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FDIC Banking Review


Interstate Banking The Past, Present And Future
by David Holland, Don Inscoe, Ross Waldrop and William Kuta

The nation's press has been rife with announcements of merger and acquisition plans by large banking organizations since midyear 1995. This burst of announcements is part of a long-term fundamental restructuring of the industry that began in the early 1980s and is likely to continue for the foreseeable future. An integral component of this restructuring is the rise of interstate or multi-state banking, and particularly an increase in the number and economic importance of banking organizations with banking offices in more than one state.

The restructuring of the banking industry may be decomposed into three interrelated trends. First, interstate banking has moved from being an oddity to being a prominent characteristic of the industry. At midyear 1995, two-thirds of the nation's banking assets were held by multi-state banking organizations. Second, consolidation, due mostly to mergers and acquisitions but also to bank failures and to a paucity of new entrants, has reduced the numbers of banking and thrift institutions substantially. For example, between year-end 1984 and March 31, 1996, the number of banking organizations bank holding companies and independent banks and thrifts declined 36 percent, from 14,887 to 9,481. Third, by some measures, the banking industry has become more concentrated. At year-end 1984, the largest 42 banking organizations held 25 percent of domestic deposits. At the end of the first quarter of 1996, the largest 13 banking organizations held 25 percent of domestic deposits. Moreover, five percent of the nation's banking organizations held 75 percent of domestic deposits.

In 1994, Congress, with the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act, added impetus to the ongoing trends. The major effect of this law derives from its authorization of interstate branching. Given the consolidation that has previously occurred in states where branching laws were already liberalized, banking organizations are expected to make extensive use of this authorization.

This study documents the changes in the geographic scope, structure and concentration of the U.S. banking and thrift industries that have occurred over the past decade. Prospects for the continuation of these trends are analyzed from a variety of perspectives. Finally, the study attempts to identify the effect of increasing consolidation in banking on the Federal Deposit Insurance Corporation's supervisory activities.

The Past and Present

For most of the nation's history, state boundaries controlled and curtailed the growth of individual banking organizations. In most instances, a U.S. banking organization could not establish domestic deposit-taking offices outside of the state where its home office was located. Moreover, its ability to expand within its home state was often limited. One result of this situation was a decentralized banking industry with numerous participants and protected geographic markets.

Over the brief period of little more than a decade, however, the U.S. banking industry has undergone what could be called a structural change of seismic proportions.1 State banking barriers have dropped quickly and significantly. At midyear 1984, 33 percent of the nation's banking assets were controlled by bank and thrift organizations with operations in two or more states. By midyear 1995, the proportion had grown to 67 percent, representing two-thirds of the nation's banking assets. A major consequence of the rise of interstate banking has been consolidation and concentration in the industry. The number of banking organizations has declined, and the proportions of banking assets and deposits controlled by larger banking organizations have risen.

The growth of interstate banking and the accompanying industry consolidation has been propelled by marketplace forces that do not recognize political borders.2 In the decades following World War II, technological changes in communications and data processing eroded much of the common ground that banking markets and political boundaries may once have shared. Beginning in the late 1970s and early 1980s, a number of states acknowledged the changing economics of banking by allowing the creation and development of interstate bank holding companies companies that own banks in two or more states. The state laws varied considerably. Some of the states acted individually. Other states required reciprocity an out-of-state bank holding company could acquire an in-state bank only if the out-of-state holding company's home state granted similar acquisition privileges to holding companies in the target state. Still other states entered into reciprocal compacts with neighboring states. Some state laws, particularly those enacted pursuant to so-called "compacts," limited permissible out-of-state entrants to those from the neighboring geographic region.




                                      Table 1

               State Elections Under the Interstate Branching Provisions
                       of the Riegle-Neal Act April 30, 1996

States Opting-In Prior to June 1, 1997 (24):

Alaska            Idaho            Mississippi         North Carolina       Utah
Arizona           Indiana          Nevada              Oregon               Vermont
California        Maine            New Jersey          Pennsylvania         Virginia
Connecticut       Maryland         New Mexico          Rhode Island         Washington
Delaware          Michigan         New York            South Dakota

States Opting-In on June 1, 1997 Trigger Date (11):

Alabama          Illinois          Oklahoma
Florida          Minnesota         Tennessee
Georgia          New Hampshire     West Virginia
Hawaii           North Dakota

State Opting Out:
Texas (sunsets September 2, 1999)
Source: The American Banker

Any uncertainties regarding state initiatives to remove barriers to bank holding company expansion across state lines were eliminated in 1985. In its decision in Northeast Bancorp v. Board of Governors of the Federal Reserve System, 472 U.S. 159, the U.S. Supreme Court upheld the ability of the states to reduce selectively, under the Bank Holding Company Act, restrictions on entry by out-of-state holding companies.

In 1994, Congress in the Riegle-Neal Interstate Banking and Branching Efficiency Act ("the Riegle-Neal Act"), Pub. L. 103328, added a federal element to the states' initiatives on interstate banking. Under the Riegle-Neal Act, most remaining state barriers to bank holding company expansion were removed effective September 29, 1995. Holding company growth, however, is restrained by explicit, statutory deposit concentration limits: a ten percent nationwide limit and a 30 percent statewide limit.3

The Riegle-Neal Act also authorizes a previously unused interstate expansion alternative for banks branching.4 Beginning June 1, 1997, banks may merge across state lines, a process that would result in the offices of one bank becoming branches of the other. Interstate branching through merger is subject to the same concentration limits as are interstate acquisitions by bank holding companies. States may elect to either prohibit or authorize interstate branching through mergers prior to June 1, 1997. States may also elect to authorize de novo interstate branching, or entry from out of state by acquisition of one or more existing branches. The status of state elections as of April 30, 1996, is summarized in Table 1.

Speculation on the impact of the Riegle-Neal Act requires an awareness of the interstate and consolidation trends that have been underway for at least the last ten years. The Riegle-Neal Act was not a precipitator of these trends. The Act, particularly its branching provisions, may shape and accelerate, the future course of these trends. To a large extent, however, the Riegle-Neal Act is merely an acknowledgment of what is being wrought by the marketplace under state laws. Consequently, the remainder of this section details the recent movements affecting the structure of the banking industry. A complete set of charts and data chronicling changes in the statistics of the banking industry is available from the authors.

The Growth of Interstate Banking

From midyear 1984 to midyear 1995, the number of multi-state banking organizations bank holding companies with banks in two or more states, and thrift institutions with offices in two or more states increased from 89 to 303 (Figure 1). When compared with the number of commercial banks and savings institutions in the nation (12,249 at midyear 1995), the number of multi-state organizations might seem small. The low number is misleading, however. Together, these multi-state organizations held 67 percent of the combined assets of the nation's commercial banks and thrifts at midyear 1995 up from 33 percent in 1984 and 59 percent of the nation's domestic deposits up from 23 percent in 1984 (Figure 1).

