federal bank
regulatory agencies—with senior loan officers
knowledgeable about small-business lending at
the sample banks. A sample of 224 banks was
chosen to represent the universe of 10,309
"Banks believe they provide
63 percent of the total debt
of their small business
customer/'
APRIL 1982, E C O N O M I C REVIEW
federally insured commercial banks in the continental United States with commercial and industrial loans of at least $1 million as of December
31, 1980. 54
The banks w e r e selected with probabilities
proportional to their size, in total assets. T h e
sample was stratified by Federal Reserve District
and by state branching and holding company
law to ensure proportional representation of
banks in the Federal Reserve Districts and of
banks operating under various state banking
laws. Participation in the survey was voluntary.
Of the original 225 banks selected, five declined
to participate; all but one of these w e r e replaced
in the sample with a bank with similar characteristics.
The definition of small business was of primary
importance in designing the survey. T h e basic
concept of small business was nonfarm firmsthat
are independently o w n e d and limited to local
sources of financing. Banks w e r e told to use their
own definition if they had one in responding to
questions. Banks without a definition, principally
small banks w h o s e business loans are generally
limited to small-business loans, w e r e given a
definition by the interviewer: under $2.5 million
in annual sales; or under $2.5 million in assets; or
less than $1.0 million in loans outstanding at the
bank.
The survey questionnaire covered six topics:
bank organization with respect to small business
lending; credit availability; loan characteristics;
pricing and profitability; government programs;
and data availability. T h e questions in the section
on credit availability are the ones relevant to the
line of c o m m e r c e issue. 55
Analysis of Data
In the analysis of the survey data, each bank's
responses w e r e weighted by the inverse of the
probability of selection of the bank. The weight
of a bank in the sample can be interpreted as the
number of banks in the population that it represents. For example, if a bank was selected with a
probability of one-tenth, it can be v i e w e d as
representing itself plus nine other banks. Thus,
the larger the bank, the lower the weight, since
the larger the bank, the fewer other banks it
represents. The data presented reflect the weighted
responses and therefore are estimates for the
population. It must be emphasized that the
survey results generally apply only to businesses
FEDERAL RESERVE BANK OF ATLANTA
Table 1
Of the small businesses to which you provide credit, about what
percentage share of their total debt is supplied by your bank and by
other commercial banks?
Share of Small-Business Debt
Supplied by Commercial
Banking Sector
(Percent)
Average Share3
Banks
All banks
By asset size
<$100 mil.
$100 mil.
<$1 bil.
>$1 bil.
By location
Urban
Suburban
Rural
individual
bank
All other
commercial banks
Total
72
63 (55,71)
9 (5,13)
63 (47,79)
10 (6,14)
73
65 (57, 73)
59 (53,65)
7 (6,8)
6 (5,7)
72
65
67 (53,81)
53 (39,67)
65 (55,75)
6 (4,8)
12 (2,22)
10 (4,16)
73
67
75
a — 95% confidence interval in parenthesis.
with which the banks already had a relationship
and that the estimates presented reflect only the
banks' perceptions, not the perceptions of their
competitors or their customers.
The banks w e r e asked a series of questions
designed to assess the importance of the commercial banking sector as a source of financing
for small business as well as to determine what
other sources are available and active. The first of
these questions was the following: " O f the small
businesses to which you provide credit, about
what percentage share is provided by your bank?"
O n average, the banks believe they provide an
estimated 63 percent of the total debt of their
small-business customers. In addition, they believe
that about 9 percent of their small-business
customers' total debt is supplied by other commercial banks. Thus, banks perceive that the
commercial banking system provides nearly threequarters of the total debt of small businesses
with which they have a relationship. 56 This perception does not appear to be related to size or
primary location of the bank. ( S e e Table 1).
The majority of banks believe that the percentage share of the total debt they supply to
their small business customers is about the
55
Table 2
Of the small businesses to which you provide credit, is the percentage share of their total debt
supplied by your bank higher, lower, or about the same as compared to five years ago?
Change in Share,of Total SmallBusiness Debt Supplied
(Percent of banks)
Share compared to five years ago3
Banks
All banks
By asset sizeb
<$100 mil.
$100 mil. <$1 bil.
>$1 bil.
By location
Urban
Suburban
Rural
Higher
Lower
About the same
31 (25,37)
7 (5,9)
57 (51,63)
30(16,44)
32 (18,46)
40 (28,52)
8 (2,14)
8 (0,16)
2 (0,4)
57 (43,71)
55 (41,69)
53 (41,65)
34(14,54)
34(10,58)
28 (12,44)
9 (-3,21)
5 (-3,13)
8 (0,16)
42 (24,60)
56 (32,80)
64 (46,82)
a— 95% confidence interval in parenthesis,
b — Subgroup totals may not add to 100 due to nonresponse.
same as it was five years before the survey was
taken. Close to a third believe their share is
higher, while less than 10 percent believe it is
lower. This perception does not differ significantly among subgroupings of banks based on
size or location. ( S e e Table 2).
The banks w e r e also asked what additional
sources of credit w e r e available, and what
sources w e r e active, for small-business customers in their local areas. N o t surprisingly, on
average, more alternative sources were perceived
by banks to be available than to be active. Also,
differences in both availability and activity
w e r e apparent among subgroupings of banks
(See Tables 3 and 4).
All banks think other commercial banks are
available as a source of credit for small businesses
in their local area. W i t h the exception of a small
percentage of banks in urban areas or in the
South, banks believe other commercial banks
are active lenders to small businesses. Thrift
institutions (savings and loan associations, mutual savings banks, and credit unions) and
finance companies are the t w o other sources
of financing most often considered to be avail56
able and, to a lesser extent, active. Thrift
institutions are considered to be available local
sources of small-business credit by more than
three-quarters of the banks. This estimate does
not vary widely by primary location of the bank
(urban, suburban, or rural). However, by census
region, banks in the W e s t appear to perceive
greater thrift institution availability than in the
other regions.
Substantially fewer banks perceive thrifts to
be active, as opposed to available, lenders to
small business—generally less than one-quarter
of the banks in any of the location or census
region subgroups, except in the W e s t w h e r e
activity of thrifts appears greater. The discrepancy b e t w e e n perceived availability and
activity of thrifts in small-business lending may
result from the changing legal and economic
environment in which these institutions operate.
With the passage of the Depository Institutions
Deregulation and Monetary Control Act in
M a r c h 1980, the lending powers of federally
insured thrift institutions w e r e broadened to
permit more business lending, thus increasing
the potential ability of these institutions to
APRIL 1982, ECONOMIC REVIEW
Table 3
In your local area, which of these sources of credit are available to small
businesses?
Available Small-Business Credit Sources
(Percent of banks)
By location
Credit
Other commercial banks
Thrift institutions
Finance companies
Brokerage houses
Loan production offices
Insurance companies
Small business investment
companies
Minority enterprise small business investment companies
Noninstitutional sources
Direct federal
Direct state
All
Banks3
Urban
By Census Region
Rural
Suburban
Northeast
South
North
Central
West
100
79(75,83)
81(77,85)
20(14,26)
29(23,35)
49(43,55)
100
86(78,94)
91(83,99)
35(15,55)
56(38,74)
61(45,77)
100
72(56,88)
86(70,102)
25(9,41)
37(13,61)
45(27,63)
100
79(65,93)
76(60,92)
12( — 2,26)
16(4,28)
45(27,63)
100
62(30,94)
80(60,110)
5C-1.11)
13(1,25)
35(5,65)
100
83(69,97)
89(79,99)
22(2,42)
31(15,47)
55(35,75)
100
75(59,91)
69(49,89)
11(1,21)
23(9,37)
40(20,60)
100
95(89,101)
100
59(21,97)
59(21,97)
68(34,102)
24(20,28)
45(27,63)
37(15,59)
10(2,18)
61(31,91)
31(15,47)
13(3,23)
10(2,18)
10(6,14)
29(19,39)
50(44,56)
22(16,28)
36(16,56)
36(16,56)
75(61,89)
39(19,59)
7(—1,15)
32(12,52)
57(33,81)
8(0,16)
0
25(9,41)
37(21,53)
19(3,35)
28(6,70)
23(1,45)
80(60,100)
41(9,73)
12(0,24)
24(8,40)
59(39,79)
24(4,44)
5(1,9)
29(13,45)
28(14,42)
14(4,24)
6( —2,14)
55(19,91)
80(56,104)
28(-10,66)
a — 95% confidence interval in parenthesis.
Table 4
In your local area, which of these are the more active lenders?
