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I
I
I
l
Multibank Holding Companies-
Development in Texas
Changes in Recent Years
Multibank holding companies are
becoming increasingly important
in Texas banking. They have, in
fact, already changed the state's
banking industry. After only four
years of rapid expansion, bank
subsidiaries of these companies
are on the verge of holding more
deposits than all other banks in
Texas.
In its early stages, the rise of
multibank holding companies was
more a matter of form than substance. The holding company device was used largely to formalize
long-standing relationships between large banks and smaller
banks affiliated with them. Recently, however, the holding company has been used as a vehicle
for expansion in a state where the
tradition of unit banking is strong.
Holding companies are now acquiring independent banks, expanding in their home markets
and across the state.
This shift from fonnalization of
previous relationships to actual
expansion is creating a far different banking structure in Texas.
And the structure of the banking
industry will influence the performance of Texas banking.
But there has also been a parallel shift in decisions of the Board
of Governors of the Federal Reserve System affecting bank holding companies in Texas. During
the initial phase of expansion of
multi bank holding companies, decisions seemed aimed at preserving
(or enhancing) competition as
established multi-unit banking
systems were consolidated into
holding companies.
Bwine!ll Review I December 1974
More recently, the Board has
acted to halt any trend toward
undue concentration as holding
companies have reached out across
the state. In taking this new policy
stance, the Board has turned its
attention to statewide structure
and the eventual implications of
that structure for competitive conditions in local banking markets.
one-bank holding companies in
Texas have set up subsidiaries to
engage in nonbanking activities,
all these activities are closely related to banking. So far, then, the
most important aspect of holding
company developments in Texas
has been the fonnation of multibank holding companies and their
acquisition of subsidiary banks.
Recent rapid growth
Early multi-units
The Bank Holding Company Act
was amended in 1970-primarily
to cover one-bank holding companies, broaden the concept of bank
control, and redefine pennissible
nonbank activities. Multihank
holding companies have spread
rapidly in Texas since then. Where
there were only four such companies in the state in 1970, there
are 24 today. And where multibank holding companies then controlled 14 bank subsidiaries with
about 7 percent of the deposits in
the state, they now control 179
subsidiaries with nearly half the
deposits. 1
While multibank holding companies are active in many states,
only Florida has rivaled Texas
in expansion over the past three
years. If all the holding company
applications pending in Texas were
approved, there would be 30 companies with 236 subsidiary banks.
While less than a fifth of the banks
in the state, these banks account
for 54 percent of the deposits.
Although the state also has 64
one-bank holding companies, these
companies control only about 6
percent of the deposits in the state.
And while 52 of the multibank and
Multi-unit banking was already
well established in Texas when the
Bank Holding Company Act was
amended in 1970. In addition to
four multibank holding companies,
there were 126 banking chains. Together, these two types of banking
organizations held two-fifths of the
banks in the state and nearly twothirds of the deposits.
Under a chain-bank arrangement, two or more separate banks
are operated under a single management. Control, however, rests
in the hands of individuals-in contrast to multibank holding companies, where control is corporate.
Chain arrangements were common in metropolitan areas where
population growth and economic
development created demand for
bank services beyond the nonna!
service area of banks in the central
city. Not only did Texas law prevent banks from shifting resources
to suburbs by branching into these
growth areas, but the law was interpreted as prohibiting one bank
in Texas from owning another.
As a result, new banks were
chartered. But in many cases, the
new banks were owned by individuals closely connected with
1
Multibank holding companies grow more important in Texas
NUMBER
(END-QF - YEAR FIGURES)
30-----------------MUL TIBANK
HOLDING
COMPANIES
NUMBER
- ----------------200
SUBSIDIARY
BANKS
15 -
-100
o ~~
n ~~~L--___"10
~
n u
n· ~~~
__ o
' 70 ' 71 ' 72 "13 -74
"12 '73
' 71
BILLION DOLLARS
'74
(ENO-OF · YEAR FIGURES )
PER CENT
20------_____________
50
TOTAL
BANK
DEPOSITS
10 -
-25
O---"---.,---.---r,--,,r--------r--,,---.,---.,---r,---O
'70
' 71
' 72
' 73
' 74
' 70
' 71
-72
1974 il S of O c t o ber 31
0'
SOURCES: Bo ard
Govern o rs, Federil l Res erve Sys t em
Federill Reser ve Bank 01 Dililii S
2
' 73
' 74
large banks already established in
the area. The owners were some·
times principal stockholders in the
established bank, sometimes om·
cers or directors, and sometimes
even legal counselors.