NUMBER OF MULTI-STATE ORGANIZATIONS

The states have embraced interstate banking with varying degrees of enthusiasm, but no state has avoided it entirely. In every state, some proportion of deposits is held in offices owned ultimately by out-of-state banking organizations. At year-end 1995, the average proportion of state deposits held by out-of-state organizations was 27.6 percent, the median was 28.8 percent, and the range stretched from 1.2 percent for North Carolina to 95.7 percent for Arizona (Figure 2). The five states, including the District of Columbia, with the largest percentages of deposits held by out-of-state organizations were: Arizona, 95.7 percent; Nevada, 70.6 percent; Wyoming, 68.2 percent; the District of Columbia, 64.7 percent; and Colorado, 61.0 percent.

Shares of Deposits Held by Out-of-State Organizations, by State

It should be noted that measuring a state's involvement in the interstate banking movement by the percentage of in-state deposits controlled by out-of-state organizations can be misleading. For example, only 1.2 percent of North Carolina's deposits are in offices of out-of-state organizations. Yet because several bank holding companies headquartered in North Carolina are among the leading multi-state banking organizations and have substantial presences in other states, North Carolina could certainly not be considered a bystander in the interstate banking movement.

Banking Industry Consolidation

A variety of statistics show a consolidating banking industry. The consolidation has been due to a large number of exits from the industry mostly in the form of mergers and acquisitions among healthy institutions but also in the form of bank failures coupled with only a small number of entrants. From 1984 to the end of the first quarter of 1996, the number of commercial banks declined 32 percent, from 14,483 to 9,841. The number of savings institutions declined 41 percent, from 3,418 to 2,005. The number of bank holding companies declined seven percent, from 5,707 to 5,305. The number of banking organizations bank holding companies and independent banks and thrifts, perhaps the most meaningful tabulation declined 36 percent, from 14,887 to 9,481(Figure 3).

Declining numbers of institutions do not necessarily equate to a declining industry. During the same period that the numbers of institutions were declining, 1984 to the end of the first quarter of 1996, in nominal terms5 the combined assets of commercial banks and savings institutions grew 46 percent, and domestic deposits grew 28 percent (Figure 4).

ASSETS AND DEPOSITS OF COMMERCIAL BANKS AND SAVINGS INSTITUTIONS



                                                              Table 2
                               Percentages of Assets and Deposits in Independents and Holding Companies

                              12/84  12/85  12/86  12/87  12/88  12/89  12/90  12/91  12/92  12/93  12/94 12/95  3/96
                                                          Percent of Total Assets
Holding Companies

 Multibank                    46.54  49.61  51.61  51.93  51.01  53.38  55.67  57.36  58.79  61.07 64.04  66.65  66.86
 One-Bank                     15.52  13.47  11.83  11.57  11.93  12.56  13.83  14.91  15.40  15.27 14.31  13.27  13.22
 IndependentBanks/Thrifts     37.94  36.93  36.56  36.56  37.06  34.06  30.50  27.73  25.81  23.70 21.65  20.08  19.92

                                                     Percent of Total Domestic Deposits

Holding Companies

 Multibank                    38.06  41.42  44.68  45.83  46.23  48.05  50.90  51.96  53.39  55.01 57.16  59.45  59.71
 One-Bank                     17.37  15.71  14.11  13.57  13.92  14.45  15.59  16.82  17.45  17.76 17.62  16.97  16.94
 IndependentBanks/Thrifts     44.57  42.87  41.21  40.59  39.85  37.50  33.51  31.22  29.15 27.23  25.21  23.58  23.35
 

The decline in the numbers of banks and savings institutions reflects a shift toward the holding company form of organization. As can be seen in Table 2, the proportion of depository institution assets controlled by holding companies both one-bank and multibank grew from 62 percent at year-end 1984 to 80 percent as of March 31, 1996. Similarly, the proportion of domestic deposits controlled by holding companies grew from 55 percent to 77 percent. The proportion of banks and thrifts in holding company structures grew from 49 percent to 65 percent (Figure 5).

BANKS AND THRIFTS IN HOLDING COMPANIES

In contrast to the declining numbers of banking organizations, the number of banking offices remained fairly constant through 1990, as branch offices proliferated. The number of bank and thrift offices rose from 81,000 in 1984 to 87,000 in 1990. Subsequently, they have declined 6.7 percent, to 81,000 as of March 31, 1996 (Figure 6).

NUMBER OF BANKS AND THRIFT OFFICES

There are three main factors responsible for the net decline of 5,931 commercial banks and thrifts during the period 1985 to 1995 (Figure 7). First, mergers and acquisitions that have not involved federal assistance have accounted for most of the consolidation among commercial banks and savings institutions over the past decade. From the end of 1985 through 1995, more than 6,000 commercial banks and savings institutions have been absorbed through unassisted mergers. Second, over the same period, more than 2,400 insolvent banks and thrifts have been closed or merged into healthy institutions with federal assistance. Third, there have been 2,554 new commercial banks and savings institutions chartered.

Banking Industry Concentration

A consolidating industry can be a concentrating industry. The number of banking organizations controlling 25 percent of domestic deposits declined from 42 at year-end 1984 to 13 at the end of the first quarter of 1996 (Figure 8). Similarly, the number controlling 50 percent of domestic deposits declined from 242 to 61, and the number controlling 75 percent of domestic deposits declined from 1,314 to 466. Another way to view the concentration of banking is to note that at the end of the first quarter of 1996, five percent of the nation's banking organizations 501 companies held 75 percent of domestic deposits.

NEW CHARTERS, CLOSED BANKS, AND MERGERS
CONCENTRATION TRENDS

With increased consolidation, will antitrust problems become a major concern in banking?6 The Riegle-Neal Act addresses this issue through state and national deposit concentration limits that reduce the likelihood of antitrust problems developing. These limits are 30 percent of a state's deposits and ten percent of the nation's deposits. With certain exceptions, an application by a banking organization for an interstate merger or acquisition cannot be approved if the effect would be to exceed one of these limits. As of the first quarter of 1996, the banking organization with the largest proportion of the nation's domestic deposits was BankAmerica Corporation, with 3.62 percent, well below the ten percent limit (Table 3). Banking organizations in six states exceeded the 30-percent state limit, and 13 other banking organizations each held more than 20 percent of a state's deposits (Table 4). Concentration limits apply only as a condition of approval for interstate merger or branching transactions and not to intrastate transactions.

Fall of Intrastate Barriers

Other legal changes that have received less notice than the lifting of interstate barriers to bank expansion are the easing of geographic barriers within states. Over the last ten years, a number of states have removed or reduced restrictions within their borders on mergers and branching by banks (Figure 9). The resultant increase in freedom to expand within these states and to adopt preferred organizational structures has been a major contributor to the industry consolidation and concentration trends. The 16 states that adopted statewide branching since 1984 have accounted for 67.9 percent of the net reduction in commercial banks and savings institutions during that time.



                    Table 3
 Banking Organization With the Largest Percentages
         of National Domestic Deposits
              as of March 31, 1996
 
Banking Organization                    Percent

BankAmerica Corp.                       3.62
NationsBank Corp.                       2.94
Chase Manhattan Corp.*                  2.93
First Union Corp.                       2.74
Banc One Corp.                          2.12
Citicorp                                1.57
Fleet Financial Group                   1.49
First Interstate Bancorp.               1.47
First Chicago NBD Corp.                 1.38
PNC Bancorp.                            1.37

* Chemical Banking Corporation and Chase Manhattan Corporation merged April 1, 1996.