Active Small-Business Credit Sources
(Percent of banks)
By Census region
By location
Credit Source
Other commercial banks
Thrift institutions
Finance companies
Brokerage houses
Loan production offices
Insurance companies
Small business investment companies
Minority enterprise small
business investment
companies
Noninstitutional sources
Direct federal
Direct state
All
banks3
97(95,99)
13(9,17)
23(17,29)
1 (.5,1.5)
8(6,10)
2(1,3)
89(69,109)
21(7,35)
21(9,33)
2(0,4)
10(0,20)
6(0,12)
1 (.4,1.6)
5(1,9)
1( —.2,1.8)
6(0,12)
6(4,8)
3(-1,7)
3(1,5)
9( —1,19)
1
*
Suburban
Urban
100
19(3,35)
60(40,80)
2( — 2,6)
2
1
1
4( —2,10)
14( —6,34)
20( —2,42)
0
Rural
100
8(0,16)
11( —3,15)
0
9(1,17)
1(-1,3)
0
0
5( —1,11)
0
0
Northeast
100
25( —5,56)
41(11,71)
*
1
4( —2,10)
8(-4,20)
2
3(-1,7)
>1( —9.51)
1
South
94(84,104)
9( — 9,19)
26(8,44)
1
4{ — 2,10)
*
*
1(-1,3)
*
2(0,4)^
North
Central
100
9(1,17)
10(2,18)
1
9( —1,19)
4( — 2,10)
2(0,4)
2(0,4)
9( —1,19)
5(—1,11)
0
West
100
42(2,82)
52(14,90)
*
25(-13,63)
1(-1,3)
*
0
26(-10,62)
23(-13,59)
0
a — 95% confidence interval in parenthesis.
* — Less than 0.5.
lend to small business. However, the deteriorating financial condition of many of these
institutions, which reflects the volatility of the
financial markets in recent years, may have
inhibited thrifts from actual expansion into this
new activity.
Finance companies are also generally perceived to be a local source of financing for
small business by most banks - and by all banks
in the W e s t . Perceived activity of finance company financing varies widely among the subgroups, however. Banks w h o s e primary market
is a suburban area believe finance companies
are active small-business lenders significantly
FEDERAL RESERVE B A N K O F A T L A N T A
more often (an estimated 60 percent) than do
rural banks (11 percent) or urban banks (21
percent). Activity also appears to vary by Census
region, with the least activity perceived in the
North Central regions and the most perceived
in the W e s t .
N o n e of the other listed potential sources of
small-business credit was
considered to be
available in their local area by more than half
the banks. These sources, in order of estimated
perceived availability, are the following: direct
federal lending (50 percent), insurance companies (49 percent), loan production offices
(29 percent), noninstitutional sources (29 per57
Table 5
In recent years, has the competition among lenders in your local area for small-business
increased, decreased, or remained about the same?
loans
Change in Competitive Environment3
(Percent of banks)
Direction of
Change
Increase
Decrease
About the same
All
By location
banks3
Urban
52 (46,58)
3(1,5)
45 (39,51)
71 (53,89)
5 ( 1,11)
24 (6,42)
Suburban
Rural
82 (70,94)
33 (15,51)
4 (-4,12)
63 (45,81)
0
18 (6,30)
a — 95% confidence interval in parenthesis.
cent), small business investment companies
(24 percent), direct state lending (22 percent),
brokerage houses (20 percent), and minority
enterprise small business investment companies
(10 percent). N o n e of these is considered an
active source of small-business financing by
more than 10 percent of all banks.
Despite the reported low levels of activity of
non-bank small-business lenders, an estimated
half of the banks believe competition for smallbusiness loans in their local areas has increased
in recent years, while very few believe it has
decreased, and not quite half think the level of
competition is about the same. ( S e e Table 5).
Bank location appears to be an important
factor in whether the banks perceive a change
in competition. Significantly more urban (71
percent) and suburban (85 percent) banks
believe competiton has increased than do rural
banks (33 percent), while significantly fewer
urban (24 percent) and suburban (18 percent)
banks believe competition is about the same
than d o rural banks (63 percent).
Reasons given for the perceived increase in
competition are about equally divided between
58
the following: a growing perception that smallbusiness lending is attractive (13 percent),
entry of nonlocal or nonbank competitors (18
percent), increased aggressiveness of existing
competitors (15 percent), other reasons (15
percent).
In sum, the estimates based on the responses
to the survey indicate that in general banks
perceive that there are nonbank financing
options for small businesses in their local area.
However, the alternative sources are generally
not considered to be active in small-business
lending. Nevertheless, the majority of banks
believe competition for small-business lending
has increased in recent years.
The survey gives no information on whether
the lack of activity of nonbank small-business
lenders is due to lack of d e m a n d by small
businesses for credit from the alternative sources,
or lack of interest by these other sources in
lending to small businesses.
—Cynthia A. Glassman
APRIL 1982, E C O N O M I C REVIEW
CONCLUSION
Our review of the relevance of the court's
treatment of commercial banking as a separate
line of commerce indicates that the courts are
on solid ground both from a theoretical and
empirical perspective. O n a theoretical level,
either a unique product or the fact that a
significant group of consumers view the array
of products offered by commercial banks as a
cluster of services is sufficient to distinguish
the product offered by banks from that
offered by suppliers of other financial services.
O n the empirical side, w e found that some
small businesses obtain all their financial
services from their local commercial bank.
The Monetary Control Act expanded the
types of financial services which thrift institutions
may supply to consumers and corporate customers. The unique position that commercial
banks once enjoyed for consumer and corporate
third party transaction services, demand deposit accounts, and commercial loans no
longer exists. Effectively, the only unique
position still enjoyed by commercial banks is
the ability to offer third party transaction
accounts to corporate customers.
To a large extent the courts' rationale for
separating the product of commercial banks
from that of all other suppliers of financial
services for antitrust purposes has historically
hinged on the uniqueness of commercial
banks offering third party transactions accounts
and financial services for small, locally constrained commercial customers. Because of the
Monetary Control Act and the revolution
within the financial services industry in recent
years, this distinction between commercial
banks and other types of financial institutions
is brought into question.
Using the courts' criteria, w e found empirical
evidence that there are significant actual or
potential alternative sources for each of the
financial services offered by commercial banks.
The legislative monopoly awarded to commercial banks as a group for offering business
. the courts are on solid ground both from
a theoretical and empirical perspective."
FEDERAL RESERVE BANK O F ATLANTA
59
"Because of the Monetary Control Act and the revolution within
the financial services industry in recent years, this
distinction between commercial banks and other types of
financial institutions is brought into question."
checking accounts was found to be sufficient
in and of itself to meet the court's criterion for
separating commercial banks' product from
the product of all other suppliers of financial
services.
W e also found that for most commercial
services offered by commercial banks, there
are significant alternative suppliers. W e can
argue over the term "significant," but all the
empirical evidence points to the fact that
alternative or potential alternatives exist for
most of the individual services offered by
commercial banks. The court's criterion, however, centered not on the availability of a
single service, but on the availability of the
cluster of services offered by commercial
banks to a specific set of customers. N e w
empirical evidence indicates that small businesses do indeed use a number of financial
services (4.7 on average) and that they tend to
obtain the vast majority of these services from
local banks.
In short, the evidence supports the view
that an identifiable proportion of businessmen
operating small businesses obtain a number of
financial services from local banks, or behave
as if the commercial banks clustered their
services. Again, in light of the evidence and
the courts' criticism, it is still relevant to view
commercial banks as offering a separate line of
commerce.
The Supreme Court's definition of the product offered by commercial banks as a cluster
of services implies that there are forces which
encourage bank customers to view the cluster
of services as a single product. There are at
least three ways in which a group of services
may be joined. First, suppliers of services may
establish tie-in arrangements requiring the
purchaser of a service to buy all services in the
cluster from the supplier. Any number of
services and any combination of services may
then be presented to the customer as a
60
cluster. Second, users of the services may find
it more convenient to purchase all needed
services from a single provider. This would
effectively cut down on search and information
costs to the customer. Or third, offering a wide
array of services may allow the suppliers to
take advantage of any agglomeration economies or economies of scale which may serve
to lower the cost of any individual service to
the customer.
Under these circumstances, commercial banks
may be capable of providing the clustered
services at a lower price than a single service
provider.
In addition, although commercial banks are
unique among financial service suppliers in
being able to offer commercial third party
transactions accounts, they are prohibited
from paying interest on these funds. Therefore,
commercial banks must compete among themselves for corporate demand deposits by
offering greater convenience, or reducing prices
on services. This may mean presenting their
array of services as a package or cluster.
Reduced prices on any single service or the
entire cluster would reduce the implicit cost
to the commercial customer of holding noninterest bearing demand deposits. This is the
economic rationale for commercial banks
offering a cluster of services to small businesses.
At the same time, it may explain why small
businesses view the commercial bank services
as a package or cluster.
Direct empirical evidence on the question
of clustering of services is very difficult to
obtain. In banking, tie-ins are not legal. They
may be used informally, but evidence of tieins would be difficult to find. Joining services
by convenience almost certainly occurs. It has
often been argued that the convenience of
one-stop banking links all of the services of
the commercial banks and has given banks a
APRIL 1982, E C O N O M I C REVIEW
substantial advantage in competing with other
suppliers of individual services. The best evidence
to confirm or deny this type of clustering
would be an empirical finding that many
consumers use a number of financial services
offered by the commercial bank. In other
words, do customers behave as if the services
supplied by commercial banks are clustered?