Large metropolitan banks also
influenced newly chartered banks
through combinations of minority
stock ownership and shares held
either in trust or as collateral for
loans. Chain·banking ties were
cemented even further through
interlocking directorates and com·
mon officers, correspondent bank·
ing relationships, and general dependence on the larger bank for
technical and managerial support.
Until its amendment in 1970,
the Bank Holding Company Act
required that only companies own·
ing as much as 25 percent of the
outstanding stock of each of two
or more banks register with the
Board of Governors as multibank
holding companies. During that
time, many large Texas banks did
not have to register-even in cases
where they formed one-bank hold·
ing companies-because they limited their direct ownership either
to one bank or to less than 25 percent each in other banks.
The one-bank exemption was
closed by the 1970 amendment.
Companies holding even one bank
were made subject to registration
and regulation. In addition, Congress extended the concept of bank
control beyond the previous tests
of stock ownership and ability to
elect directors to include controlling influence. If the Board of
Governors of the Federal Reserve
System determined that an or·
ganization exercised controlling
influence over a bank, the organization had to register 88 a bank
holding company.
From the outset, this change in
the legal environment was expected t o spur expansion of multibank holding companies in Texas.
As many of the chain-banking
practices then in common use in
Texas actually amounted to controlling influences, chain systems
coming under regulation of the
Board of Governors anyway were
expected to reorganize as holding
companies.
But there were also advantages
to the chain in reorganizing as a
holding company. By reorganizing,
a chain could formalize relations
with banks making up the chain,
possibly streamlining operations as
these banks were made subsidiaries of the holding company. In
addition, a holding company would
have better access to organized
capital markets than could be
achieved by anyone of the members of a chain. Managerial and
technical efficiencies might also be
improved. And there were opportunities for expansion, with regulatory approval, into new product
lines and new market areas.
The most likely source of multibank activity would be chains with
lead banks that were subsidiaries
of one-bank holding companies.
Since one-bank holding companies
definitely had to register anyway,
the move to multibank status appeared natural. And chain members made ready targets for further
acquisition.
Depos it growth of five largest organizations
comes mainly through acqui s ition
of banks not affiliated in 1970
.r--
SUBSIDIARIES , YEAR· END 1970
0 .7%
FORMER CHAIN MEMBERS
5 .4 %
. . LEAD BANKS
.
"
. ..
,
66.9 %
. '.'
"
-,'.
PREVIOUSLY
UNAFFILIATED BANKS
-.
26.7%
..., .
NEWLY CHARTERED BANKS
0.3 %
DEPOSITS, OCTOBER 31, 1974 - $11.7 BILLION
SOURCES: Board 01 Governors, Federal Reserve System
Federal Reserve Sank 01 Oallas
Preexisting structure •••
Soon after amendment of the Bank
Holding Company Act, the Federal
Reserve Bank of Dallas conducted
a study of multi-unit banking in
Texas. Showing the developing
multibank holding company movement in Texas would probably
mirror patterns already established in chain-banking arrangements, the study identified 29
chains as potential multibank holding companies. It indicated several
possible developments:
• Most multibank holding company formations would represent the consolidation of existing chains.
Business Review I December 1974
3
• Most holding company activity
would be in the most populated
areas-particularly the Dallas,
Fort Worth, Houston, and San
Antonio SMSA's.
• Initial expansion of holding
companies would center around
home market areas, where their
affiliates were concentrated.