Sources:  Bank Summary of Deposits, Thrift Branch Office
Survey, FRB NIC Database, FDIC DRS RIS Database


Recent Merger and Acquisition Activity

A number of mergers and acquisitions among large banking organizations were announced in 1995. The total number of transactions announced during the year was 443.7 The amount of assets in the institutions to be acquired totaled $488 billion, far exceeding the amount of assets in acquired institutions in any previous year (Table 5). The next highest year was 1991 when the assets in acquired institutions totaled $297 billion. A variety of reasons may help to explain the unprecedented merger activity among very large banks. Through July 1996, 229 transactions have been announced with assets in institutions to be acquired totaling $164 billion. The largest transaction announced in 1996 involved the acquisition of First Interstate Bancorp by Wells Fargo and Company with seller's assets of $58 billion.

Favorable Environment. The legal environment is now more permissive. As has been discussed, the Riegle-Neal Act allows bank holding companies more freedom to acquire banks across state lines than was possible under the existing state authorizations. At the same time, there are few potential acquisitions that would be precluded by the deposit concentration limitations specified in the new law.



                       Table 4
    States Where an Out-of-State Banking Organization Holds
    More Than 20 Percent of the Domestic Deposits in a State,
                        as of June 30, 1995

State                    Banking Organization            Percent

Rhode Island            Royal Bank of Scotland            33.28
Arizona                 Banc One Corp.                    31.05
Nevada                  First Interstate BancCorp.        25.44
Nevada                  BankAmerica Corp.                 25.30
Idaho                   First Security Corp.              26.13
Arizona                 BankAmerica CorP.                 27.47
Washington              Bank America Corp.                21.95
South Dakota            Citicorp                          21.26
New Mexico              Boatmen's Bancshares              21.96
Maine                   KeyCorp.                          20.73
North Dakota            First Bank System                 20.89
Wyoming                 NorWest Corp.                     27.71
 
         States Where Banking Organization Holds More Than20
          Percent of the Domestic Deposits in Its Own State,
                         as of June 30, 1995

State                    Banking Organization            Percent

Alaska                  National BancCorp of Alaska       41.25
Idaho                   West One BancCorp.                34.09
Rhode Island            Fleet Financial Group             33.74
Hawaii                  BancCorp Hawaii                   30.52
Utah                    First Security Corp.              30.10
Oregon                  US BancCorp.                      28.85
Hawaii                  First Hawaiian                    27.98
District of Columbia    Riggs National Corp.              26.55
Alaska                  First National Bank of Anchorage  22.23
California              BankAmerica Corp.                 20.90
Minnesota               Norwest Corp.                     20.69
Minnesota               First Bank System                 20.37
Utah                    Zions BancCorp.                   20.22
Delaware                MBNA Corp.                        22.21

Sources:  Bank Summary of Deposits, Thrift Branch Office
Survey, FRB NIC Database, FDIC DRS RIS Database


The economic climate also favors mergers and acquisitions. Low interest rates and an improved economy have combined to push bank profits to record levels. This, in turn, has boosted stock prices, giving acquirers more purchasing power. High stock prices have facilitated "poolings" in which the acquirer trades its stock for the stock of the selling company. Of the 443 transactions announced in 1995, 177 were cash-only purchases, and 255 included stock trades.8 Also, equity capital ratios have reached their highest level in 40 years. Historically, high capital levels have provided more leveraging capability, allowing companies with excess capital to grow their assets through acquisitions.

STATE BRANCHING LAWS


                                         Table 5
                     Bank and Thrift Merger and Acquisition Announcements,
                                  1989 through August 5, 1996
                                  (Dollar Amounts in Billions)
 

       Announced                                             Completed
   Mergers and Acquisitions                            Mergers and Acquisitions
                                 
                                      Number    Percent of  Sellers'   Percent of   Value     Percent of
                                        of       Announced  Assets of   Announced      of      Announced
         Number   Sellers'    Deal     Deals      Deals     Completed     Deals    Completed    Deals
Year   Announced   Assets    Value   Completed  Completed     Deals       Assets     Deals     
Value
 
1996      229      163.9     $23.7       35       15.28%      $69.8       42.59%     $14.0      59.07%
1995      443      488.0      63.2      373       84.20       482.6       98.89       62.4      98.81
1994      565      190.1      22.4      523       92.57       181.9       95.69       21.2      94.78
1993      477      175.4      23.5      447       93.71       169.0       96.37       22.5      95.69
1992      399      181.0      16.3      357       89.47       159.3       87.99       15.3      93.51
1991      305      296.7      22.1      274       89.84       291.3       98.21       21.7      98.41
1990      216       87.4       4.6      168       77.78        36.6       41.84        3.1      68.37
1989      201      115.2      11.5      173       86.07       103.3       89.62       10.5      91.58

*1995 Sellers' Assets and Deal Value do not include theannounced merger of First Bank, Inc. and
First Interstate Bancorp.
(seller assets of $55 billion and deal value of $10.7 billion). This deal was terminated.  The 1996
Sellers' Assets include 
the Wells Fargo acquisition of First Interstate, which was completed on April 1, 1996.
Note:  Run date for 1996 and 1995 data is 8/5/96.  Run date for 1989 - 1994 data is 7/30/96.
Source:  SNL Securities


Motivations for Sellers. Sellers have an opportunity to lock in high stock prices. Bank stock prices have risen since 1991, reflecting three consecutive years of record earnings by the commercial banking industry. Various bank-stock indexes show that prices continued to increase during 1995. Many acquisitions announced in 1995 were priced at a high premium over book value. The average price-to-book value ratio for acquisitions has increased in each of the last four years. According to data compiled by SNL Securities, the average price-to-book ratio for banks and thrifts acquired during 1995 was 169 percent.

Some banks may choose to sell to a friendly purchaser to avoid the possibility of a hostile takeover in the future. Many of the target companies have fully recovered from asset-quality problems and have clean balance sheets. Some companies may opt to sell instead of trying to expand in a slow-growth industry.

Motivations for Buyers.Some of the recent transactions involve institutions that each predominantly operate in the same market. Operating efficiencies and product synergies are cited as motivations where branch structures or product lines overlap. Acquirers in within-market transactions may be seeking to protect today's high profits through cost-cutting and increased market share.

A number of the announced transactions expand the acquirer's geographic and product markets. Inter-market transactions may be motivated by the desire to diversify sources of income and risks. Transactions may also be undertaken for defensive reasons: larger banking companies have fewer potential acquirers.