Each of the three empirical studies on this
question found evidence consistent with the
assertion that small businessmen behave as if
they perceive commercial bank services as a
cluster. In addition, the Sixth District small
business survey found that some 35 percent
of the small businesses using financial services
obtained from banks obtained all of their
financial services from banks. In light of the
Supreme Court's focus on the probable anticompetitive effects of mergers and acquisitions
on a significant group of customers, the 35
percent may be viewed as a significant group
of customers and used to assert the validity of
the courts' view of banking as a separate line
of commerce.
The reader should be cautioned, however,
because the same survey showed that 51
percent of the small businesses using financial
services from commercial banks also used
financial services supplied by nonbanks. The
fact that there are alternatives for almost every
service provided by commercial banks supports
the view that these alternative suppliers may
have some competitive impact on price and
output decisions of commercial banks. The
purpose of the competitive standards in the
Bank Holding Company and Bank Merger Act,
as well as our antitrust laws generally, is to
avoid reducing competitive pressures. To the
extent that nonbank suppliers of financial
services influence the pricing decisions of
commercial banks, either for the cluster of
services or for any individual service, they
should be viewed as competitors and included
in any competitive analysis.
The regulatory authorities and courts have
consistently appraised the competitive impact
of nonbank suppliers on a case by case basis.
Denials of acquisitions and mergers have been
handed down in rare cases based on substantial anticompetitive effects on a given service
line, such as trust services. The empirical
evidence suggests that nonbank alternatives
for financial services supplied by commercial
FEDERAL RESERVE BANK OF ATLANTA
banks are growing in significance and both
market forces and new legislation are expected
to heighten this significance.
Although the evidence presented to date is
probably not sufficient to cause the courts to
redefine the commercial banks' product, the
time is right for the regulatory agencies to
emphasize certain service lines in their analysis
of bank merger and acquisitions. Following the
M C A , all consumer financial services offered
by banks are also offered at a number of other
financial institutions. Therefore, anticompetitive
consequences of bank mergers or acquisitions
are less likely to affect this group of customers
than business customers. As a consequence,
the regulatory agencies should focus on those
services provided by banks to business customers. If the agencies find that a merger or
acquisition would have substantially adverse
competitive consequences on the market, a
denial recommendation would be supportable
in the courts under our present antitrust laws.
Assuming the courts and regulatory agencies
do not change their criteria for defining
relevant products for antitrust consideration,
our findings are consistent with the courts'
present treatment of banks as offering a
separate product in local markets. Neither the
recent legislative changes nor the new realities
of the market place are sufficient to encourage
a change in the way the courts view commercial banking.
61
"Although the evidence presented to date is probably not
sufficient to cause the courts to redefine the commercial banks'
product, the time is right for the regulatory agencies to emphasize
certain service lines in their analysis . .
Consolidation of banks within local markets
will continue to be restricted, encouraging a
large number of small producers. Consolidation
among banks located in different geographic
markets will continue to be restricted by the
prohibition of interstate banking at this time.
Unless w e get new legislation, commercial
banking will continue to be an industry
composed of a large number of competitors,
while other types of financial institutions
continue to consolidate.
Based on the evidence presented here,
however, it is likely that in the near future
commercial banking as a separate line of
commerce may cease to be relevant for
antitrust purposes or as a market place reality.
The evidence suggests that the financial market
place is changing, and that small businesses
are turning increasingly to nonbank institutions
for some of their financial services. The once
exclusive position enjoyed by commercial
banks is coming to an end.
In addition, new technology and the development of new services by nonbank financial
institutions is undermining one of the critical
pillars supporting the separability of banks
from other types of financial institutions, i.e.
the convenience element. W i t h the develop-
62
ment of in-home computers which may be
linked via cable television to financial institutions,
financial services of all types will be as close as
your television. This will surely undermine the
notion that consumers or small businesses are
limited to their local area for financial services.
These market changes will force legislative
changes which inevitably will result in a new
financial infrastructure. As George Benston has
pointed out, w e should have no fear that a
repeal of the 1930s legislation limiting geographic and product segmentation will result
in an unsafe or unstable financial system.
Market forces of the 1980s will force these
changes.
The real questions now are how soon these
changes should come and what type of
financial infrastructure do we need. The answer
to the first question is apparently that market
forces have not pushed us to this point yet,
but are likely to in the near future. Thus, w e
must now understand that change is coming
and plan for it. W e need more research to
answer the second question concerning the
financial infrastructure necessary in the decades
ahead. These questions will be the subject of
future issues of this Review.
—David D. Whitehead
APRIL 1982, E C O N O M I C REVIEW
BIBLIOGRAPHY
Bleier, Michael E amd Robert A. Eisenbeis, "Commercial Banking asthe'Line
of Commerce' and the Role ot Thrifts," T h e Banking Law Journal, Vol. 98, No.
4, April 1981.
Bowers, Robert D., "Businesses, Households and Their Banks," Business Review,
Federal Reserve Bank of Philadelphia, March 1969,14-19.
Eisemann, Peter and Victor L. Andrews, "The Financing of Small Business," Economic Review, Federal Reserve Bank of Atlanta, August 1981, 66:16-20.
Eisenbeis, Robert A., "Banking as a Separate Product Line: Regulatory Issues,"
Proceedings of a Conference, The Future of the Financial Service Industry,
Federal Reserve Bank of Atlanta, June 3-4,1981.
Eisenbeis, Robert A., "A Study of Geographic Markets for Business Loans: The
Results for Local Markets," Proceedings of a Conference on Bank Structure and
Competition, Federal Reserve Bank of Chicago, 1970, pp. 188-214.
Katona, George, Business Looks at Banks (Ann Arbor: University of Michigan
Press, 1957).
Kaufman, George G., Business Firms and Households View Commercial
Banks: A Survey of Appleton, Wisconsin (Chicago: Federal Reserve Bank of
Chicago, 1967).
Kaufman, George G „ Customers View Bank Markets and Services: A Survey of
Elkhart, Indiana (Chicago: Federal Reserve Bank of Chicago, 1967).
Kildoyle, Patrick Page, A Study of Bank Customers in Central Nassau County
(New York: Federal Reserve Bank of New York, 1971).
FEDERAL RESERVE B A N K O F A T L A N T A
King, B. Frank, "New Smyrna Beach Market Survey," unpublished, Federal Reserve
Bank of Atlanta.
Lozowick, Arnold; Peter O. Steinerand Roger Miller, "Law and Quantitative Multivariate Analysis: An Encounter," Michigan Law Review, June 1969, 66:1641-78.
Luttrell, Clifton B. and William E. Pettigrew, "Banking Markets for Business
Firms in the St. Louis Area," Review, Federal Reserve Bank of St. Louis,
September 1966, 48: 9-12.
Peter Merrill Associates, The Environment for Non-Local Competition In U.S.
Banking Markets (Washington, D.C.: American Bankers Association, 1981).
Shay, Jerome W. and Edward L. Yingling, "Agencies Find Method to Weigh
Thrift Competition," Legal T i m e s of Washington, Monday, J u n e 29,1981 Vol. IV, No. 4.
Staats, William F., "Corporate Treasurers and Their Depositories," Business
Review, Federal Reserve Bank of Philadelphia, March 1969, 9-13.
Stiles, Lynn A., Business View Banking Services: A Survey of Cedar Rapids,
Iowa (Chicago: Federal Reserve Bank of Chicago, 1967).
Ware, Robert F. and Lorraine E. Duro, A Survey of Manufacturing Firm-Bank
Relationships in Ohio (Cleveland: Federal Reserve Bank of Cleveland, 1974).
Zayas, Edison R., "Statement Before the Senate Banking Subcommittee on
Securities," April 29,1980, mimeo.
63
NOTES
1 Charles
R. McNeill and Denise M. Rechter, "The Depository Institution
Deregulation and Monetary Control Act of 1980," Federal Reserve
Bulletin, June 1980, pp. 444-453.
226
Stat. 209.
3|d.
"David D. Martin, "Mergers and the Clayton Act," 1959, 257-8. Paragraphs 3-5 are
omitted because they are not relevant to this particular article.
spublic Law, 86-463; 73 Stat. 129.
6
Unlted States v. Philadelphia National Bank, 374 U.S. 321 (1963), 356.
'United States v. Crocker-Anglo National Bank, 277 F. Supp. 133 (N.D. Calif.
1967).
»Public Law, 89-356; 80 Stat. 7,8.
United States v. Phillipsburg National Bank & Trust, et al., 399 U.S. 350 (1969),
358.
9
10
ld., at 360.
"Id., at 360, 361-2.