• Consolidation of chains into
holding companies would raise
measures of local market and
statewide concentration as expressed in terms of banking organizations instead of banks.
By and large, these expectations
did materialize. In the early stages
of the holding company movement, most acquisitions were in
the market of the acquiring company's lead bank. Ten members of
the original 29 most likely candidates have formed multibank holding companies of their own, while
lead banks of seven others have
been acquired by larger holding
companies. Banks providing threefourths of the deposits held by holding companies today were members of corresponding multi-unit
organizations at the end of 1970.
As expected, most multibank
holding company activity has been
in large metropolitan areas. More
than eight out of ten bank subsidiaries, in fact, are in SMSA's.
And fully two-thirds of these are in
Dallas, Fort Worth, Houston, and
San Antonio.
The consolidation of chains has
contributed 1.6 percentage points
to the share of statewide deposits
held by the five largest banking organizations. And these acquisitions
have increased the market share of
the three largest organizations in
seven of the state's 24 major bankingmarkets (21 SMSA's plus three
specially defined markets).
..• and policies in 1971-72
The study of multi-unit banking
in Texas also recognized that policies of the Board of Governors
•
would influence the extent and direction of the growth of holding
companies in this state. Policies of
the Board regarding the early formation of Texas multibank holding
companies are apparent from decisions on applications for acquisitions under the Bank Holding
Company Act. Throughout 1971
and early 1972, the Board approved applications to acquire
stock in banks tied so closely to the
lead bank of the acquiring company that denial would not change
actual control.
Since the affiliate was already
effectively controlled by the applicant, this type of acquisition was
regarded mainly as a corporate
reorganization of existing interests
having no impact on competitionactual or potential. Only three
acquisitions, in fact, enlarged the
market shares of leading organizations. These were in Houston and
Beaumont.
During the same period, the
Board of Governors sought to reduce market power when disaffiliation appeared feasible and
worthwhile. When Houston-based
Southwest Bancshares, for example, applied to acquire its affiliate
in Longview, approval was conditional on Southwest's divestiture
of its affiliate in Kilgore, another
significant competitor in the same
banking market.
The divestiture required of
Southwest was consistent with
other Board decisions in those
early stages of the multibank
holding company movement in
Texas. Generally, the Board's decisions focused on the competitive
effects of a proposed acquisition
on the relevant local banking market. In addition, attention was
given to the financial and managerial resources of the applicant,
its subsidiaries, and the bank it
sought to acquire; the prospects of
each for the future; and the possible effects of the acquisition on
the convenience and needs of the
community to be served.
Although in one instance involving a Houston-area bank, the
Board noted that acquisition by a
holding company based outside the
area would tend to enhance competition, references to the state's
banking structure were usually
confined to the relative deposit
size of the applicant among banking organizations in Texas. Since
most banks being acquired were
small affiliates, reference to any
new trends in statewide structure
probably did not seem necessary.
By the end of 1971, however,
there were nine multibank holding
companies in Texas-more than
twice the number at the beginning
of the year. The proportion of
statewide deposits held by multibank holding companies had also
doubled, exceeding 14 percent, and
the number of subsidiary banks
had climbed even more sharply,
reaching 34.
Despite the pace of this growth,
multibank holding companies still
had little impact on the state's
banking structure. The share of
total deposits held by the state's
five largest banking organizations
had edged up only another half a
percentage point. And since all the
significant bank acquisitions had
involved fonner affiliates, the same
multi-unit organizations were still
operating in their usual markets.
It was not until 1972 that statewide trends in the multibank holding company movement began
taking shape. Up to that point, the
movement had been little more
than a consolidation of existing
chain arrangements in local banking markets.
Emerging trends
In early 1972, First City Bancorporation of Texas received approval
for its acquisition of Midland National Bank, the second ranking
bank in the Midland·Odessa bank-
iog market with deposits totaling
$78.7 million. Actually, .First City
Bancorporation's application was
~Q acquire Midlan-d National Cor.
poration, a one: bank holding com·
pany that owned 83.3 percent of
the Midland bank and a minority
interest in Southwest National
Bank ofEf Paso.
