Consolidation in U.S. banking: Implications for efficiency and risk

  • John H. Boyd
  • Stanley L. Graham
Part of the The New York University Salomon Center Series on Financial Markets and Institutions book series (SALO, volume 3)


We don’t really know why the U.S. banking industry is consolidating rapidly, as it has been doing for the last decade or so. After a large number of studies on the topic including this one, what seems clear is that consolidation is not producing significant efficiencies — at least not on average. Other dimensions of the consolidation trend — such as its heavy concentration in large banks — are just as poorly understood. Given this ignorance as to the “why” of consolidation, it is extremely risky to predict its future effects. Based on past experience and data, at least, we can conclude the following.


Total Asset Banking Industry Large Bank Small Bank Bank Market 
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  1. 1.
    Merger data have been constructed by Rhoades (see Rhodes 1996 ). They exclude mergers where the acquiring and acquired banks were commonly owned prior to merger. They also exclude mergers where the target was a failing or likely-to-fail bank.Google Scholar
  2. 2.
    This computation is not exactly the rate of acquisitions by size class, since the numerator size is at the time of acquisition (anytime from 1980 to 1994) and the denominator is fixed in 1980.Google Scholar
  3. 3.
    This is admittedly a “back of the envelope” computation. The more precise alternative would be to tally up all mergers over the 1980–94 period, record the size of each target bank, and then sum the acquired assets within each size class. For a variety of reasons this is a difficult and labor-intensive task. It seemed not worth the effort given the striking nature of the computations presented, even under the most conservative of assumptions.Google Scholar
  4. 4.
    Calculated as the dollar value of assets of acquired banks (from Table 4) as a percent of the dollar value in 1980.Google Scholar
  5. 5.
    This ex post correction of the data is of little consolation to the many economists who did empirical studies of the “Credit Crunch” during that period. They were attempting to explain an apparent contraction in bank lending which was largely ephemeral.Google Scholar
  6. 6.
    Boyd and Gertler (1995) also looked at banks’ share of value added to GDP, and banks’ share of factor inputs (labor and capital) relative to factor inputs of the national economy. According to these measures, commercial banking has actually been a “growth industry,” substantially expanding its share of value added, employment, and net investment in capital and equipment. Although we have not reproduced these computations here, the same is true with our updated data.Google Scholar
  7. 7.
    From an antitrust perspective (not the perspective of this study) what is alarming in the recent data is the rising concentration levels in rural markets, and in small urban markets. For example, between 1984 and 1994 the average Herfindahl-Hirschman Index (HHI) for all rural markets increased from 3,584 to 3,724, or 140 points. Over the same period, the average HHI for small urban markets, (those with populations less than 100,000) increased from 1,715 to 1,810, or 95 points (Amel 1996 ). This is above the 1,800 threshold level above which the Justice Department defines bank markets as “highly concentrated.” Note that these are averages, so that in something like half of all markets the actual HHI is higher. The implication is that in many small markets, be they rural or urban, there are competitive problems which are getting worse.Google Scholar
  8. 8.
    Although this large literature is interesting and informative, we believe it is best viewed as a form of “statistical cost accounting,” not really “economies of scale measurement.” We say that because, the “output level” or “product” of financial intermediary firms is extremely difficult to define, let alone measure. The output measures typically employed in these statistical cost studies bear almost no relationship to the output measures suggested by the modern theory of financial firms (for example, Diamond 1984 or Boyd and Prescott 1986 ). Interestingly, the same conceptual issues are present in national income accounting for the financial intermediary sector. One study which rigorously investigates some of these issues is Hornstein and Prescott (1991).Google Scholar
  9. 9.
    As indicated above, Rhoades identifies one study which examines the mergers of small banks ( O’Keefe 1992 ). It examined mergers involving failed banks and thus is quite different from ours.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 1998

Authors and Affiliations

  • John H. Boyd
  • Stanley L. Graham

There are no affiliations available

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