«United States v. First National Bank of Jackson, 301 F. Supp. 1161 (S.D. Miss.
1969).
13
tdaho First National Bank, 315 F. Supp. 261 (D. Idaho 1970).
"United States v. Connecticut National Bank, 418 U.S. 656 (1973).
United States v. First National State Bancorporation, 1980-2 Trade Cases
(CCH) paragraph 63, 445 at 76, 339 (D.N.J. 1980)
,5
United States v. Zions Utah Bancorporation, C79-0769A (D. Utah 1980), at Tr.
3526.
16
1 7 See
preceding article for a discussion of the legal history.
'»United States v. Philadelphia National Bank, 374 U.S. 321 (1963).
1938 Federal Reserve Bulletin 382-384 (1952).
20See
decisions involving applications by (1) Baystate Corporation, Boston,
Mass, to acquire Union Trust Company of Springfield, Springfield, Mass., 44
Federal Reserve Bulletin 432 (1958), (2) New Hampshire Bankshares, Inc.,
Nashua, N.H., to acquire the New Hampshire National Bank of Portsmouth,
Portsmouth, N.H., 44 Federal Reserve Bulletin 432 (1958), (3) New Hampshire
Bankshares, Inc., Nashua, N.H., to acquire the Peoples National Bank of
Claremont, Claremont, N.H., 46 Federal Reserve Bulletin 742 (1960) and (4)
Marine Midland Corporation, Buffalo, N.V. to acquire the First National Bank
of Poughkeepsie, Poughkeepsie, N.Y, 46 Federal Reserve Bulletin 1228
(1960) and (5) Baystate Corporation, Boston, Mass. to acq uire Manufactu rers
National Bank of North Attleborough, North Attleborough, Mass., 46 Federal
Reserve Bulletin 1230 (1960).
"Bank is by far the largest of four commercial banks in the primary service
area. However, a mutual savings bank in Poughkeepsie, one of two such
banks in the area, is much larger than Bank and it appears appropriate to
consider competition afforded by mutual savings banks as well as by
21
64
commercial banks." 46 Federal Reserve Bulletin 1229 (1960). "It is appropriate to
consider competition afforded by mutual savings banks as well as by
commercial banks in connection with the fifth factor." 46 Federal Reserve
Bulletin 1231 (1960).
^Application of First Bank Stock Corporation, Minneapolis, Minnesota to acquire
Eastern Heights State Bank, Minneapolis, Minnesota, 46 Federal Reserve Bulletin
487 (1960). Application by Northwest Bancorporation, Minneapolis, Minnesota to
acquire The First National Bank of Pipestone, Pipestone, Minnesota, 47 Federal
Reserve Bulletin 408 (1961).
Singling and Shay (1981) cite the following mergers: (1) Lincoln Bank and Trust
Co., Louisville, Ky. and The First National Bank of Louisville, Louisville, Ky., Comptroller's Annual Report, 1960, p. 89, (2) West End Bank, Pittsburgh, Pa. and
Western Pennsylvania National Bank, McKeesport, Pa., Comptroller's Annual
Report, 1962, p. 26, (3) First National Bank of Brunswick, Brunswick, Maine and
First National Bank of Portland, Portland, Maine, Comptroller's Annual Report,
1962, p. 34, and (4) National Mohaive Bank of Great Barrington, Great Barrington,
Mass. and First Agricultural National Bank of Berkshire County, Comptroller's
Annual Report, 1963, p. 93.
2 4 The
discussion in this paragraph is based on the analysis and conclusions
in Bleier and Eisenbeis (1981) and Eisenbeis (1981).
25 See
United States v. National Bank of Lexington, 376 U.S. 665 (1964) and United
States v. Third National Bank of Nashville, 390 U.S. 171 (1968).
^United States v. Phillipsburg National Bank and Trust Co., 399 U.S. 350 (1970) and
United States v. Connecticut National Bank, 418 U.S. 656 (1974).
27For
example, in several cases between 1963-1974 the Board first analyzed the
competitive effects using commercial bank deposit shares only and then added in
mutual savings banks as well. See applications by (1) Depositors Corporation,
Augusta, Maine to acquire The Liberty National Bank in Ellsworth, Ellsworth, Maine,
52 Federal Reserve Bulletin 1635 (1966), (2) Baystate Corporation, Boston, Mass.
to acquire the Merchants National Bank of New Bedford, New Bedford, Mass., 53
Federal Reserve Bulletin 59 (1967), (3) Lincoln First Group, Inc., Rochester, New
York to become a bank holding company, 53 Federal Reserve Bulletin 382 (1967),
(4) State Street Boston Financial Corporation, Boston, Mass. to acquire the Union
National Bank, Lowell, Mass., 59 Federal Reserve Bulletin 526 (1973) and (5)
Northeast Bancorp, Inc., New Haven, Conn, to merge with First Connecticut Bancorp, Inc., Hartford, Conn., 60 Federal Reserve Bulletin 375 (1974). Similarly, the
Comptroller of the Currency also considered nonbank competition in many cases.
See (1) National Mohaive Bank of Great Barrington, Great Barrington, Mass. to
merge with First Agricultural National Bank of Berkshire County, Comptroller's
Annual Report, p. 93, 1963, (2) Winchester National Bank, Winchester, New
Hampshire to merge with Cheshire National Bank of Keene, Keene, New
Hampshire, Comptroller's Annual Report, p. 93, 1964, (3) Martin State Bank,
Michigan to merge with First National Bank and Trust Co. of Kalamazoo,
Kalamazoo, Michigan, Comptroller's Annual Report, p. 81, 1965-66, and (4) Rutland County Bank, Rutland, Vermont to merge with Howard National Bank and Trust
Co., Vermont, Comptroller's Annual Report, p. 48,1967.
28Application
of Bangor Savings Bank, Bangor, Maine to merge with Piscataquis
Savings Bank, Dover-Foxcraft, Maine, FDIC Annual Report, footnote, p. 78,1976.
^Application of Bangor Savings Bank, Bangor, Maine to merge with Eastport
Savings Bank, Eastport, Maine, FDIC Annual Report, p. 60,1977 and Competitive
factor report to the Comptroller of the Currency on the proposed merger of the
Northern National Bank, Presque Isle, Maine and Merchants National Bank of
Bangor, Bangor, Maine, 6/16/1980.
APRIL 1 9 8 2 , E C O N O M I C R E V I E W
aoSee for example, National Bank and Trust Co. of Norwich, Norwich, New York to
merge with The First National Bank of Sidney, Sidney, New York, Comptroller's
Annual Report, p. 101,1978, BancOhio National Bank, Columbus, Ohio to merge
with Citizens Bank of Shölby, Shelby, Ohio, approved order Jan. 7, 1980, First
National State Bank of Central Jersey, Trenton, New Jersey to merge with First
National Bank of South Jersey, Egg Harbor, New Jersey, approval order May 8,1979,
Pacific National Bank of Washington, Seattle, Washington to merge with American
Commercial Bank, Spokane, Washington, approval order February 21, 1980 and
National Bank of Paulding County, Paulding, Ohio to merge with National Bank of
Defiance, Defiance, Ohio, approval order Dec. 12,1980.
recent rulings by the District Court in the Mercantile and Republic cases
virtually wipe out application of the potential competition doctrine. Thus, antitrust will
not play a significant role in affecting the structure of banking in market extension
situations.
Northern National Bank, Presque Isle, Maine to merge with Merchants
National Bank of Bangor, Bangor, Maine, approval order Dec. 12, 1980.
^Northern National Bank, Presque Isle, Maine, to merge The Merchants National
Bank of Bangor, Maine, approval order Dec. 12,1980.
^Northeast Bancorp, Inc., New Haven, Conn., to acquire The First Connecticut
Bancorp. Inc., Hartford, Conn., 60 Federal Reserve Bulletin 375 (1974).
^ h e y also are becoming less and less relevant since they are collected on a
banking office basis rather than on a customer location basis.
31
3 3 For
example, see First Bancorp of N.H., Inc., Manchester, New Hampshire
to acquire Londonderry Bank and Trust Company, Londonderry, New
Hampshire, 64 Federal Reserve Bulletin 967 (1978) and United Bank
Corporation of New York, Albany, New York to acquire The Schenectady
Trust Company, Schenectady, New York, 64 Federal Reserve Bulletin 894
(1978).
34See
note 33.
United Bancorporation of New York, Albany, New York to acquire The
Schenectady Trust Company, Schenectady, New York, 66 Federal Reserve
Bulletin 61 (1980).
36
^"Shading was not in fact a new concept. The Supreme Court in the PNB case used
"shaded" to arbitrarily reduce certain of the market shares in that case in an attempt
to recognize the role of nonlocal competitors.