- This acquisition marked the
beginning of two new and highly
important developments in Texas
banking. It was the first acqui·
sition of an independent bank
used to expand the operations of
a major Texas bank holding company into new markets. And it was
the first of a series of acquisitions
in which major banking organizations in Dallas, Fort Worth, and
Houston picked up one or more of
the top three banks in one of the
! sta~'s_~!l_da1J'.: S:~SA banking
I mar.l$:ets-SMSA-markets other
than Dallas, Fort Worth, Houston,
and San Antonio.
This type of acquisition was
obviously attractive to large banking organizations. Not only did it
provide geographic diversification
but also faster growth than could
have ordinarily been achieved
through internal means.
The three larg~tpJIDkll9k1~t'!g
~m.P_a_ujes jn the state-First City
Bancorporation, Texas Commerce
Bancshares, and Southwest Bancshares-expandM rapidlYJ,cLO.§§
tbe sl!te in)972. By year-end,
these three Houston-based companies had acquired the third and
fifth largest banks in Fort Worth
and a smaller bank in the Dallas
market. In addition, they had
gained representation in eight of
the state's 21 secondary SMSA's.
The larger of the Fort Worth
acquisitions was a $200 million
bank. Subsidiaries in secondary
markets ranged in deposit size
from $28 million to $112 million.
In seven secondary markets, they
included one or more of the three
largest banks.
Business Re"iew I December 1974
Before the year was out, the
Board of Governors also approved
the formation of First International Bancshares. With First National Bank in Dallas as its lead
bank and approval for the acquisition of Houston-Citizens Bank &
Trust Company, a $219 million
bank that ranked as the fifth largest in the Houston market, First
International became the largest
barifhoidinK.fQmpariYln~Texas.
Over the year, effects of the
vigorous expansion of large holding companies began to show in
the state's banking structure. The
number of holding companies increased to 15, and the number of
bank subsidiaries increased even
more. Where there had been 34
b{!!lk subsidi.aries.ln Texas at the
stanof 1972, there-;ere 73 at
yi8?s en Ana of the 39new-subsidlaries picked up by hoJding
companies, nearly half represented
previously unaffiliated banks. The
share of statewide deposits held
by multibank holding companies
jumped from 14.5 percent to 34.5
percent. During the year, the five
largest banking organizations increased their share of total deposits 4 percentage points.
In 1973 and on into 1974, holding companies acquired far more
independent banks than they did
fanner affiliates. Although smaller
companies were also active-some
of them picking up independent
banks outside their home marketsexpansion of the largest organizations continued to dominate the
movement.
First International Bancshares
was especially active. In addition
t.o picking up five of its Dallas affiliates, it acquired 14 previously
independent banks. Seven of the
independent banks were leaders in
secondary markets.
Shifts in structure
The holding company movement
has made the structure of the
banking industry in Texas significantly different from what it was
at the end of 1970. Deposit concen·
tration for the five largest banking
organizations has increased 8.2
percentage points-a relative gain
of 37 percent. For the ten largest
organizations, the ratio has in·
creased 11 percentage points-a
relative gain of 36 percent.
These are considerably more
than gains from formalization of
affiliate relationships. Taken together, holding companies have increased the deposits they control
roughly four times more from ac·
quiring independent banks than
from acquiring affiliates of their
lead banks.
They have also extended their
operations well beyond local markets. Under chain banking, the
influence of leading banks was
confined essentially to their home
markets. But holding companies
now reach across the state. All
but one of the five largest banking
organizations, for example, operate outside their home markets
in Dallas or Houston. With 21
subsidiary banks, they are represented in 12 secondary markets.
And in ten of these markets, their
subsidiaries rank among the three
largest local banks.
Despite this increase in concentration, however, there has been
considerable competition among
holding companies. For one thing,
large organizations have entered
one another's markets. First City
Bancorporation, for example, entered the Dallas market through
acquisition of Texas Bank & Trust
Company. A 8240 million bank
then, Texas Bank & Trust was the
fifth largest in Dallas.
