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For release at
12 Noon EDT
Tuesday, June 22, 1965

Concentration Ratios and Banking Competition
Remcrlcs of George W. Mitchell
Member, Board of Governors of the Federal Reserve System
at the
Annual Convention of the
Wisconsin Bankers Association
Milwaukee, Wisconsin
June 22, 1965


Measuring Banking Competi.tion

The efficacy of competition is firmly engrained
in American economic and social philosophy.


is viewed as the stern but successful taskmaster of our
business system, promoting innovation, driving down prices,
and inducing entrepreneurs to adjust to the changing
needs of their customers.
To be sure, in some industries fraught with a
special public interest, certain extremes of competitive
behavior have been restrained oy law and regulation.
In the bc?nking business, entry, branching, and merging are all
regulated to guard against predatory practices.


of credit are scrutinized by examiners for cuality and
conforaiance to statutory retirements.

Within the kind

of Marcuis of Queensberry rules established for the
banking industry, however, the public interest favors a
vigorous competitive attitude among bankers.
Whatever beliefs to the contrary might once
have been held, the Holding Company Act of 1956 and the
Bank Merger Act of 1960 clearly articulate competition
as a goal for banking.

Recent court cases have gone even

further, saying that the pro-competitive strictures of
the two main trust-busting statutes, the Sherman and
Clayton Acts, a l s o ^ p ] ^ | d ' i w s as they do to nonregulaced




p t e i ’) i


- 2 -

These court rulings have been greeted with
considerable misgivings by some elements of the industry,
Congress, and the public.

Their misgivings are not, I

am sure, based on any repudiation of the beneficial
consequences of competition--that conviction is too firmly

Much of the differences of opinion, I am convinced,

stem from conflicting judgments about how to resolve a
very knotty problem in each case, namely, the evaluation
of comparative competitive situations in which competition
is already diluted by structural limitations and regulatory
How can one judge whether a given banking situation
is more or less competitive than another when neither meets
the requirements of perfect competition?

Many cases

present no particular problem because, by whatever criterion,
no difference in the competitive situation can be detected.
In other instances, however, that judgment will depend
heavily upon the measurement of competition employed.
A favorite yardstick for measuring levels and
changes in bank competition is the so-called concentration

Just what is meant by a concentration ratio?


concentration ratio most often used in banking relates the
proportion of deposits or assets held by one or a few of
the largest banks to the total for all banks in the market;



whether that be construed to cover all banks in the
city, the country, the metropolitan area, or the State,
The concentration ratio concept is actually
fairly new.

Back in the late 1930*s, concentration ratios

were developed for a large number of major industries in a
massive study of the structure of the American economy by
the Temporary National Economic Committee,

Since that

study, the concentration ratio has received wide use by
academic scholars, Government agencies, including the
Department of Justice, and the Courts.
Wide and continuing use in antitrust proceedings
has given concentration ratios the respectability of age
and association.

They have their detractors, however, who

emphasize the shortcomings of the ratios both as a measure
of market structure and as an index of competitiveness in
a market.
Some of the popularity of these measures may lie
in their simplicity for all they really show is the relative
size of a particular bank by comparing it with the total for
all banks in a particular area.

The larger the ratio the

greater the concentration and the more compelling the
presumption of anti-competitiveness.
Solving a problem by quantifying its dimensions
and characteristics is the essence of using our growing
knowledge constructively.

The more skillful we become at

using numbers to describe economic relationships the greater



the likelihood of being able to deal with our more
intractable problems.

But concentration ratios as

ordinarily used do very little by way of focusing or rein­
forcing our judgment about competition in banking--in fact,
they often warp that judgment.

This is clear if we consider

for a moment whether banks are Sui generis competing only
among themselves in the services they provide to lenders,
depositors or borrowers.

Obviously most such services are

available from other sources.

Individuals and corporations

are not confined to banks alone either as sources of credit
or as outlets for their savings.

Banks provide only one

unique service of major importance, the checking account.
All other bank activities are subject to varying degrees
of nonbank competition and the denominator of the concen­
tration ratio should reflect that fact.
The Supreme Court has leaned heavily on the
concentration ratio in recent antitrust cases, including
the controversial Philadelphia National Bank case.

In that

case, the Supreme Court adopted the view that "the cluster
of products and services denoted by the term ’
banking1 composes a distinct line of commerce."
This is not my view of the banking industry.


because banks operate in at least a score of different
markets, the competitive situation is likely to be
different in each one.


-5I recognize that the Court’ concept of banking
is one that is held by some bank supervisors, bankers,
and academic scholars, but in my judgment this is a quite
untenable position for the analysis of banking competition.
This does not mean that recent decisions were necessarily
wrong nor does it mean that the Court would have decided
any recent cases differently if it had adopted a different
view of commercial banking.

It only means that I would

advocate looking at the question of the extent of banking
competition from a completely different perspective.
Let me illustrate the core of my objection to
using a single concentration ratio as an indicator of
competition among banks.

No doubt many of you promote

yourselves as full-service banks.

Your customers could,

if only they would, do all of their banking business at
one stop.