37 See
for example the Board's denial of the application of Toledo Trustcorp, Inc.,
Toledo, Ohio to acquire The National Bank of Defiance, Defiance, Ohio, 66 Federal
Reserve Bulletin 462 (1980). As was indicated previously, this case was subsequently approved by the Comptroller of the Currency who not only defined the
relevant geographic market differently, but also gave weight to the role of S&L's in the
market. Also, the denial of the formation of Heritage Racine Corporation, Racine,
Wise., 66 Federal Reserve Bulletin 419 (1980).
^In its denial of Republic of Texas Corporation's, Dallas, Texas, application to merge
with Fort Sam Houston Bankshares, Incorporated, San Antonio, Texas, 66 Federal
Reserve Bulletin 580 (1980), the Board appeared to revert to its previous method of
subjectively giving weight to thrifts after analyzing the market including only commercial banks.
s^The Board stated that it continued to view commercial banking as the "line of
commerce" but then indicated in a footnote the following: "The Board notes that
under the Monetary Control Act of 1980, the commercial lending and investment
powers of federally-chartered thrift institutions were broadened. However, in view of
the uncertainty with respect to the extent to which thrifts will exercise their new
powers, the Board believes that it would be premature to give full credence to thrift
institutions as full competitors of banks until the effects can be ascertained." Fidelity
Union Bancorporation, Newark, New Jersey to acquire the Garden State National
Bank, Paramus, New Jersey, 66 Federal Reserve Bulletin 576 (1980). Essentially
the same conclusion one year later appeared in the Board's approval of the application of United Bank Corporation of New York, Albany, New York to acquire The
Sullivan County National Bank of Liberty, Liberty, New York, 67 Federal Reserve
Bulletin 358 (1981). In denying the acquisition by the Independent Bank Corporation, Ionia, Michigan to acquire The Old State Bank of Fremont, Fremont, Michigan,
67 Federal Reserve Bulletin 436 (1981), the Board met applicant's contention that
thrifts should be included by noting the lack of evidence that thrifts competed over a
range of services sufficient to warrant their inclusion. Even if they were, the Board
cited market shares for thrifts and banks combined that were sufficiently high to
warrant denial of this case.
"^This section is taken in large part from Eisenbeis (1981).
41lt
is noted that all attempts by applicants, the agencies, or the District Courts to
formally broaden the "line of commerce" definition set forth in the Philadelphia
National Bank case hare been reversed by the Supreme court. Most recently, the
U.S. District Court for the District of New Jersey relied on the Connecticut National
decision's emphasis on the uniqueness of the cluster of products provided to
commercial entities and declined to expand the "line of commerce" definition. United
States v. First Nat'l State Bancorporation, 499 F. Supp. 793 (D.N.J. 1980).
FEDERAL RESERVE B A N K O F A T L A N T A
42 Prudential,
for example, has recently announced that itsgeneral agents will
also begin to sell mutual funds.
43The
^It can be argued that antitrust, which focuses on case-by-case factual situations, is
not well suited nor can it deal effectively with such broader transitional issues.
"United States v. Connecticut National Bank, 418 U.S. 656 (1973)
•»8418 U.S. 656,41 L.Ed. 2-1016, United States v. The Connecticut National Bank, pp.
2794-2795.
«Ibid, page 2794.
5 0 Edward Mason, Economic Concern and the Monopoly Problem
(Cambridge, Mass.: Harvard Univ. Press), 1957, p. 6.
5 1 Julie
W. F.Shih with the Bureau of Economic and Business Research at the
University of Florida was responsible for conducting the survey and tabulating the
results.
^Recognition to Joe Cleaver, Staff Board of Governors, Julie W. F. Shih, University
of Florida, Bureau of Economic and Business Research
^ S e e "NOW Pricing: Perspectives and Objectives," this Review, January 1981.
^Generally, the competition between banks and savings and loan associations
takes place in markets which are less than statewide. The S M S A is the most
common definition of each city. For some purposes, analysts of retail banking
competition have defined markets more narrowly than the SMSAs, which
typically comprise several counties. For other purposes, the S M S A may be
too limited a definition. The S M S A definition seems sensible in the case of the
products whose prices we examine, however, because even where institutions
on one side of a market may not compete directly with ones on the other side,
they were advertising NOW account terms widely throughout the S M S A and
perhaps over a larger territory. As a result, branching institutions cannot price
NOW accounts differently within the same advertising market.
5 5 The
rationale for this measure is simple. Convenience is a primary
consideration determining where people open new transaction accounts. A
relative abundance of offices should increase S&Ls' ability to compete, and
vice versa.
^In general, thrifts can offer the small-savers certificates at a quarter-percent
premium over the banks. At the time we sampled bank prices, however, the premium
was not in effect because the yield on 2V£-year Treasury securities was high enough
to trigger an exception clause.
5 7 The
S&L sample consists of 65 institutions in the 22 markets The individual
institutions were chosen using a stratified sampling process similar to that
used to choose the banks.
58 Studies
of Small Business Finance, A Report to Congress prepared by the
Interagency Task Force on Small Business Finance, February 1,1982.
The total number of federally insured U.S. banks as of December 31,1980, was
14,422.
59
60 For the results of the entire survey see Cynthia A. Glassman and Peter L. Struck,
"Survey of Commercial Bank Lending to Small Businesses" in Studies of Small
Business Finance, op. clt.
61 This is an overestimate to the extent that some banks appeared to ignore trade
credit inrespondingto the applicable questions; it may be more representative of the
banks' share of institutional lending to small businesses.
65
Next Month
in the REVIEW
•
Highlights of a Conference:
"Supply-Side Economics in the 1980s"
Friedman, Feldstein, Weidenbaum,
Klein, Sprinkel, Türe
•
Kemp,
IRA Survey:
Competition Heats Up in Southeast
Insurance companies, securities dealers
are "in the game" with banks, S&Ls, credit
•
unions.
Banking's challenges in the '80s
Lessons from deregulation
of trucking,
airlines
• The Vanishing Tax Cut
Will it be offset by inflation
Social Security taxes?
and increased state> local and
• Southeast Exports
Surge in exports through region's ports should
• 1981 Business Tax Cuts
How will key southeastern industries
under new depreciation
rules?
66
fare
continue.
mi
FINANCE
MAR
1982
C o m m e r c i a l Bank
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & T i m e
FEB
1982
1,107,074 1,099,303
286,543
289,113
54,550
53,777
148,047
148,282
647,213
634,123
43,030
41,552
2,769
2,685
37,602
36,283
MAR
1981
ANN.
%
11
998,599
298,370
34,819
157,545
540,915
35,578
1,835
31,955
4
57
6
20
21
51
18
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & T i m e
119,830
34,317
7,169
14,711
67,075
4,225
293
3,621
118,492
34,161
7,030
14,714
65,409
4,088
278
3,487
107,556
34,941
4,329
15,616
56,192
3,253
211
2,827
c o m m e r c i a l Hank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & T i m e
13,511
3,420
622
1,523
8,389
734
56
625
13,409
3,504
612
1,530
8,190
717
55
617
12,196
3,477
397
1,642
t,058
526
46
478
c o m m e r c i a i » a n x Deposits
3a,83»
12,362
3,164
6,352
18,681
1,925
163
1,523
39,219
12,174
3,107
6,374
18,152
1,845
156
1,431
36,312
13,067
1,892
6,886
15,361
1,502
118
1,176
+
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & T i m e
C o m m e r c i a l Sank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & T i m e
16,352
5,837
1,010
1,578
8,893
778
25
720
16,151
5,877
997
1,573
8,634
755
23
703
14,030
5,865
621
1,589
7,070
551
14
524
+
c o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & T i m e
21,605
6,194
977
2,394
12,716
115
12
107
21,511
6,227
941
2,380
12,493
114
8
106
19,062
5,934
572
2,428
10,718
83
4
77
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & T i m e
10,002
2,362
536
734
6,637
N.A.
N.A.
N.A.
9,799
2,336
521
731
6,449
N.A.
N.A.
N.A.
87910
2,419
326
780
5,678
N.A.
N.A.
N.A.
18,402
4,044
852
2,125
11,491
657
36
630
17,046
4,179
521
2,291
10,307
591
29
572
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & T i m e
Notes:
4,143
860
2,130
11,758
673
37
646
+ 11
+
+
+
+
+
2
66
6
19
30
39
28
+ 11
+
-
+
+
+
+
-
2
57
7
19
40
22
31
9
5
+ 67
+
+
+
+
8
22
28
38
30
Savings & Loans
T o t a l Deposits
NOW
Savings
Time
M o r t g a g e s Outstanding
Mortgage C o m m i t m e n t s
Savings <c Loans
5
T o t a l Deposits
NOW
Savings
Time
M o r t g a g e s Outstanding
Mortgage C o m m i t m e n t s
Savings <c Loans
5
Total Deposits
NOW
Savings
Time
M o r t g a g e s Outstanding
Mortgage C o m m i t m e n t s
Savings & Loans
Total Deposits
NOW
Savings
Time
M o r t g a g e s Outstanding
17
0
63
1
26
41
79
37
Savings & Loans
T o t a l Deposits
NOW
Savings
Time
+ 13
+ 4
+ 71
Savings Sc Loans
T o t a l Deposits
NOW
Savings
Time
+
+
+
+
+
-
1
+ 19
+ 39
+200
+ 39
+12
- 2
+ 64
- 6
+ 17
M o r t g a g e s Outstanding
Mortgage C o m m i t m e n t s
M o r t g a g e s Outstanding
Mortcrnpe C o m m i t m e n t s
Savings & Loans
T o t a l Deposits
NOW
Savings
Time
M o r t g a g e s Outstanding
Mortgage C o m m i t m e n t s
10
1
65
7
14
14
28
13
ANN.