For another, additional holding
companies have been formed. In a
number of local markets, these
companies are effective competitors
to the five largest banking organizations. For example, Texas Amer·
iean Bancshares (formerly Fort
5
Share of statewide deposits
held by largest bank organizations
turns up in 1970' s
PERCENT
45---------------------40-
35-
30-
25-
2°--'-'I-,r-rl-,-,--r-TI-'68
' 70
' 72
' 74
1974 as 01 October 31
SOURCES: Board 01 Go¥ ernors,
Federal Re~e rve System
Fede.al Re serve Bank 01 Dallas
•
Worth National Corporation) had
sizable subsidiaries in Dallas and
two secondary markets when it acquired a large Houston bank. By
entering the Houston market, this
company became a significant competitor to all five of the largest organizations in their home markets.
Competition and markets
The entry of large companies into
banking markets all across the
state and the rise in statewide concentration do not necessarily represent any great loss of competitive vigor, And although holding
companies can still expand rapidly,
the policy stance the Board of Governors has taken in recent decisions is designed to allow the state
to reap any possible benefits from
the development of holding companies while retaining an actively
competitive banking industry.
The perfonnance of an industry
is inseparably linked with competition. Where in everyday usage,
competition implies rivalry (or the
feeling of rivalry) between parties
in some kind of contest, the word
has a special meaning in economics. Competition refers mainly to
the ability of a buyer or selier to
affect prices, If the price of a good
or service is generally determined
by market forces-the interactions
of many buyers and seliers, no one
of which can have a significant effect by himself-the market is usually said to be competitive.
When resources in a market are
concentrated in a few hands, the
market tends to become less competitive. And in the case of banking markets, unless economies of
scale or organizat ion are realized
from the concentration and these
savings are passed on, bank customers are confronted with bank
services that are more costly and
less available.
Any meaningful effort to relate
the competitive performance of an
industry to its structure, then,
assumes the determination of the
proper market. Because corrunercial banks offer a variety of services, their markets are difficult to
determine. This is true whether
the services they offer are characteristically wholesale or retail.
One approximation of a banking
market might be the state itself.
By this measure, the banking industry in Texas is still fairly unconcentrated. An index of deposit
concentration for the five largest
banking organizations in each
state shows the average concentration for the nation twice that
for Texas.
Despite the rapid spread of
holding companies in Texas, the
state ranks 45th in deposit concentration. That is only one position
higher than before the multibank
holding company movement began
in Texas three years ago. Even
among unit-banking states, the
index for Texas is considerably
below average. Among the 15 unitbanking states, Texas ranks fifth
from the bottom in deposit con·
centration. But the state is probably not a good approximation of
the market for most services provided by Texas banks.
Local areas seem to provide a
better approximation of markets
for retail services. Banking markets serving households and small
businesses are generally highly
localized-and for two reasons.
First, these users of retail banking services cannot shop far without running up information and
transportation costs that are pro·
hibitive. And second, banks also
find it too costly to develop retail
business at any great distance.
Studies show that corrunuting
patterns and communication ties
are important in defining banking
markets along geographic lines.
And in deciding the competitive
effects of proposed bank acquisitions in Texas, the Board of Governors-like the Supreme Court in
a recent decision regarding a bank
merger in Connecticut-has recognized that banking markets are
characteristically local.
Standard metropolitan statistical areas sometimes take appropriate patterns and ties into account,
providing the Board with convenient approximations of banking
markets. At other times, the Board
has had to use different market
approximations. But in all cases,
the markets have been local, not
statewide.
It might be possible in some
states for aggregate concentration
to provide a rough gauge of market
developments. This could happen
if the state were very small and
local banking markets overlapped
or if the state had only a few banking markets. But Texas does not
fit either category.
Texas is a very large state.
Texarkana, for example, is about
as close to Chicago as it is to EI
Paso. And within this vast area
are 24 SMSA's and many other
local banking markets.