But they don*t--perhaps much to your chagrin.

To be sure, some use several of the services you provide.
Businesses frequently borrow from, and maintain demand
deposit accounts at the same bank.

But it is clear that

few customers use all or even most of the services offered
by a single bank.

And what is more important, most of them



do not transact all of their banking business, in the
broadest sense, at a single institution.

Banking products

and services do not constitute a neatly bound and
inseparable bundle.

The total includes many distinct

and separate components among which customers choose as
they will.
To appreciate how markedly different this view
of banking markets can be, let us focus our attention
briefly on one after another of the major bank earning
assets and liabilities.

Business loans are a good place

to begin, for they are a credit of key economic significance.
A major difficulty arises at once:

what business loan

aggregate to use as a base for comparison?

In one business

loan market a bank may be competing with several large
U.S. banks and any number of foreign banks for business
in Japan or Latin America.

In another market, it may be

competing with fifty or more U.S. banks, the capital markets,
several large insurance companies and pension funds for a
loan to a large U.S. firm selling its products nationx^ide.
Or in its most localized market, the bank may need only
to face the competition of one or two local banks, trade
credit from suppliers, and equity funds from friends and
In the first two of these business loan markets,
the concentration ratios are bound to be small, even if



the}7 include the biggest banking institution on either coast.
This is because almost all large U.S. banks are competitors,
as well as insurance companies, pension funds and capital
markets--in fact the base for the ratio should probably
be the total of external funds available or in use.


the third kind of market, for localized business credit,
concentration ratios covering the one or a few largest
local lenders can sometimes be quite high--ouite high
enough to raise the presumption of potentially anti­
competitive bank structure.

But I would maintain that it

is a patent absurdity to add up the figures for all three
of these markets, strike an average, and call that the
representative concentration ratio for the "business loan"
Much the same sort of market structure exists
in bank lending to governments:

Federal, State, local and

In these markets it might be useful to add another

type of subdivision of the market based upon the term of the
credit (a similar substructure could also be used for
business loans).

Thus relevant concentration ratios might

be based not on a bankfs total holdings of Governments but
on its participation in three markets:

Treasury bills,

intermediates and longer term issues.

In each case the

denominator is obviously not the comparative holdings or
participation of other banks in the area or even the Nation,



but upon the holdings of or trading in all such securities
by all types of investors conceivably even including the
Treasury trust accounts and the Federal Reserve's port­
Because tax exempt securities are so widely
traded among individuals as well as banks, concentration
ratios for this credit activity of banks ought also, excepting
for purely local issues, to be compared with nationwide out­
standings or activity.

The bonds of small governmental

units and short-term borrowings of medium-sized units, on
the other hand, often are sold or traded in a very limited

Quite likely banks in the community or in communities

close by are the principal sources of funds, a fact that can
be established by an appropriately constructed concentration
ratio for such limited credit use.
It should be clear from these illustrations that
the whole array of alternatives for bank investment can be
similarly examined and broken down into submarkets with the
pertinent areas defined in light of the facts of bank and
nonbank competition.

If this is done it will be found that

in the extension of credit banks are often confronted with
more nonbank and nonlocal bank than local bank competitors.
Banks are a minor f a c m a n y

particular markets as

of investment that encourages
them to enter a grea

credit markets, constantly



shifting their preferences to those loans or instruments
where rates and terms are most attractive.

This general

situation is further reflected in their widened competitive
influence geographically as they have reached out from their
home territories for regional, national and even inter­
national business.
On the other hand, those banks that attempt to
serve the local credit requirements most intensively often
provide significant competition to nonbank lenders in local
markets, mainly in loans to small and medium sized business,
agriculture and consumers.

Bank rates to these types of

borrowers tend to be lower than nonbank rates, but the quality
of the paper banks hold tends to be higher, thus offsetting
some of the apparent advantage of bank lending.
In my judgment, studies of concentration in the
markets where banks act as lenders are not likely to uncover
very many kinds of credit on which a merger betx^een local
banks would have a large anticompetitive effect.

And con­

cerning the few types of credit--ordinarily local--for which
such a merger might significantly raise concentration ratios,
intensive analysis is essential in order to appropriately
assess the overall competitive effects of the merger.
The role of banks as lenders usually receives
primary attention from those who are looking for the anti­
competitive effects of prospective bank mergers.

But banks


- 1 0 -

are also borrowers--from a number of markets--and it is
in one of the markets where they obtain funds that the
threat of concentration is most likely to be found.


referring to banks as borrowers, I do not have in mind their
borrowings in the federal funds market, through repurchase
agreements, from the Federal Reserve, or from the issuance
of notes or debentures.

I refer rather to the deposits

they obtain on either a time or demand basis.

In the case

of time deposits, interest payments are contractual; in
the case of demand deposits compensation to the depositor
takes the form of a variety of services connected with
money payments and a conveniently safe storage for liquid
When commercial banks borrow money by paying
interest on time accounts--savings or certificates of
deposit--they must meet a great deal of nonbank competition
from savings and loan associations, mutual saving banks,
direct investment opportunities in government securities,
equities, and even contractual commitments to insurance
companies and pension funds.