%
OHO!.
MAR
1982
CHG.
Savings & Loans
T o t a l Deposits
NOW
Savings
Time
M o r t g a g e s Outstanding
Mortgage C o m m i t m e n t s
FEB
1982
MAR
1981
524,297
8,667
91,811
424,412
JAN
508,240
15.547
521,441
8,377
92,743
420,811
DEC
509,133
15.163
510,074
4,093
100,227
405,142
JAN
495,415
15.893
+ 3
+112
- 8
+ 5
77,150
1,425
11,708
64,037
JAN
74,418
3,364
76,566
1,372
11,766
63,471
DEC
74,633
3.488
74,240
624
12,824
60,592
JAN
71,593
3.382
+ 4
+128
- 9
+ 6
4,412
74
571
3,791
JAN
3,979
49
4,404
71
579
3,782
DEC
4,003
51
4,369
32
654
3,692
JAN
3,969
138
+ 1
+131
- 13
+ 3
46,917
998
7,868
37,958
JAN
45,536
2,913
46,371
962
7,893
37,444
DEC
45,702
3,059
45,151
461
8,676
35,792
JAN
43,188
2,721
9,657
146
1,166
8,380
JAN
9,324
113
9,720
143
1,183
8,430
DEC
9,349
111
9,431
53
1,329
8,050
JAN
9,336
175
+ 2
+175
- 12
+ 4
7,577
88
1,208
6,298
JAN
7,151
9.35
7,519
83
1,216
6,238
DEC
7,140
90R
6,972
31
1,210
5,742
JAN
6,810
99*
+ 9
+184
- 0
+ 10
2,382
40
221
2,136
JAN
2,200
2,378
37
222
2,131
DEC
2,205
2,354
14
242
2,100
JAN
2,188
+ 1
+186
- 9
+ 2
6,205
78
5,474
673
JAN
6,228
39
6,173
75
5,445
657
DEC
6,234
42
5,963
33
5,216
591
JAN
6,102
62
+ 4
+136
+ 5
+ 14
+
-
+
-
3
2
4
1
+ 0
- R4
+ 4
+116
- 9
+ 6
+
+
?
7
- 0
- as
+
5
+
A
+
1
+ 2
- 37
All deposit d a t a a r e e x t r a c t e d f r o m t h e F e d e r a l R e s e r v e R e p o r t of T r a n s a c t i o n A c c o u n t s , other Deposits and Vault Cash (FR2900),
and a r e r e p o r t e d f o r t h e a v e r a g e of t h e week ending t h e 1st Wednesday of t h e m o n t h . This d a t a , r e p o r t e d by i n s t i t u t i o n s with
over $15 million in deposits as of D e c e m b e r 31, 1979, r e p r e s e n t s 95% of deposits in t h e six s t a t e a r e a . Savings and loan m o r t g a g e
d a t a a r e f r o m t h e F e d e r a l H o m e Loan Bank Board S e l e c t e d Balance S h e e t D a t a . T h e S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e six s t a t e s .
S u b c a t e g o r i e s w e r e chosen on a s e l e c t i v e basis and do not add t o t o t a l .
N.A. = f e w e r t h a n f o u r i n s t i t u t i o n s r e p o r t i n g .
FEDERAL RESERVE BANK OF ATLANTA
67
EMPLOYMENT
ANN.
JAN
1982
DEC
1981
JAN
1981
Civilian Labor F o r c e - t h o u s .
T o t a l Employed - thous.
T o t a l Unemployed - t h o u s .
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured U n e m p l . R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
108,014
97,831
10,183
8.5
N.A.
N.A.
36.8
308
108,574
99,562
9,013
8.8
N.A.
N.A.
39.9
329
106,885
98,139
8,746
7.4
N.A.
N.A.
39.9
308
Civilian Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Ave. Wkly. Earn. - $
13,793
12,440
1,353
9.3
N.A.
N.A.
33.0
238
13,867
12,691
1,175
8.7
N.A.
N.A.
40.5
289
12,992
12,025
967
7.3
N.A.
N.A.
40.3
268
Civilian Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - t h o u s .
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
1,673
1,428
245
13.8
N.A.
N.A.
»29.2
228
1,666
1,483
183
11.2
N.A.
N.A.
40.0
287
Civilian Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
4,511
4,165
346
7.4
N.A.
N.A.
40.3
237
Civilian Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - t h o u s .
Unemployment R a t e - % SA
Insured Unemployment - t h o u s .
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. E a r n . - $
JAN
1982
CHG.
DEC
1981
ANN.
%
JAN
1981
CHG.
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. C o m . <c Pub. U t i l .
5
89,781
19,449
3,691
20,726
15,884
18,503
5,327
5,047
91,915
19,818
4,153
21,403
16,129
18,754
5,351
5,140
89,988
20,075
3,995
20,366
16,216
17,972
5,235
5,063
1
+
+
+
-
0
3
8
2
2
3
2
0
Nonfarm E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
T r a n s . C o m . & P u b . Util.
11,413
2,231
671
2,691
2,131
2,199
633
— _ 697
11,570
2,266
708
2,751
2,144
2,201
635
707
11,321
2,281
682
2,630
2,179
2,091
621
687
+
+
+
+
+
1
2
2
2
2
5
2
1
1,632
1,480
152
8.8
N.A.
N.A.
40.1
276
N o n f a r m E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
Trans. C o m . & Pub. Util.
1,336
350
62
274
292
212
59
70
1,353
356
66
278
293
212
59
72
1,343
359
64
268
298
207
59
71
- 1
- 3
- 3
+ 2
- 2
+ 2
0
- 1
4,569
4,236
333
7.7
N.A.
N.A.
41.1
282
4,254
3,982
272
6.1
N.A.
N.A.
41.2
259
N o n f a r m E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. Com. & Pub. Util.
3,804
468
273
1,024
612
906
277
234
3,824
471
283
1,030
617
900
277
234
3,698
467
279
975
626
853
264
223
+ 3
+ 0
- 2
+ 5
- 2
+6
+ 5
+ 5
2,604
2,386
218
8.2
N.A.
N.A.
»30.2
205
2,611
2,424
187
7.3
N.A.
N.A.
40.0
267
2,376
2,222
154
6.4
N.A.
N.A.
40.2
249
Nonfarm E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
T r a n s . C o m . & Pub. Util.
2,155
504
96
495
436
360
114
142
2,185
510
101
515
435
360
114
143
2,172
518
102
500
440
349
113
143
+
+
-
Civilian Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured U n e m p l . R a t e - %
Mfg. Avg. Wkly. Hours
M f e . Avg. Wkly. Earn. - $
1,852
1,675
178
9.4
N.A.
N.A.
34.7
326
1,863
1,702
161
9.0
N.A.
N.A.
43.4
382
• 1,748
1,617
131
7.0
N.A.
N.A.
41.4
342
N o n f a r m E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. Com. & Pub. Util.
1,620
209
132
371
308
294
75
130
1,651
218
140
381
311
295
75
132
1,585
215
132
358
303
279
76
129
+ 2
- 3
0
+ 4
+ 2
+ 5
- 1
+ 1
Civilian Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - t h o u s .
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
1,051
939
112
10.0
N.A.
N.A.
«28.6
1,046
951
94
9.1
N.A.
N.A.
38.8
1,001
914
87
8.1
N.A.
N.A.
39.1
241
226
"21
N o n f a r m E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
T r a n s . C o m . & Pub. Util.
807
213
40
161
185
121
33
40
822
218
41
167
187
122
33
41
816
219
39
160
194
120
32
40
- 1
- 3
+3
+ 1
- 5
+ 1
+3
0
2,112
1,895
217
10.4
N.A.
N.A.
39.9
277
1,981
1,810
171
7.5
N.A.
N.A.
39.8
258
+ 6
+ 2
N o n f a r m E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
T r a n s . C o m . <c P u b . U t i l .
5
1,691
487
68
366
298
306
75
1,735
493
77
380
301
312
77
85
1,707
503
Earn
' ~ *
Civilian Labor F o r c e - t h o u s .
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured U n e m p l . R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
Notes:
179
2,102
1,847
254
10.9
N.A.
N.A.