The state's economy, moreover,
is highly diversified. Texas has
some well-defined economic areas
with credit needs and sources different from those in the rest of the
state. The special credit needs of
some areas may be influenced as
much by banking developments in
Phoenix or New Orleans as by developments in Dallas and Houston.
While the state is too large a
market area for use in assessing
competitive developments in retail
banking, it is too small for analyzing developments in wholesale
banking. Customers with large
banking needs often find it worth
the expense to shop away from
home for the best deal in bank
credit and services.
These large customers may turn
to the major money market in New
York, for example, or they may go
to a regional money center. And
since their credit worthiness is
easily established-especially if
they are major corporations-their
business is actively sought by
larger banks throughout the
United States.
Many markets for wholesale
banking services cross state lines.
A recent survey of the largest nonfinancial corporations in Texas
showed that most of their banking
was done with institutions in New
York, Chicago, and California. Z
These companies keep a large part
of their loan and deposit balances
in other states, for example, and
go out of state for other vital banking services. This suggests that
as far as wholesale banking in
Texas is concerned, the nation
may provide a better market approximation than the state. If so,
statewide concentration is probably a poor measure of competitive
conditions in wholesale banking.
Statewide concentration
Since the whole state does not approximate a meaningful banking
market, the relationship between
market power and the increase in
statewide concentration is somewhat obscure. Statewide concentration does not tell much, for
example, about local competitive
conditions. If one of the leading
companies in Texas enters a new
market through acquisition of an
existing bank, statewide concentration increases. But the acquisition does not immediately increase
concentration in the local market.
Many of the affiliates acquired
by the state's leading organizations have, of course, increased
concentration ratios at both the
state and local levels. But as was
pointed out before, these acquisitions often represented formalization of preexisting relationships.
In cases where control was already
absolute-however informal-the
increase in concentration represents a correction in measurement
rather than an actual increase in
market power.
And even as the overall concentration index rose in Texas, two
developments have been at work
promoting competition in local
banking markets. One has been
the breakup of some chain-banking
arrangements. The other has been
the entry of new competitors into
highly concentrated markets.
During the three years that
multibank holding companies have
been expanding their operations in
Texas, the Board of Governors has
broken up some chain arrangements in local markets. One of the
devices used has been divestiture.
To acquire two of its Houston
affiliates, for example, First City
Bancorporation had to divest itself of controlling influence in two
larger Houston affiliates.
Another device for breaking up
chains has been to allow the acqui~
sition of one member of a chain
but not other members in the
same market. First International
Bancshares, for instance, applied
to acquire two banks affiliated
with each other in the Houston
market. The Board allowed the
company to acquire one bank but
not the other, thereby breaking up
the chain.
The true state of deposit concentration in Texas is very prob~
ably unknown. While many chain
banks have been taken up in the
development of multibank holding
companies, it is not known how
much infonnal group banking is
still done in Texas. But the breaking up of chain relationships in
accordance with Federal Reserve
policies has been a deconcentrating
influence even though it does not
enter directly into fonnal concentration ratios.
2. S ...i"e.. R""Wtw. October 1913
Business Review I December 1974
7
Share of Deposits in " Approximated " Metropolitan Markets
Held by the Five Largest Multibank Holding Companies in Texas
DALLAS
60 .3 %
FORT WORTH
15 .1%
AM AR IL LO
0 .0 %
SHERMAN -OENISON
16.4 %
WICHITA FALLS
TEXARKANA
0 .0 %
. ===~~L
0.0%
LUBBOCK
12 .9 %
--------L-lCl
---------t-----I
::~=~t==::::~;;:J
ABILENE
24 .B%
EL PASO
14 .7 %
MIDLAND-ODESSA
39 .4 %
~..-11UJ
TYLER
0 .0 %
:'~~J~j~-~:::
<~~~~j=:-:::,
WACO
0 .0 %
BRYAN-COLLEGE STATION
....