                                             Table 6
                  Number of FDIC-Insured Commercial Banks and Savings Institutions,
                                       by Asset Size*
Yr./         Less than    $100 Million to   $1Billion to   $5 Billion to   $10 Billion
Qtr.        $100Million     $1Billion       $5Billion      $10 Billionor       More
                                                                                         TOTAL
                %of              %of             %of             %of              %of
         No.   Total      No.   Total      No.  Total      No.  Total       No.  Total
 
96:1   7,480   63.1     3,787   32.0       406   3.4       86   0.7         87   0.7     11,846
95:4   7,568   63.2     3,820   31.9       414   3.5       78   0.7         90   0.8     11,970
95:3   7,754   64.0     3,789   31.3       395   3.3       92   0.8         82   0.7     12,112
95:2   7,930   64.7     3,759   30.7       388   3.2       92   0.8         80   0.7     12,249
94:4   8,254   65.5     3,792   30.1       389   3.1       93   0.7         74   0.6     12,602
93:4   8,837   66.8     3,827   28.9       405   3.1       87   0.7         64   0.5     13,220
92:4   9,401   67.9     3,884   28.0       426   3.1       82   0.6         59   0.4     13,852
91:4   9,982   68.9     3,921   27.1       435   3.0       86   0.6         58   0.4     14,482
90:4  10,576   69.8     3,967   26.2       470   3.1       85   0.6         60   0.4     15,158
89:4  11,177   70.8     3,973   25.2       499   3.2       88   0.6         59   0.4     15,796
88:4  11,911   71.9     3,985   24.1       511   3.1       92   0.6         62   0.4     16,561
87:4  12,676   73.1     4,025   23.2       507   2.9       71   0.4         57   0.3     17,336
86:4  13,221   74.0     4,049   22.7       484   2.7       75   0.4         47   0.3     17,876
85:4  13,631   75.6     3,836   21.3       462   2.6       68   0.4         36   0.2     18,033
84:4  13,807   77.1     3,594   20.1       409   2.3       59   0.3         32   0.2     17,901
84:1  14,034   78.5     3,399   19.0       375   2.1       50   0.3         28   0.2     17,886


                  Assets of FDIC-Insured Commercial Banks and Savings Institutions,
                                            by Asset Size*
Yr./     Less than     $100 Million to     $1Billion to    $5 Billion to         $10 Billion
Qtr.   $100 Million      $1 Billion         $5 Billion      $10 Billion             orMore
                                                                                                 TOTAL
                %of                %of                %of              %of                %of
      Assets   Total    Assets    Total    Assets    Total  Assets    Total    Assets    Total
 
96:1 $341,862   6.4    $971,161   18.2    $869,835   34.2  $596,911   11.2  $2,544,972   47.8   $5,324,741
95:4  344,564   6.5     975,148   18.3     897,196   34.9   549,033   10.3   2,572,479   48.2    5,338,420
95:3  348,932   6.6     973,733   18.5     844,973   34.5   639,911   12.2   2,446,431   46.6    5,253,980
95:2  354,785   6.8     962,844   18.6     836,752   35.0   644,157   12.4   2,389,397   46.1    5,187,935
94:4  366,345   7.3     969,139   19.3     850,211   39.3   671,097   13.4   2,162,509   43.1    5,019,301
93:4  388,472   8.3     975,725   20.7     883,409   48.2   626,293   13.3   1,833,181   38.9    4,707,080
92:4  401,966   8.9     996,429   22.0     927,719   56.9   580,012   12.8   1,629,763   35.9    4,535,889
91:4  412,705   9.1   1,008,979   22.2     964,673   62.1   604,639   13.3   1,552,646   34.2    4,543,642
90:4  423,960   9.1   1,020,390   22.0   1,034,167   66.1   605,861   13.0   1,564,271   33.7    4,648,649
89:4  436,058   9.2   1,028,182   21.8   1,093,290   71.5   639,324   13.5   1,530,020   32.4    4,726,874
88:4  457,330   9.7   1,037,334   21.9   1,096,655   71.9   620,073   13.1   1,525,893   32.2    4,737,285
87:4  477,774  10.6   1,031,801   22.9   1,073,738   74.8   483,646   10.7   1,435,100   31.9    4,502,059
86:4  490,312  11.3   1,038,162   24.0     992,492   76.9   515,354   11.9   1,291,245   29.8    4,327,565
85:4  489,922  12.3     985,035   24.7     936,800   84.5   472,688   11.8   1,108,881   27.8    3,993,326
84:4  484,170  13.3     934,770   25.6     827,910   82.5   403,091   11.0   1,003,176   27.5    3,653,117
84:1  482,454  14.3     874,915   25.9     746,222   79.5   332,415    9.9     938,115   27.8    3,374,121

*Excludes institutions operating in RTC conservatorship.
Source:  FDIC Division of Research and Statistics, RIS Database


Consummation of the Transactions. To achieve cost savings, acquirers may decide to convert newly acquired subsidiaries to branches, and to close branches where there is overlap. The transactions require approval by stockholders and regulators. Completion of an announced transaction reduces the number of independent banking organizations but may not necessarily lead, immediately or ultimately, to a reduction in the number of banks. Whether the number of commercial banks or savings institutions declines after bank holding companies combine depends on whether the holding company subsidiaries are also combined. While there has been considerable consolidation activity following the completion of mergers and acquisitions in the past, state and federal branching restrictions have limited the decline in the number of banks. The Riegle-Neal Act, however, will allow bank holding companies considerable freedom to merge banking subsidiaries across state lines and to convert acquired institutions into branches.

The full effect of the announced transactions on industry structure data will not appear for some time. As of August 5, 1996, 373 of the 443 announced transactions have been completed; 21 have been terminated. The largest announced deal of 1995 involved Chemical Banking Corp. acquiring Chase Manhattan Corp. with assets of approximately $118 billion, or nearly 24 percent of total assets covered by all 1995 announcements. This deal was completed on April 1, 1996.

The Future

It is fairly safe to predict that the interstate banking and industry consolidation trends have not run their course. These trends had been proceeding apace under previous law, and now have the additional spur of the Riegle-Neal Act. The real uncertainties regarding the future concern how much further the trends are likely to proceed and how their impacts may differ regionally and from state to state. In the following discussion, several approaches are taken to these issues.

Before the scenarios are presented, however, a caveat is in order. The expansion and consolidation opportunities opened by the Riegle-Neal Act will not necessarily be pursued by all, or even a majority, of banking organizations. This might be particularly the case with interstate branching. For a variety of managerial and competitive reasons, some banking organizations may prefer to conduct interstate operations through holding company structures rather than through branching systems. That is, instead of converting all of its banking offices to branches of a single bank, a holding company might want to maintain one or more legally distinct bank subsidiaries in states or banking markets in which it operates. Some multibank holding companies currently operate more than one commercial bank subsidiary within a single state even when branching laws would permit those in-state banks to be merged.

MINIMALIST APPROACH ON A STATE-BY-STATE BASIS

A banking organization may perceive competitive advantages in having community banks with local management, or in retaining the distinct identities and names of acquired banks. A banking organization may prefer to operate different businesses, such as credit cards or mortgage lending, out of separately chartered institutions. Some banking organizations may not agree that potential cost savings from converting banks into branches outweigh the advantages of operating multiple banks. Some banking organizations may choose to explore the possibilities of the "affiliate as agent" provision in Section 101 of the Riegle-Neal Act. This provision permits affiliated banks to receive deposits, renew time deposits, and collect loan payments for one another.