»34.9
251
—
+ 6
+ 3
+40
-18
+10
+ 7
+42
-25
-18
S
S
'
!
1
3
6
1
1
3
1
1
•
+ 3
+29
-27
+49
-12
- 3
81
66
369
318
283
77
81
- 1
- 3
+ 3
- 1
-
6
+ 8
- 3
0
All labor f o r c e d a t a a r e f r o m Bureau of Labor S t a t i s t i c s r e p o r t s supplied by s t a t e agencies.
Only t h e unemployment r a t e d a t a a r e seasonally a d j u s t e d .
T h e S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e six s t a t e s .
The annual p e r c e n t change c a l c u l a t i o n is based on t h e most r e c e n t d a t a over prior y e a r .
• S u r v e y t a k e n week of ice s t o r m .
68
APRIL 1982, E C O N O M I C REVIEW
f ^ l
CONSTRUCTION
ANN.
%
DEC
1981
NOV
1981
DEC
1980
150,189
149,232
148,393
58,234
1,179.5
52,491
1,200.4
+11
- 3
31,877
29,001
32,234
- 1
25,597
25,843
26,326
- 3
8,383
195.5
8,188
194.2
7,688
183.7
+ 9
+ 6
4,919
4,825
5,530
-11
1,774
1,792
1,919
- 8
577
14.0
566
13.3
558
13.9
+ 3
+ 1
350
361
458
-24
12,299
12,598
12,847
- 4
3,732
90.8
3,614
89.5
2,928
78.5
+27
+16
1,707
1,683
2,461
-31
3,841
3,896
3,939
- 2
NOV
1981
DEC
1980
60,063
1,123.7
61,998
1,170.1
63,668
1,331.4
- 6
-16
Residential P e r m i t s - Thous.
Number single-family
Number m u l t i - f a m i l y
557.5
411.6
575.8
424.4
704.0
466.9
-12
Value - $ mil.
N u m b e r of Units - Thous.
12,296
262.3
12,829
274.6
13,107
312.2
- 6
-16
R e s i d e n t i a l P e r m i t s - Thous.
Number single-family
Number multi-family
117.9
100.9
123.5
106.7
154.4
124.1
-24
-19
Value - $ mil.
N u m b e r of Units - Thous.
847
21.7
864
22.3
903
25.0
- 6
-13
R e s i d e n t i a l P e r m i t s - Thous.
Number single-family
Number multi-family
5.4
5.5
5.8
6.0
9.2
7.4
-41
-26
Residential Contracts
Value - $ mil.
N u m b e r of Units - Thous.
6,860
146.4
7,301
155.8
7,458
176.6
-17
R e s i d e n t i a l P e r m i t s - Thous.
Number s i n g l e - f a m i l y
Number multi-family
70.4
72.9
74.6
77.9
89.1
86.2
Value - $ mil.
N u m b e r of Units - Thous.
1,755
37.0
1,819
38.3
1,820
44.4
- 4
-17
R e s i d e n t i a l P e r m i t s - Thous.
Number single-family
Number multi-family
21.1
8.8
21.4
8.3
26.7
8.6
-21
+ 2
Value - $ mil.
N u m b e r of Units - Thous.
1,321
24.5
1,316
25.2
1,136
24.0
+16
+ 2
R e s i d e n t i a l P e r m i t s - Thous.
Number s i n g l e - f a m i l y
Number multi-family
9.9
8.1
10.1
8.3
11.6
8.3
-15
- 2
Value - $ mil.
Number of Units - Thous.
556
12.6
551
12.6
601
14.9
- 7
-15
R e s i d e n t i a l P e r m i t s - Thous.
Number s i n g l e - f a m i l y
Number m u l t i - f a m i l y
3.5
1.7
3.6
1.8
5.1
5.1
-31
-67
Value - $ mil.
N u m b e r of Units - Thous.
956
20.1
979
20.5
1,189
27.3
-20
-26
R e s i d e n t i a l P e r m i t s - Thous.
Number s i n g l e - f a m i l y
Number multi-family
7.6
3.9
8.0
4.5
12.7
8.4
-40
-54
+ 1
58,249
1,166.3
ANN.
%
CHG.
DEC
1981
CHG.
12-Month Cumulative R a t e
Total Construction Contracts
Value - $ mil.
Nonresidential C o n t r a c t s
Value - $ mil.
Sq. F t . - mil.
Nonbuilding C o n t r a c t s
Value - $ mil.
Total C o n s t r u c t i o n C o n t r a c t s
Value - $ mil.
Nonresidential C o n t r a c t s
Value - $ mil.
Sq. F t . - mil.
Nonbuilding C o n t r a c t s
Value - $ mil.
Total C o n s t r u c t i o n C o n t r a c t s
Value - $ mil.
Nonresidential C o n t r a c t s
Value - $ mil.
Sq. F t . - mil.
Nonbuilding C o n t r a c t s
Value - $ mil.
Total Construction Contracts
Value - $ mil.
Nonresidential C o n t r a c t s
Value - $ mil.
Sq. F t . - mil.
Nonbuilding C o n t r a c t s
Value - $ mil.
Total C o n s t r u c t i o n C o n t r a c t s
Value - $ mil.
Nonresidential C o n t r a c t s
Value - $ mil.
Sq. F t . - mil.
Nonbuilding C o n t r a c t s
Value - $ mil.
Construction C o n t r a c t s
Value - $ mil.
Nonresidential C o n t r a c t s
Value - $ mil.
Sq. F t . - mil.
Nonbuilding C o n t r a c t s
Value - $ mil.
Total C o n s t r u c t i o n C o n t r a c t s
Value - $ mil.
Nonresidential C o n t r a c t s
Value - $ mil.
Sq. F t . - mil.
Nonbuilding C o n t r a c t s
Value - $ mil.
1,202
33.4
1,193
32.9
1,320
36.3
- 9
- 8
884
885
799
+11
3,775
3,526
3,270
+15
1,508
24.4
1,341
23.8
1,213
18.5
+24
+32
946
869
921
+ 3
1,343
1,406
1,561
-14
307
7.1
356
8.4
629
9.6
-51
-26
480
499
331
+45
2,565
2,625
2,789
- 8
1,056
25.7
1,117
26.3
1,040
26.9
+ 2
- 4
553
528
560
- 1
Contracts
Value - $ mil.
Nonresidential C o n t r a c t s
Value - $ mil.
Sq. F t . - mil.
Nonbuilding C o n t r a c t s
Value - $ mil.
Notes:
-21
-31
-15
C o n t r a c t s a r e c a l c u l a t e d f r o m t h e F. W. Dodge C o n s t r u c t i o n P o t e n t i a l s . P e r m i t s a r e c a l c u l a t e d f r o m t h e Bureau of t h e Census,
Housing Units A u t h o r i z e d By Building P e r m i t s and Public C o n t r a c t s . The S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e six s t a t e s . T h e
annual p e r c e n t change c a l c u l a t i o n is based on t h e most r e c e n t m o n t h over prior y e a r .
http://fraser.stlouisfed.org/
FEDERAL RESERVE BANK OF
Federal Reserve Bank of St. Louis
ATLANTA
69
M
GENERAL
ANN.
%
CHG.
JAN
1982
P e r s o n a l I n c o m e - ? bil. SAAR
( D a t e s : 3Q, 2Q, 3Q)
R e t a i l Sales - $ bil.- SA (FEB.)
Plane P a s s e n g e r Arrivals (thous.)
P e t r o l e u m Prod, (thous. bis.)
Consumer P r i c e Index
1967=100 (FEB.)
K i l o w a t t Hours mil. (OCT)
P e r s o n a l I n c o m e - ! bil. SAAI
(Dates: 3Q, 2Q, 3Q)
T a x a b l e Sales - $ mil
P l a n e Passenger Arrivals (thous.)
P e t r o l e u m Prod, (thous. bis.)
C o n s u m e r P r i c e Index
1967=100
K i l o w a t t Hours mil. (OCT)
Personal Ineome-S bil. SAAR
(Dates: 3Q, 2Q, 3Q)
Taxable Sales - $ mil.
P l a n e P a s s e n g e r Arrivals (thous.)
P e t r o l e u m Prod, (thous. bis.)
Consumer P r i c e Index
1967=100
Kilowatt Hours mil. (OCT)
DEC
1981
JAN
1981
2,412.9
87.6
N.A.
8,695.1
2,340.5
86.2
N.A.
8,607.6
2,155.8
86.0
Ñ.A.
8,508.3
+ 2
283.4
168,7
282.5
183.6
263.2
170.1
+ 8
- 1
282.1
N.A.
4,239.7
1,406.7
272.8
N.A.
3,719.3
1,407.8
249.2
N.A.
4,026.2
1,441.5
+13
N.A.
27.7
N.A.
31.5
N.A.
29.0
32.4
N.A.
105.2
59.0
31.4
N.A.
102.4
59.4
29.1
N.A.