But there are some banking

markets where nonbank competition is either non-existent or
is not very vigorous so far as savings deposits are concerned.
This can be inferred from the reaction of the Nation's bankers
to the most significant change in Regulation Q in recent years-that of January 1, 1962.

According to a survey made at that

time only about one-half of the member banks increased their

-11rates of interest on regular savings accounts during the first
two weeks after the ceiling was raised, and only 40 per cent
who raised their rates went immediately to the new 4 per cent

However, as many of you, as Wisconsin bankers, know

banks in some states meet the toughest competition by steering
the straying customers from regular savings accounts into
certificates of deposit.
When banks "borrow" money by providing services to
demand depositors they are in a market in which the only nonbank
competition--and not a very satisfactory substitute--comes
from coin and currency.

Actually the bundle of conveniences

and outright necessity inherent in a demand deposit account
has no true counterpart in the service offered by any other
financial intermediary.

Hence the analysis of the competitive

factor in this particular market depends solely upon the
availability of service from other banks.
In recent years, competition among banks for business
demand deposits has spread out over larger and larger areas as
corporate business has grown by diversification, decentralization
or branching into more states and communities.

National and

regional businesses now have scores of banking connections and
are constantly being importuned to add others.

Today competitiveness

among banks for these types of accounts is no longer local but
at least regional or nationwide.

It is doubtful that any likely

merger proposal x^ould significantly change the concentration
ratio in the market for these types of demand accounts because

- 1 2 -

the denominator would encompass so large a number of alternatives
open to the alert corporate treasurer.
Local demand deposit customers, on the other hand,
have no such wealth of alternatives for banking accommodation.
Most of them depend upon local banks or offices of branching

They rate convenience to their home, office,

or shopping center as a major factor in determining where
they bank.

It is a goal of public policy to provide these

customers with as many alternatives as are practicably
consistent with economy and efficiency.
How helpful are concentration ratios in evaluating
the effects of mergers on this banking market?
I can illustrate the differing results that can be
obtained by drawing upon the information on size of account
collected periodically by the Federal Deposit Insurance

The Corporation obtains from each bank the

number and total of its deposit balances in accounts under
$10,000, between $10,000 and $25,000, between $25,000 and
$100,000 and over $100,000.

Suppose x^e assume that any

depositor with less than $10,000 in the bank is fairly well
confined to local banking alternatives, and, on the other
hand, that any individual or firm with more than $100,000
on deposit is a sufficiently desirable customer to be
sought after with various service appeals not only by his
local banks but also by a goodly number of other banks
from nearby toxins and cities.

On this basis, the pertinent



concentration ratio for the local demand deposit market
should certainly exclude balances over $100,000, and it
might also be instructive to calculate a "hard core1 ratio
based only on demand deposit balances under $10,000.
In a city like Milwaukee, this means that we are
talking about a concentration ratio for the three largest
banks of 56 per cent for demand deposits under $100,000,
and 47 per cent for deposits under $10,000, compared with
a ratio of 69 per cent if one simply looked at all their
demand deposits taken together.

For Chicago, your neighbor

to the south, the contrasts are even sharper.

There the

three top banks account for but 24 per cent of demand
deposits under $100,000 and only 13 per cent of accounts
under $10,000, as opposed to a 49 per cent share of all the
area’ demand deposits combined.

On the other hand, in

some other Midwestern centers where city-wide branching
prevails, the ratios suggest that the large banks1 shares
in the various deposit markets are much less disparate.
Thus, in Detroit, the three biggest banks hold 73 per cent
of total demand deposits, 65 per cent of demand accounts
under $100,000, and 60 per cent of accounts under $10,000;
for Indianapolis, the corresponding ratios are 83 per cent,
75 per cent and 67 per cent, respectively.




I am sure that using size of account as a proxy
for sorting out local accounts with limited access to nonlocal
banks is not as accurate as a direct determination of the
actual or potential banking radius of each depositor.


I think such numbers as I have reported provide dramatic
evidence of how differing the market position of leading
banks can be in the local as distinct from the aggregate
total deposit picture in any particular community.
Attention to such size-of-account concentration ratios would
be useful in every merger or holding company case, as a
simple means of obtaining an indication when the concen­
tration of locally limited bank deposits may be markedly
different from what is suggested by overall deposit totals.
In the last analysis, concentration ratios in
any form are best utilized as indicia--warning lights whose
flashings can alert regulators to the need for a more
intensive probing for present and potential anti-competitive
effects in the particular banking markets under review.


in a while the complexity of relationships involved or the
paucity of obtainable evidence may force the authorities to
fall back upon presumptive judgments or inferences based in
part on concentration ratios, but in my own view these
occasions need be relatively infrequent.
In whatever way their signals are employed, however,
I think it is imperative that concentration ratios be refined



15 -

to distinguish between the differing customer markets
for differing bank services.

Any other usage substantially

heightens the risk of mistaking shadow for substance--in a
field that already is haunted by too many ghosts