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Local or state? Evidence on bank market size using branch prices

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  • Paul Edelstein
  • Donald P. Morgan

Abstract

With the elimination of state laws against branching, banks can now compete across states. They are no longer limited to competing in local markets, defined by the Federal Reserve as metropolitan statistical areas or small groups of rural counties. Accordingly, a "local or state?" debate over market size is taking place among researchers, with some arguing that banking markets are statewide and others contending that they remain local. This article contributes to the debate with a novel, arguably better, indicator of market size: bank branch prices, as opposed to bank deposit rates. The pattern of branch price data suggests that banking markets are not necessarily local. The authors find that branch prices in ten northeast states over the 1990s are more closely correlated with bank concentration at the state level than at the local level, consistent with the "state-market" argument. However, they caution that the relationship is not completely robust; it depends partly on how the data are parsed. Further study using a larger set of branch price data will help settle the debate more definitively.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2006)
Issue (Month): May ()
Pages: 15-25

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Handle: RePEc:fip:fednep:y:2006:i:may:p:15-25:n:v.12no.1

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Keywords: Banking market ; Branch banks ; Bank competition;

References

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  1. Elizabeth K. Kiser, 2002. "Household switching behavior at depository institutions: evidence from survey data," Finance and Economics Discussion Series 2002-44, Board of Governors of the Federal Reserve System (U.S.).
  2. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
  3. Hannan, Timothy H. & Prager, Robin A., 2004. "The competitive implications of multimarket bank branching," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1889-1914, August.
  4. Lawrence J. Radecki, 1998. "The expanding geographic reach of retail banking markets," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 15-34.
  5. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-99, May.
  6. Jith Jayaratne & Philip E. Strahan, 1997. "The benefits of branching deregulation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 13-29.
  7. Berger, Allen N. & DeYoung, Robert, 2006. "Technological Progress and the Geographic Expansion of the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1483-1513, September.
  8. Dean F. Amel & Martha Starr-McCluer, 2001. "Market definition in banking: recent evidence," Finance and Economics Discussion Series 2001-16, Board of Governors of the Federal Reserve System (U.S.).
  9. Hannan, Timothy H., 1991. "Bank commercial loan markets and the role of market structure: evidence from surveys of commercial lending," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 133-149, February.
  10. Susan McLaughlin, 1995. "The impact of interstate banking and branching reform: evidence from the states," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(May).
  11. Gropp, Reint Eberhard & Corvoisier, Sandrine, 2009. "Contestability, Technology and Banking," ZEW Discussion Papers 09-007, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  12. Erik Heitfield & Robin A. Prager, 2002. "The geographic scope of retail deposit markets," Finance and Economics Discussion Series 2002-49, Board of Governors of the Federal Reserve System (U.S.).
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