113.5
61.5
N.A.
3.9
N.A.
4.5
N.A.
4.3
98.3
66,806
1,725.5
90.4
NOV
153.6
59,334
2,182.1
117.5
JAN
48.7
N.A.
1,599.1
N.A.
FEB
279.8
4.1
47.6
N.A.
1,464.9
N.A.
DEC
282.2
4.7
43.7
N.A.
1,697.5
N.A.
FEB
263.0
4.3
40.4
N.A.
255.2
1,164.3
39.1
N.A.
259.6
1,164.0
35.3
N.A.
253.8
1,166.5
N.A.
4.8
N.A.
5.5
N.A.
4.7
18.3
N.A.
30.8
94.4
17.7
N.A.
30.0
94.0
16.5
N.A.
33.7
96.0
N.A.
1.9
N.A.
2.3
N.A.
2.0
39.8
N.A.
140.1
N.A.
38.8
N.A.
136.8
N.A.
35.8
N.A.
140.1
N.A.
N.A.
5.1
N.A.
5.8
N.A.
5.5
P e r s o n a l Income-? bil. SAA
( D a t e s : 3Q, 2Q, 3Q)
T a x a b l e Sales - $ thous. (FEB.)
P l a n e P a s s e n g e r Arrivals (thous.)
P e t r o l e u m Prod, (thous. bis.)
Consumer P r i c e I n d e x - Miami
Nov. 1977 = 100
Kilowatt Hours mil. (OCT)
'ersonai Income-5 b
(Dates: 3Q, 2Q, 3Q)
T a x a b l e Sales - $ mil.
P l a n e Passenger Arrivals (thous.)
P e t r o l e u m Prod, (thous. bis.)
Consumer P r i c e Index - A t l a n t a
1967 = 100
Kilowatt Hours - . mil. (OCT)
> ersonai Income-$
( D a t e s : 3Q, 2Q, 3Q)
T a x a b l e Sales - $ mil.
Plane P a s s e n g e r Arrivals (thous.)
P e t r o l e u m P r o d , (thous. bis.)
Consumer P r i c e Index
1967 = 100
K i l o w a t t Hours mil. (OCT)
P e r s o n a l Income-$ bil. SAAR
( D a t e s : 3Q, 2Q, 3Q)
T a x a b l e Sales - $ mil.
P l a n e P a s s e n g e r Arrivals (thous.)
P e t r o l e u m Prod, (thous. bis.)
Consumer P r i c e Index
1967 = 100
Kilowatt Hours mil. (OCT)
Personal I n c o m e - 5 bE
( D a t e s : 3Q, 2Q, 3Q)
T a x a b l e Sales - $ mil.
P l a n e P a s s e n g e r Arrivals (thous.)
P e t r o l e u m P r o d , (thous. bis.)
Consumer P r i c e Index
1967 = 100
K i l o w a t t Hours mil. (OCT)
FEB
1982
JAN R
1981
FEB R
1981
ANN.
%
CHG.
+ 5
- 2
- 4
+11
- 7
- 4
- 9
+11
- 6
+ 6
- 5
+14
+ 1
- 0
+ 2
+11
- 9
- 2
- 7
+11
- 7
Agriculture
P r i e e s R e c ' d by F a r m e r s
133
Index (1977=100)
Broiler P l a c e m e n t s (thous.)
79,341
59.50
Calf P r i c e s ($ per c w t . )
Broiler P r i c e s (« per lb.)
27.0
5.96
Soybean P r i c e s ($ per bu.)
Broiler Feed C o s t ($ p e r ton)
209
132
78,942
57.10
27.1
6.13
211
144
80,404
70.60
30.4
7.13
238
- 8
- 1
-16
-11
-16
-12
Agriculture
P r i c e s R e c ' d by F a r m e r s
Index (1977=100)
120
Broiler P l a c e m e n t s (thous.)
31,402
Calf P r i c e s ($ per cwt.)
55.15
Broiler P r i c e s (t per lb.)
25.5
Soybean P r i e e s ($ per bu.)
6.22
Broiler F e e d C o s t ($ per ton)
205
119
31,337
53.55
25.6
6.27
207
129
32,169
66.30
29.3
7.24
234
- 7
- 2
-17
-13
-14
-12
Agriculture
F a r m Cash R e c e i p t s - $ mil.
1,876
(Dates: NOV, NOV)
9,874
Broiler P l a c e m e n t s (thous.)
54.00
Calf P r i c e s ($ per c w t . )
24.5
Broiler P r i c e s (« per lb.)
6.17
Soybean P r i c e s ($ per bu.)
225
Broiler F e e d C o s t ($ per ton)
9,684
53.00
23.5
6.22
230
1,668
10,854
61.40
28.5
7.08
240
+12
- 9
-12
-14
-13
- 6
Agriculture
Farm Cash R e c e i p t s - $ mil.
(Dates: NOV, NOV)
3,610
Broiler P l a c e m e n t s (thous.)
2,006
Calf P r i c e s ($ per cwt.)
57.50
Broiler P r i c e s (* per lb.)
27.5
Soybean P r i c e s ($ per bu.)
6.17
Broiler F e e d C o s t ($ per ton)
225
+12
+ 2
1,904
54.50
25.0
6.22
220
3,379
1,866
64.30
29.0
7.08
245
+ 7
+ 8
-11
-5
-13
- 8
Agriculture
F a r m Cash R e c e i p t s - $ mil.
2;913
(Dates: NOV, NOV)
12,182
Broiler P l a c e m e n t s (thous.)
53.60
Calf P r i c e s ($ per c w t . )
25.0
Broiler P r i c e s (« per lb.)
6.13
Soybean P r i c e s ($ per bu.)
189
Broiler F e e d C o s t ($ per ton)
12,344
51.10
25.5
6.10
194
2,446
12,374
63.80
29.0
7.10
240
+19
- 2
-16
-14
-14
-21
Agriculture
Farm Cash R e c e i p t s - $ mil.
1,546
( D a t e s : NOV, NOV)
N.A.
Broiler P l a c e m e n t s (thous.)
55.50
Calf P r i c e s ($ per c w t . )
27.0
Broiler P r i c e s (t per lb.)
6.37
Soybean P r i c e s ($ per bu.)
245
Broiler Feed Cost ($ per ton)
1,469
N.A.
63.00
31.0
7.36
260
+ 5
N.A.
56.00
28.5
6.52
245
Agriculture
Farm Cash R e c e i p t s - $ mil.
2,041
(Dates: NOV, NOV)
6,035
Broiler P l a c e m e n t s (thous.)
56.40
Calf P r i c e s ($ per cwt.)
27.5
Broiler P r i c e s (« per lb.)
6.18
Soybean P r i c e s ($ per bu.)
189
Broiler F e e d C o s t ($ per ton)
6,102
55.60
29.0
6.31
183
1,924
5,884
72.40
31.0
7.24
210
+ 6
+ 3
-22
-11
-15
- 10
Agriculture
F a r m Cash R e c e i p t s - $ mil.
1,607
(Dates: NOV, NOV)
1,305
Broiler P l a c e m e n t s (thous.)
53.60
Calf P r i c e s ($ per c w t . )
25.0
Broiler P r i c e s (1 per lb.)
6.17
Soybean P r i c e s ($ per bu.)
Broiler F e e d C o s t ($ per ton)
191
1,303
51.40
24.0
6.07
210
1,521
1,191
62.00
28.0
7.33
210
+ 6
+10
-14
-11
- 16
- 9
-
-
-
-
-
-12
-13
-13
- 6
Note»
P e r s o n a l I n c o m e d a t a supplied by U . S. D e p a r t m e n t of C o m m e r c e . T a x a b l e Sales a r e r e p o r t e d as a 12-month c u m u l a t i v e t o t a l . Plane
P a s s e n g e r Arrivals a r e c o l l e c t e d f r o m 26 airporte. P e t r o l e u m P r o d u c t i o n d a t a supplied by U . S. Bureau of Mines. C o n s u m e r P r i c e
Index d a t a supplied by Bureau of Labor S t a t i s t i c s . Kilowatt hours a r e monthly sales to u l t i m a t e consumers published by U . S.
D e p a r t m e n t of Energy. A g r i c u l t u r e d a t a supplied by U. S. D e p a r t m e n t of A g r i c u l t u r e . F a r m Cash R e c e i p t s d a t a a r e r e p o r t e d as
cumulative for t h e calendar y e a r through t h e m o n t h shown. Broiler p l a c e m e n t s a r e an a v e r a g e weekly r a t e . The S o u t h e a s t d a t a
r e p r e s e n t t h e t o t a l of t h e six s t a t e s . N.A. = not available. T h e annual p e r c e n t change calculation is based on m o s t r e c e n t d a t a
over prior y e a r . R = Revised
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P.O. Box 1731
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Bulk Rate
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Address Correction Requested
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P e r m i t 292
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