The point is that the Riegle-Neal Act only increases the structural alternatives available to banking organizations. Neither it nor the marketplace mandates that all banking organizations select an identical structure.

A Minimalist Approach

At midyear 1995, there were 303 banking organizations with interstate banking operations, representing 1,605 commercial banks and savings institutions with combined assets of $3.58 trillion. If each of these multi-state companies were to consolidate into a single lead bank or thrift and convert all other subsidiaries to branch offices, and no other interstate or intrastate transactions were to occur, the net reduction would be 1,302 institutions. The number of banks and thrifts would decline to 10,947, a reduction of 11 percent from the midyear 1995 total of 12,249 institutions (Table 6). For the FDIC, the net reduction in supervised institutions would be 322 out of 6,635.

A recent study finds that, due to the very favorable industry conditions since 1990, many banking organizations appear to have the strong performance and capitalization necessary to take advantage of future acquisition opportunities.9 Although noting that it is difficult to know the extent to which future merger activity will be stimulated by the Riegle-Neal Act, the study finds that mergers and consolidations have risen in the past when state restrictions upon intrastate branching were relaxed.

O'Keefe states that it is difficult, if not impossible, to predict which banks will combine operations through mergers, that is, to predict pairs of targets and acquirers. However, analyses of the financial characteristics of past target banks and acquirers show that one may be able to predict which banks are likely merger targets, and acquirers may then be used to infer the level of future merger activity.

An Extrapolation Approach

In a paper published in April 1995, Daniel Nolle, an economist with the Office of the Comptroller of the Currency, used an extrapolation approach to arrive at the total number of U.S. commercial banks that might exist in the year 2001.10 Assuming that recent patterns of structural changes closings, de novo charters, thrift conversions, intra-company mergers, and inter-company mergers persist, Nolle arrives at a figure of 8,798 commercial banks at year-end 2000, a 19-percent reduction from 10,870 commercial banks at the end of 1993. Then, to allow for the impact of interstate branching, he increased the assumed rates of intra- and inter-company mergers, resulting in 7,787 commercial banks at the end of the year 2000, a 28-percent reduction over seven years. By way of comparison, if one simply takes the actual reduction in the number of commercial banks in 1993 504 banks and multiplies that number by seven (for the years 1994 through 2000), the result is a net reduction of 3,528 banks, or 32 percent.

CHANGES IN THE NUMBER OF FDIC-SUPERVISED INSTITUTIONS

The Future of the Community Bank

A noteworthy aspect of the consolidation process over the past decade has been a decline in the number of small institutions. For example, there has been a 45-percent reduction in the number of banks and thrifts with less than $100 million in assets since 1984 (Table 5). The decline in the number of these small institutions accounts for the entire decrease in the number of insured commercial banks and savings institutions over that period. Given that the imminent arrival of interstate branching is expected to add momentum to the trends of industry consolidation, it may reasonably be asked whether the small community bank has a viable place in the future structure of the industry. This question is of interest to the FDIC in its supervisory role; the FDIC is the primary federal regulator for two out of every three insured institutions with less than $100 million in assets.

Four factors have contributed to the decline in the number of the smallest institutions. The most significant has been the number absorbed by unassisted mergers. Approximately 4,500 small banks and thrifts have been merged into larger institutions since 1984. A second factor has been growth. Since 1984, about 2,100 institutions have increased their assets above the $100-million asset-size threshold. Failures are the third factor. From 1985 through 1995, there were 1,599 failures of commercial banks and savings institutions with assets of less than $100 million. Finally, the number of new charters has declined, and new charters are issued most often for smaller institutions. Although 2,424 new charters were issued from 1985 through 1995, the number has trended steadily downward. In 1985, there were 598 new commercial banks and thrifts chartered. By 1994, the number of new charters had declined to 75. As more institutions are removed from the ranks of the smallest, fewer new institutions are replacing them.

Over half (61.4 percent) of the net reduction in the smallest institutions since 1984 has occurred in the 16 states that had restrictive branching laws but have since removed those restrictions. Branching restrictions tend to increase the number of new charters, which serve as substitutes for de novo branches. For example, four out of every five new commercial bank charters in 1985 occurred in one of the 31 states that restricted branching at that time; almost one-third were in a single unit banking state, Texas. The lifting of these restrictions has spurred the subsequent pace of merger and consolidation activity as more multibank holding companies are able to convert subsidiaries into branches.

If the decline in the number of smaller institutions is all that is considered, the future prospects of this segment of the banking industry might seem unpromising. The picture painted by the declining number, however, is incomplete. Smaller banks still are the most numerous category of institution. As of March 31, 1996, there were nearly 7,500 commercial banks and savings institutions with less than $100 million in assets, accounting for two out of every three FDIC-insured depository institutions. More than 95 percent of all insured institutions have less than $1 billion in assets. Although institutions with less than $100 million in assets together represent only 6.4 percent of industry assets, they held 22 percent of all loans to small businesses. 11 They operate in over 4,000 cities and towns in which there are no offices of larger banks, providing essential financial services to consumers and businesses.


                              Table 7
        Number of FDIC-Insured Commercial Banks and Savings
            Institutions according to Primary Regulator*
            FDIC            OCC            FRB           OTS**     TOTAL
Yr./            %of            %of            %of           %of
Qtr.     No.   Total    No.   Total    No.   Total   No.   Total
 
96:1   6,561   55.4   2,822   23.8   1,047   8.8   1,416   12.0   11,846
95:4   6,637   55.4   2,855   23.9   1,042   8.7   1,436   12.0   11,970
95:3   6,726   55.5   2,892   23.9   1,034   8.5   1,460   12.1   12,112
95:2   6,832   55.8   2,946   24.1     994   8.1   1,477   12.1   12,249
94:4   7,010   55.6   3,075   24.4     975   7.7   1,542   12.2   12,602
93:4   7,278   55.1   3,304   25.0     969   7.3   1,669   12.6   13,220
92:4   7,432   53.7   3,593   25.9     955   6.9   1,872   14.0   13,852
91:4   7,606   52.5   3,790   26.2     974   6.7   2,112   14.6   14,482
90:4   7,811   51.5   3,979   26.3   1,009   6.7   2,359   15.6   15,158
89:4   7,969   50.4   4,175   26.4   1,034   6.5   2,618   16.6   15,796
88:4   8,182   49.4   4,353   26.3   1,059   6.4   2,967   17.9   16,561
87:4   8,462   48.8   4,623   26.7   1,092   6.3   3,159   18.2   17,336
86:4   8,679   48.6   4,871   27.2   1,094   6.1   3,232   18.1   17,876
85:4   8,742   48.5   4,959   27.5   1,070   5.9   3,262   18.1   18,033
84:4   8,793   49.1   4,902   27.4   1,056   5.9   3,150   17.6   17,901
84:1   8,886   49.7   4,790   26.8   1,059   5.9   3,151   17.6   17,886

