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Are mergers responsible for the surge in new bank charters?

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  • William R. Keeton
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    Abstract

    After stagnating for many years, the rate of new bank formation increased sharply in the second half of the 1990s. The financial press attributes this development to the high volume of bank mergers, which are said to have encouraged new entry by reducing service to some bank customers. It is commonly asserted, for example, that many new banks serve small businesses whose banks were taken over by larger banks uninterested in making small business loans. Most banking experts agree that such an increase in new banks in response to mergers would be healthy, helping maintain competition in local banking markets and offset reductions in service.> The view that mergers encourage new bank formation has recently come into question. Examining data on new bank charters and mergers in the 1990s, a study released early last year concluded that mergers have actually discouraged new bank formation. Shortly thereafter, another study came to the opposite conclusion, finding that mergers encourage new entry. Taken together, these studies raise two important questions. First, is merger activity positively or negatively related to new bank formation? Second, if mergers are positively related to new bank formation, which types of mergers account for the link?> Keeton reexamines the relationship between mergers and new bank charters, distinguishing more carefully than the other two studies between different types of mergers. The results, based on data for the second half of the 1990s, provide strong support for the view that mergers encourage the formation of new banks. Specifically, the author finds that markets with more merger activity experienced higher rates of new bank formation, and that the mergers with the strongest link to new bank formation were those in which small banks were taken over by large banks or local banks by distant banks.

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    File URL: http://www.kansascityfed.org/publicat/econrev/PDF/1q00keet.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

    Volume (Year): (2000)
    Issue (Month): Q I ()
    Pages: 21-41

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    Handle: RePEc:fip:fedker:y:2000:i:qi:p:21-41:n:v.85no.1

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    Related research

    Keywords: Bank mergers ; Bank charters ; Banks and banking;

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    Cited by:
    1. Robert Avery & Katherine Samolyk, 2004. "Bank Consolidation and Small Business Lending: The Role of Community Banks," Journal of Financial Services Research, Springer, vol. 25(2), pages 291-325, April.
    2. Yongil Jeon & Stephen M. Miller, 2001. "Deregulation and Structural Change in the U.S. Commercial Banking Industry," Working papers 2001-07, University of Connecticut, Department of Economics.
    3. Ken Cyree & James Wansley, 2009. "Managerial Rationale for Entry and the Relation to Performance and Small-Business Lending," Journal of Financial Services Research, Springer, vol. 35(2), pages 119-139, April.
    4. Robert DeYoung & William Hunter & Gregory Udell, 2004. "The Past, Present, and Probable Future for Community Banks," Journal of Financial Services Research, Springer, vol. 25(2), pages 85-133, April.
    5. Robert DeYoung, 2000. "For how long are newly chartered banks financially fragile?," Working Paper Series WP-00-9, Federal Reserve Bank of Chicago.
    6. Yongil Jeon & Stephen M. Miller, 2005. "Has Deregulation Affected Births, Deaths, and Marriages in the U.S. Commercial Banking Industry?," Working papers 2005-24, University of Connecticut, Department of Economics.
    7. Allen N.Berger & Lawrence G. Goldberg & Lawrence J. White, 2001. "The Effects of Dynamic Changes in Bank Competition on the Supply of Small Business Credit," Working Papers 01-07, New York University, Leonard N. Stern School of Business, Department of Economics.
    8. Robert DeYoung & William C. Hunter, 2001. "Deregulation, the Internet, and the competitive viability of large banks and community banks," Working Paper Series WP-01-11, Federal Reserve Bank of Chicago.
    9. Robert M. Adams & Dean F. Amel, 2007. "The effects of past entry, market consolidation, and expansion by incumbents on the probability of entry," Finance and Economics Discussion Series 2007-51, Board of Governors of the Federal Reserve System (U.S.).
    10. Robert Feinberg, 2008. "Explaining the Credit Union Entry Decision, and Implications for Performance," Review of Industrial Organization, Springer, vol. 33(1), pages 81-91, August.
    11. Robert Feinberg, 2009. "Patterns and Determinants of Entry in Rural County Banking Markets," Journal of Industry, Competition and Trade, Springer, vol. 9(2), pages 101-115, June.

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