0 .0 %
BEAUMONT -PORT ARTHURORANGE
34 .6 %
SAN ANGelO
60.2%
GALVESTON - TEXAS CITY
22.4 %
HOUSTON
51 .4 %
A USTIN
0 .0 %
KILLEEN -TEMPLE
21.7 %
CORPUS CHRISTI
21 .7 %
LAREDO
12 .7 %
SAN ANTONIO
7 .4 %
BROWNSVILLE -HARLINGEN · SAN BENITO
47 .6 %
M c: A LLE N-PHARR-EOINBURG
0 .0 %
SOURces: Board 01 Governorl , Fed e r,,1 Reserve System
Feder.IRuerye Bank of Dalles
The proportion of statewide deposits held by holding company
subsidiaries is still well below the
proportion held by all multi-unit
systems in Texas at the end of
1970. And the rise in the share
held by holding companies may
not reflect what has happened to
multi-unit systems as a whole.
The largest companies have
been expanding across the statein many cases, entering markets
through the acquisition of leading
•
banks. While such acquisitions do
not affect local market concentration ratios, they could still affect
competition-either favorably or
unfavorably.
On the one hand, entry of an
outside organization could promote
competition. Since small markets
in Texas cannot support a large
number of banks. they tend to
have fairly concentrated structures. The average three-bank
concentration ratio for the state's
20 secondary markets is 70.4-about a third higher than the
average for the four largest banking markets and five times that
for the state as a whole.
If concentration in a market is
high enough, competitors-actually members of an oligopoly-can
recognize their interdependence,
learning that aggressive behavior
by one of them will only bring retaliation by the others. Competitive behavior is stifled under such
conditions. Except for customers,
no one is able to gain, for example,
by price cutting.
Where such a situation has developed, an outside organization
could acquire a leading bank in the
market without upsetting the old
arrangements. But the holding
company might require its subsidiary to compete vigorously as a
matter of policy. Or the mere presence of a newcomer could unsettle
old understandings, renewing competition among market leaders.
Even the possibility of entry by an
aggressive holding company could
conceivably compel market leaders
to lower the cost of credit and services, make credit more available,
and offer new and better services.
On the other hand, a large company could enter a market and
monopolize it by allowing the new
subsidiary to use company resources to offset losses from aggressive price competition while
driving other banks into submission. The possibility of such a situation would be more likely if the
company entered the market by acquiring a bank that was already in
a dominant position.
Monopolization by an outside
organization would be foreign to
traditions in Texas, where through
its unit-banking laws, the state
has tried to preserve community
banks and keep them responsive
to local credit needs.
The Tyler decision
One recent decision by the Board
of Governors has already sharply
reduced the possibility that holding companies might be able to
monopolize local markets. In denying an application for First International Bancshares to acquire
Citizens First National Bank of
Tyler, the Board established a
doctrine barring the largest companies in the state from absorbing
leading banks in secondary markets if there was any serious likeliBusioe$S Review I December 1974
hood of the acquisition reducing
potential competition. In this doctrine--reaifinned in the denial of
First International's application
to acquire the largest bank in
Waco and the denial of First City
Bancorporation's application to
acquire a Lufkin bank that is the
largest in Angelina County-the
Board expressed concern over the
rise in aggregate concentration in
Texas banking.
The sharp rise in concentration
was viewed by the Board as a
growing disparity in the size of
bank holding companies in Texas.
And the disparity would certainly
increase further if the largest holding companies in the state were
allowed to continue entering secondary markets through the acquisition of the largest banks.
Some of this concern was for competition and concentration in the
state as a whole. But even more
concern was for the impact of such
acquisitions on competition in
local banking markets.
If one of the large companies entered a market by creating a new
bank or acquiring a small bank, additional competition would be created. But if the company entered
by acquiring one of the leading
banks in the market, the acquisition would not amount to an additional competitor in the market.