 
        Assets of FDIC-Insured Commercial Banks and Savings institutions
                            (Dollars in Millions)
            FDIC               OCC              FRB              OTS**
Yr./            %of                %of              %of               %of
Qtr.    Assets  Total     Assets  Total    Assets  Total    Assets   Total      TOTAL

96:1 $1,174,513  22.1  $2,398,414  45.0  $988,962  18.6   $762,851   14.3  $5,324,740
95:4  1,182,984  22.2   2,400,831  45.0   983,630  18.4    770,973   14.4   5,338,418
95:3  1,181,091  22.5   2,319,184  44.1   978,635  18.6    775,069   14.8   5,253,979
95:2  1,166,646  22.5   2,299,720  44.3   943,912  18.2    777,657   15.0   5,187,935
94:4  1,144,169  22.8   2,255,941  44.9   845,067  16.8    774,124   15.4   5,019,301
93:4  1,104,868  23.5   2,100,566  44.6   726,871  15.4    774,775   16.5   4,707,080
92:4  1,080,667  23.8   2,004,940  44.2   638,233  14.1    812,049   17.9   4,535,889
91:4  1,070,232  23.6   1,985,322  43.7   592,893  13.0    895,195   19.7   4,543,642
90:4  1,073,242  23.1   1,987,777  42.8   557,788  12.0   1,029,842  22.2   4,648,649
89:4  1,020,819  21.6   1,978,226  41.9   540,830  11.4   1,186,999  25.1   4,726,874
88:4    984,188  20.8   1,850,460  39.1   534,256  11.3   1,368,381  28.9   4,737,285
87:4    914,052  20.3   1,773,470  39.4   529,563  11.8   1,284,974  28.5   4,502,059
86:4    848,164  19.6   1,743,902  40.3   533,196  12.3   1,202,303  27.8   4,327,565
85:4    759,757  19.0   1,632,586  40.9   495,721  12.4   1,105,262  27.7   3,993,326
84:4    690,488  18.9   1,498,179  41.0   455,728  12.5   1,008,722  27.6   3,653,117
84:1    654,124  19.4   1,399,298  41.5   438,743  13.0     881,956  26.1   3,374,121


* Excludes institutions operating in RTC conservatorship.
** FHLBB prior to the enactment of FIRREA on August 9,1989.
Source:  FDIC Division of Research and Statistics, RIS Database

Smaller institutions have demonstrated the ability to thrive in both large and small markets. Indeed, smaller institutions have flourished in states such as California, New York and Virginia where statewide branching has been allowed for many years. The recent performance of small banks and thrifts does not offer cause to doubt their future viability. In four of the last six years, and in four of the last six quarters through the first quarter of 1996, institutions with less than $100 million in assets have been more profitable than the industry average as measured by return on assets (ROA). In 1994, 1995, and through the first quarter of 1996, more than 95 percent of these institutions were profitable. More than half reported ROAs above 1.00 percent, and more than three-quarters had ROAs above 0.75 percent.

In summary, although the trend toward consolidation in banking appears likely to continue, data on bank performance suggest that the smaller banking organization, focused on service to a particular local community, taking advantage of competitive strengths resulting from that focus, can continue to prosper.

Impact on Supervision:

Background

In terms of numbers of institutions supervised, the consolidation process has affected all four federal regulators. As shown in Table 7, from the end of 1984 through the first quarter of 1996, the number of banks and thrifts supervised by the FDIC declined by 25 percent, from 8,793 to 6,561; the number of national banks supervised by the Office of the Comptroller of the Currency declined by 42 percent, from 4,902 to 2,822; the number of banks supervised by the Federal Reserve declined by one percent, from 1,056 to 1,047; and the number of savings institutions supervised by the Federal Home Loan Bank Board (FHLBB) and its successor, the Office of Thrift Supervision (OTS), declined by 55 percent, from 3,150 to 1,416.

CHANGES IN THE NUMBER OF 0CC-SUPERVISED INSTITUTIONS

As shown in Figures 11 through 14, different factors explain the decline in the number of institutions supervised by each regulator. Since the beginning of 1989 through 1995, the number of institutions supervised by the FDIC has declined by 1,334 (Figure 11). Nearly 1,900 FDIC-supervised institutions have been absorbed in unassisted mergers and consolidations (consolidations occur when multibank holding companies merge together their subsidiary banks). An additional 317 FDIC-supervised institutions failed and were closed. On the increase side, 434 new FDIC-supervised banks were chartered. A number of these new charters were issued in acquisitions of failing banks. During the same period, charter conversions resulted in 598 institutions switching to FDIC supervision from one of the other three federal regulators, and 374 FDIC-supervised institutions switching to another regulator, for a net gain to the FDIC of 224 institutions.

A large share of the institutions switching to FDIC supervision consisted of "Sasser" charter conversions by OTS-supervised savings associations.12 Since the passage of FIRREA in 1989, SAIF-member savings associations regulated by the OTS have been able to convert their charters and become state savings banks regulated by the FDIC where state law permits, or they can become commercial banks regulated by one of the three federal bank regulators. As of March 31, 1996, the FDIC supervised 233 SAIF-member "Sasser" savings banks and 57 SAIF-member "Sasser" commercial banks that previously had been savings associations supervised by the OTS.

The OCC has experienced a similar decline 1,317 banks since 1989 in the number of institutions it supervises (Figure 13). If this reduction is expressed as a percentage, it is more than twice the decrease experienced by the FDIC (-31.5 percent, as compared with -16.7 percent), because the OCC supervises a smaller number of banks. As with the FDIC, the reduction in the number of institutions supervised by the OCC since 1989 has been due primarily to unassisted mergers and consolidations. The addition of 253 new charters and the conversions of 171 existing charters to OCC supervision were offset by the loss of 309 national banks to failures and 280 national banks converting to state charters.

In contrast, there has been a slight increase in the number of banks supervised by the Federal Reserve. At year-end 1995, the Federal Reserve supervised 1,042 state-chartered member banks, eight more than at the end of 1989. Increases from new charters (70) and conversions from other charters (329) have been matched by conversions of state member banks to other charters (82) and by absorptions of Federal Reserve-supervised banks in mergers and consolidations (269). There have been 50 failures of state member banks since 1989, accounting for the net decline in banks under Federal Reserve supervision.

The most dramatic reduction in institutions under supervision has occurred at the OTS (Figure 14). Although the net decline of 1,182 OTS-supervised savings institutions is smaller than the declines for the FDIC or the OCC, it represents a 45.2-percent decrease. The substantial reduction in the number of OTS-supervised savings institutions was initially due to failures but more recently has resulted from mergers and "Sasser" charter conversions. Unlike the case with the other three federal supervisory agencies, the impact of these losses has not been cushioned by the addition of new charters or conversions from other charters. From the beginning of 1989 through the end of 1995, 761 OTS/FHLBB-supervised institutions failed.13 Another 502 institutions were absorbed by unassisted mergers and consolidations, while 370 savings associations converted to state savings banks supervised by the FDIC or commercial banks supervised by one of the three federal bank regulators. Only 89 new thrift charters were issued during this period.

