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Are mergers responsible for the surge in new bank charters?

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  • William R. Keeton

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.

Suggested Citation

  • William R. Keeton, 2000. "Are mergers responsible for the surge in new bank charters?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 21-41.
  • Handle: RePEc:fip:fedker:y:2000:i:qi:p:21-41:n:v.85no.1
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    References listed on IDEAS

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    1. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    2. Dale Orr, 1974. "The Economic Determinants of Entry into Canadian Banking: 1963-7," Canadian Journal of Economics, Canadian Economics Association, vol. 7(1), pages 82-99, February.
    3. Stephen A. Rhoades, 1996. "Bank mergers and industrywide structure," Staff Studies 169, Board of Governors of the Federal Reserve System (U.S.).
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    Citations

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    Cited by:

    1. Robert DeYoung, 2000. "For how long are newly chartered banks financially fragile?," Working Paper Series WP-00-9, Federal Reserve Bank of Chicago.
    2. 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.).
    3. Robert DeYoung & William Hunter & Gregory Udell, 2004. "The Past, Present, and Probable Future for Community Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 85-133, April.
    4. Robert Avery & Katherine Samolyk, 2004. "Bank Consolidation and Small Business Lending: The Role of Community Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 291-325, April.
    5. 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.
    6. McCord, Roisin & Prescott, Edward Simpson, 2014. "The Financial Crisis, the Collapse of Bank Entry, and Changes in the Size Distribution of Banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 23-50.
    7. repec:taf:oaefxx:v:3:y:2015:i:1:p:1017947 is not listed on IDEAS
    8. Yongil Jeon & Stephen M. Miller, 2002. "Has Deregulation Affected Births, Deaths, and Marriages in the U.S. Commercial Banking Industry?," Working papers 2002-26, University of Connecticut, Department of Economics.
    9. Yongil Jeon & Stephen M. Miller, 2007. "Births, Deaths, And Marriages In The U.S. Commercial Banking Industry," Economic Inquiry, Western Economic Association International, vol. 45(2), pages 325-341, April.
    10. Berger, A.N. & Goldberg, L.G. & White, L.J., 2001. "The Effects of Dynamic Change in Bank Competition on the Supply of Small Business Credit," New York University, Leonard N. Stern School Finance Department Working Paper Seires 01-07, New York University, Leonard N. Stern School of Business-.
    11. Enrico Beretta & Silvia Del Prete, 2007. "Bank consolidation and lending policies to small business: Differences across geographical areas," Temi di discussione (Economic working papers) 644, Bank of Italy, Economic Research and International Relations Area.
    12. Robert Adams & Dean Amel, 2016. "The Effects of Past Entry, Market Consolidation, and Expansion by Incumbents on the Probability of Entry in Banking," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 48(1), pages 95-118, February.
    13. Robert Feinberg, 2008. "Explaining the Credit Union Entry Decision, and Implications for Performance," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(1), pages 81-91, August.
    14. Stephen M. Miller & Yongil Jeon, 2003. "Deregulation and Structural Change in the U.S. Commercial Banking Industry," Eastern Economic Journal, Eastern Economic Association, vol. 29(3), pages 391-414, Summer.
    15. 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.
    16. Ken Cyree & James Wansley, 2009. "Managerial Rationale for Entry and the Relation to Performance and Small-Business Lending," Journal of Financial Services Research, Springer;Western Finance Association, vol. 35(2), pages 119-139, April.
    17. Neale Faith R. & Drake Pamela Peterson & Clark Steven P., 2010. "Diversification in the Financial Services Industry: The Effect of the Financial Modernization Act," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-30, March.

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