Either development would remove the company from the ranks
of potential competitors. But if the
company entered by acquiring a
market leader, there would be no
increase in actual competition to
offset the lessening in potential
competition. Moreover, an opportunity to reduce market concentration would have been lost. And the
acquisition would have solidified
the bank's market position while
foreclosing the possibility of its
either remaining a significant independent competitor or becoming
affiliated with one of the state's
smaller bank holding companies.
In the order denying the Tyler
application, the Board said it did
not have to await the development
of undue concentration among
bank holding companies in Texas
before it intervened to stop the
trend. Incorporated in the Bank
Holding Company Act is the purpose of the Clayton Act-which is
to break the force of a trend toward undue concentration before it
gathers momentum. In applying
this interpretation of the act to the
Tyler, Waco, and Lufkin cases, the
Board concluded that the proposed
acquisitions would have significant
adverse effects on potential competition--so adverse that they were
not outweighed by other considerations taken up in the act.
Future perfonnance
There are now 12 statewide bank
holding companies in Texas. And
their expansion across the state
should be injecting a new note of
competition into markets that
previously had been close-knit
structures. In some cases, the mere
possibility of a holding company
entering a market might be enough
to stimulate local banks to more
aggressive competition.
Meanwhile, competition continues strong among the state's
larger banking organizations. And
with a more competitive banking
structure statewide, rankings of
the largest banking organizations
have turned over. Not only has
First Intermitional Bancshares replaced Republic National Bank of
Dallas as the state's largest banking organization, but First City
Bancorporation and Texas Commerce Bancshares have advanced
to second and third places, respectively. Republic of Texas Corporation (the holding company of
Republic National Bank) stands
fourth, and Southwest Bancshares
stands fifth.
Further down in the rankings,
new names have been added and
9
other transpositions have taken
place. Federated Capital Corporation, for example, was created
through the merger of Federated
Texas Bancorporation and Capital National Corporation. This
brought together four $200 million
banks (in Houston, Austin, Corpus Christi, and San Antonio),
propelling the new organization
into the top ten holding companies.
Multibank holding companies,
then, can be used to make competition more vigorous in Texas
banking marketa-despite the rise
in statewide concentration ratios.
And more vigorous competition
should reduce the cost and increase the availability of bank
credit and services.
To help ensure that multibank
holding companies make the banking industry in Texas more responsive to public needs, the Board of
Governors has established policies
to promote competition. To that
end, the policies have been attentive to matters of fairness and
financial soundness.
While final judgment must wait
on clear evidence concerning the
conduct and perfonnance of these
new banking organizations, preliminary data indicate some favorable
trends. These data indicate that
two out of three of the small sample of banks for which operating
10
histories are available showed improvements in three important
capital ratios (including adjusted
capital-risk assets) after they became holding company subsidiaries. And these improvements
were in the face of an apparent
downtrend in capital ratios for
Texas banks in general.
Much of the improvement in
capital ratios stems from Federal
Reserve System policies that encourage holding companies to invest capital as needed in the banks
they acquire. But holding companies apparently are a source of
financial strength to their banks.
A larger sampling shows that
better than two out of three banks
had higher loan-deposit ratios after they became subsidiaries. This
finding could indicate that holding
company affiliation leads to a more
aggressive lending posture.
-John R. Stodden
New member bank
The Richardson National Bank, Richardson, Texas, a newly organized institution
located in the territory served by the Head Office of the Federal Reserve Bank
of Dallas, opened for business November 4, 1974, as a member of the Federal
Reserve System. The new member bank opened with capital of $500,000, surplus
of $500,000, and undivided profits of $250,000. The officers are: C. A. Richardson,
Chairman of the Board; John A. Bryant, President; Bill Prince, Executive Vice
President; and Carole Jenkins, Cashier.
New par bank
The Lovelady State Bank, Lovelady, Texas, a newly organized insured
nonmember bank located in the territory served by the Houston Branch of the
Federal Reserve Bank of Dallas, opened for business November 4, 1974, remitting
at par. The officers are: V. B. Woods, President, and Michael R. Broxson, Vice
President and Cashier.
Businesa Review I December 1974
11
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