CHANGES IN THE NUMBER OF FEDERAL RESERVE BOARD-SUPERVISED INSTITUTIONS

It is clear from these trends that the factors determining the number of institutions unassisted mergers and acquisitions, failures, new charters, and charter conversions have affected each of the agencies differently. As a result, each agency's share of institutions supervised has shifted. The FDIC's share has shown the greatest increase, rising from 49.1 percent of insured banks and thrifts in 1984 to 57.1 percent as of March 31, 1996 (Table 7). The OTS/FHLBB share experienced the greatest decrease, declining from 17.6 percent in 1984 to 12.0 percent at year-end 1995. During the same period, the OCC's share declined slightly, from 27.4 to 23.8 percent, and the Federal Reserve's share rose modestly, from 5.9 to 8.8 percent.

The shifts in shares of the number of institutions regulated can be largely explained by changes in the thrift industry. If only commercial banks are considered, the shares of the three bank regulatory agencies show little movement (Table 8). Between year-end 1984 and the end of the first quarter of 1996, the FDIC's share of the number of commercial banks supervised increased from 58.9 percent to 60.1 percent, and its share of industry assets under supervision shrank slightly, from 22.1 percent to 21.4 percent. The OCC's shares of institutions and assets supervised both showed small declines, while the Federal Reserve's shares both rose slightly.

CHANGES IN THE NUMBER OF OTS-SUPERVISED INSTITUTIONS

The portion of the thrift industry supervised by the OTS/FHLBB has decreased over the last ten years, while that of the FDIC has increased (Table 9). The decline in the OTS/FHLBB share is largely a result of financial difficulties experienced by thrifts in the 1980s. Much of the shift has occurred since the creation of the RTC in 1989, when large numbers of insolvent savings-and-loan associations began to be resolved. From August 1989 through July 1995, 745 insolvent OTS-supervised thrifts were resolved by the RTC. In addition, large numbers of OTS institutions have either been acquired without government assistance or have converted their charters and are now supervised by one of the other federal regulators. From the end of 1984 to the end of the first quarter of 1996, the OTS/FHLBB's share of thrifts supervised declined from 92.2 percent to 70.6 percent, while the FDIC's share rose from 7.8 percent to 29.4 percent. During this period, the OTS/FHLBB's share of thrift assets supervised declined from 88.2 percent to 75.1 percent, while the FDIC's share rose from 11.8 percent to 24.9 percent.

The shrinkage in the number of commercial banks during the past ten years has been accompanied by an increase in industry size as measured by total assets. All three banking regulators have experienced significant increases in assets under supervision since the end of 1984, even as the OTS/FHLBB experienced a decline (Table 7). Total assets under Federal Reserve supervision grew by 117 percent, while assets under FDIC supervision increased by 70 percent, and those under OCC supervision grew by 60 percent. Assets under OTS/FHLBB supervision declined by 24 percent. The three banking agencies all had minor increases in the share of assets supervised during this period. The FDIC's share rose from 18.9 percent to 22.1 percent; the OCC's share rose from 41.0 percent to 45.0 percent; and the Federal Reserve's share rose from 12.5 percent to 18.6 percent. The increases were at the expense of the OTS/FHLBB, which saw its share decline from 27.6 percent to 14.3 percent.


                     Table 8
        Number of FDIC-Insured Commercial Banks
            According to Primary Regulator
          FDIC            OCC             FRB
Yr./          %of            %of             %of
Qtr.   No.   Total    No.   Total     No.   Total   TOTAL
96:1   5,972   60.7   2,822   28.7    1,047   10.6    9,841
95:4   6,044   60.8   2,855   28.7    1,042   10.5    9,941
95:3   6,126   60.9   2,892   28.8    1,034   10.3   10,052
95:2   6,228   61.3   2,946   29.0      994   9.8    10,168
94:4   6,400   61.2   3,075   29.4      975   9.3    10,450
93:4   6,685   61.0   3,304   30.2      969   8.8    10,958
92:4   6,914   60.3   3,593   31.3      955   8.3    11,462
91:4   7,157   60.0   3,790   31.8      974   8.2    11,921
90:4   7,355   59.6   3,979   32.2    1,009   8.2    12,343
89:4   7,500   59.0   4,175   32.9    1,034   8.1    12,709
88:4   7,711   58.8   4,353   33.2    1,059   8.1    13,123
87:4   7,999   58.3   4,623   33.7    1,092   8.0    13,714
86:4   8,234   58.0   4,871   34.3    1,094   7.7    14,199
85:4   8,378   58.2   4,959   34.4    1,070   7.4    14,407
84:4   8,525   58.9   4,902   33.8    1,056   7.3    14,483
84:1   8,610   59.5   4,790   33.1    1,059   7.3    14,459
 

                Assets of FDIC-Insured Commercial Banks
                          (Dollars in Millions)
              FDIC                OCC                FRB
Yr./               %of                 %of               %of
Qtr.    Assets    Total     Assets    Total   Assets    Total     TOTAL

96:1   $920,960   21.4   $2,398,414   55.7   $988,962   23.0   $4,308,336
95:4    928,217   21.5    2,400,831   55.7    983,630   22.8    4,312,678
95:3    931,486   22.0    2,319,184   54.8    978,635   23.1    4,229,305
95:2    927,074   22.2    2,299,720   55.1    943,912   22.6    4,170,706
94:4    909,648   22.7    2,255,941   56.2    845,067   21.1    4,010,656
93:4    878,754   23.7    2,100,566   56.7    726,871   19.6    3,706,191
92:4    862,501   24.6    2,004,940   57.2    638,233   18.2    3,505,674
91:4    852,425   24.8    1,985,322   57.9    592,893   17.3    3,430,640
90:4    843,906   24.9    1,987,777   58.6    557,788   16.5    3,389,471
89:4    780,306   23.7    1,978,226   60.0    540,830   16.4    3,299,362
88:4    746,080   23.8    1,850,460   59.1    534,256   17.1    3,130,796
87:4    696,915   23.2    1,773,470   59.1    529,563   17.7    2,999,948
86:4    663,600   22.6    1,743,902   59.3    533,196   18.1    2,940,698
85:4    602,364   22.1    1,632,586   59.8    495,721   18.2    2,730,671
84:4    554,964   22.1    1,498,179   59.7    455,728   18.2    2,508,871
84:1    518,763   22.0    1,399,298   59.4    438,743   18.6    2,356,804
    
Source:  FDIC Division of Research and Statistics, RIS Database

Three points summarize the trends in regulatory responsibilities over the last decade. First, the decline in the number of supervised institutions began with a wave of failures in the 1980s extending into the early 1990s. At the same time there was an increase in the pace of unassisted mergers that is still continuing and a sustained decline in new chartering activity. Second, mergers have increased the average sizes of supervised institutions14 and have led to a greater concentration of industry assets. Supervisory responsibilities, as measured by assets under supervision, have increased at the three banking agencies. Third, except for the declines experienced by the OTS/ FHLBB, there has been little change so far among the three bank regulatory agencies in shares of institutions and assets supervised. This stability in bank regulators' shares will probably not continue in light of the recent trend in large company mergers. Major acquisitions announced during 1995 involve changes in ownership of 10.2 percent of all commercial bank and thrift assets.

                Table 9
    Number of FDIC-Insured Savings Institutions
          According to Primary Regulator*

            FDIC              OTS**
Yr./             %of                %of
Qtr.    No.     Total      No.     Total     TOTAL
 
96:1     589     29.4      1416     70.6      2,005
95:4     593     29.2      1436     70.8      2,029
95:3     600     29.1      1460     70.9      2,060
95:2     604     29.0      1477     71.0      2,081
94:4     610     28.3     1,542     71.7      2,152
93:4     593     26.2     1,669     73.8      2,262
92:4     518     21.7     1,872     78.3      2,390
91:4     449     17.5     2,112     82.5      2,561
90:4     456     16.2     2,359     83.8      2,815
89:4     469     15.2     2,618     84.8      3,087
88:4     471     13.7     2,967     86.3      3,438
87:4     463     12.8     3,159     87.2      3,622
86:4     445     12.1     3,232     87.9      3,677
85:4     364     10.0     3,262     90.0      3,626
84:4     268      7.8     3,150     92.2      3,418
84:1     276      8.1     3,151     91.9      3,427


        Assets of FDIC-Insured Savings Institutions
                   (Dollars in Millions)
               FDIC                   OTS**
Yr./                  %of                   %of
Qtr.     Assets      Total     Assets      Total       TOTAL

96:1     253,553     24.9      762,851     75.1     1,016,404
95:4     254,767     24.8      770,973     75.2     1,025,740
95:3     249,604     24.4      775,069     75.6     1,024,673
95:2     239,572     23.6      777,657     76.4     1,017,229
94:4     234,521     23.3      774,124     76.7     1,008,645
93:4     226,114     22.6      774,775     77.4     1,000,889
92:4     218,166     21.2      812,049     78.8     1,030,215
91:4     217,807     19.6      895,195     80.4     1,113,002
90:4     229,336     18.2    1,029,842     81.8     1,259,178
89:4     240,513     16.8    1,186,999     83.2     1,427,512
88:4     238,108     14.8    1,368,381     85.2     1,606,489
87:4     217,136     14.5    1,284,974     85.5     1,502,110
86:4     184,563     13.3    1,202,303     86.7     1,386,866
85:4     157,392     12.5    1,105,262     87.5     1,262,654
84:4     135,524     11.8    1,008,722     88.2     1,144,246
84:1     135,361     13.3      881,956     86.7     1,017,317

*  Excludes institutions operating in RTC conservatorship.
** FHLBB prior to the enactment of FIRREA on August 9, 1989.
Source:  FDIC Division of Research and Statistics, RIS Database

Table 6 illustrates how the drop in the number of smaller banks has coincided with an increase in the number of very large banks and the assets they hold. Between early 1984 and March 31, 1996, the number of banks and savings institutions with less than $1 billion in assets declined by almost one-third, from 17,433 to 11,267. During that period, their share of industry assets declined from 40.2 percent to 24.6 percent. In contrast, the number of institutions with more than $1 billion in assets increased from 453 to 579. The most significant increase in terms of industry asset share has taken place at the largest institutions. The number of institutions with over $10 billion in assets increased almost threefold, from 28 in 1984 to 87 as of March 31, 1996. The proportion of bank and thrift assets held by this relatively small number of large institutions increased from 28 percent to 48 percent.

Implications

Consolidation within multibank organizations may simplify some aspects of supervision by decreasing the number of federal regulators that have jurisdiction over a banking organization. For example, many bank holding companies have multiple bank subsidiaries. The regulator of each subsidiary is determined by the subsidiary's charter and, if the charter is from a state, the subsidiary's Federal Reserve membership status. Thus, each of the four federal bank and thrift regulators may supervise a portion of a multibank holding company. When banks or thrifts merge, the resultant institution has only one primary federal regulator. In the case of a holding company with national banks the resultant institution would have two federal regulators. Although interstate branching, to the extent it encourages such consolidation, may simplify federal jurisdictions, it will complicate the task of state bank supervisors. Branching across state lines will result in a number of banking organizations that must answer to more than one state authority.

Finally, attention to communications and information-sharing both within and between federal and state regulators will assume increasing importance as a nationwide banking system evolves and more institutions find themselves subject to multiple regulatory jurisdictions. Organizations as disparate as the Basle Committee on Bank Supervision and the Conference of State Bank Supervisors have recognized the need for regulatory agencies to communicate adequately with each other.



                                        Table 10
            Shifts of Federally Insured Depository Institutions Among Primary                    
              Federal Regulators If All Institutions Were Consolidated into
            Largest Institution Under the Top Holder (Regulatory High Holder)
                           (as of March 31, 1996; excludes IBAs)
                                                           Assets       % ofTotal
                                                Number   (Millions)    Number  Assets

Total                                           11,846   $5,324,740
Institutions regulated by FRB on 3/31/96         1,047      988,962    8.8%     18.6%
Institutions that would be regulated by FRB      1,083    1,135,190    9.1      21.3
 Current regulator
 FDIC                                               88       60,686
 FRB                                               895      860,960
 OCC                                                88      207,948
 OTS                                                12        5,595
Institutions regulated by FDIC on 3/31/96        6,561    1,174,513    55.4     22.1
Institutions that would be regulated by FDIC:    6,177      984,126    52.1     18.5
 Current regulator
 FDIC                                            5,987      954,937
 FRB                                                46        5,545
 OCC                                               116       17,608
 OTS                                                28        6,036
Institutions regulated by OCC on 3/31/96         2,822    2,398,414    23.8     45.0
Institutions that would be regulated byOCC:      3,219    2,501,691    27.2     47.0
 Current regulator
 FDIC                                              474      156,407
 FRB                                               981       20,984
 OCC                                             2,611    2,172,007
 OTS                                                36       52,293
Institutions regulated by OTS on3/31/96:         1,416      762,851    12.0     14.3
Institutions that would be regulated byOTS:      1,367      703,733    11.5     13.2
 Current regulator
 FDIC                                               12        2,483
 FRB                                                 8        1,473
 OCC                                                 7          849
 OTS                                             1,340      698,927
Institutions shifiting to a new regulator:       1,013      637,909     8.6     12.0

* Excludes insured branches of foreign banks.
Source: FDIC Division of Research and Statistics


The final chart, Table 10, shows how the balance among the regulators would shift if all bank holding companies were to merge all of their bank and thrift subsidiaries into the "lead" bank.15 It assumes that the largest subsidiary would retain its current charter and federal regulator. It is apparent that the consolidation process would bring many institutions under the supervision of new regulators. For example, 574 banks and thrifts that are currently regulated by the FDIC would be consolidated into "lead" banks supervised either by the Federal Reserve (88 banks), the OCC (474), or the OTS (12). At the same time, 190 banks that are currently regulated by the Federal Reserve (46), the OCC (116) or the OTS (28) would be consolidated into "lead" banks supervised by the FDIC.

Last Updated 7/12/1999 Questions, Suggestions & Requests