Trends in the concentration of bank deposits: the Northwest – interstate banking in the Twelfth Federal Reserve District—Oregon and Washington

Trends in the concentration of bank deposits: the Northwest – interstate banking in the Twelfth Federal Reserve District—Oregon and Washington – Statistical Data Included

Liz Laderman

Two major trends affecting the structure of the banking industry since the mid-1980s have been tremendous consolidation and the liberalization of interstate banking. Consolidation has unambiguously increased concentration at the national level. The effects on concentration in smaller geographic areas are more complicated. For one thing, mergers can involve interstate transactions, and a merger between banks in two states usually leaves both states, and their local banking markets, with the same number of banks. For another, antitrust enforcement, as well as market forces, tends to limit the impact of mergers on concentration in local markets.

This Letter looks at how bank consolidation has affected deposit concentration at the national level and in two key states in the Twelfth Federal Reserve District–Oregon and Washington. Both states have seen declines in the number of depository organizations, as well as a considerable degree of acquisition by out-of-state organizations. The analysis indicates that concentration has increased notably at the national level and for the state of Washington, but less so for Oregon. However, relatively few local markets within the states have become highly concentrated.

Trends in consolidation and interstate banking

The U.S. banking industry has seen massive consolidation since the mid-1980s. The number of independent bank and thrift organizations (collectively, depository organizations) in the U.S. fell from 15,416 in 1984 to 8,191 in 2001, a drop of 46.9%. Some of the depository organizations that have been eliminated ranked among the largest in the nation. As a result, the share of deposits held by the five largest increased from about 9% in 1984 to over 23% in 2001.

The consolidation of banking at the national level has been facilitated by the liberalization of the laws governing interstate banking. Beginning in the mid-1970s, states allowed bank holding companies headquartered in other states to acquire banks in their state. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permitted interstate branching, whereby banks in one state could acquire banks in another state and turn the acquired branches into their own, rather than keeping the acquired bank as a separately chartered entity.

The experience with interstate banking and the effect on concentration at the state level vary considerably. Oregon has been especially affected by interstate acquisitions–as of 2001, out-of-state organizations controlled 74.2% of Oregon deposits, the second highest percentage in the nation. For Oregon, for the most part, out-of-state acquirers have merely replaced the large in-state institutions, with little effect on concentration at the state level. Thus, the deposit share of the top five institutions operating in Oregon barely has changed, increasing from 63.1% to 67.9% since 1984. (These shares are considerably higher than in states without a long history of statewide branching.) At 45.2% and ranking seventh in the nation, Washington’s out-of-state controlled deposit share also is relatively high. However, the top-five share in Washington increased more than Oregon’s, from 48.6% in 1984 to 60.5% in 2001, largely due to gains by one of the state’s own– Washington Mutual, Inc., the second largest deposit ory institution in Washington.

Public policy concerns

From a public policy perspective, the main concern is the impact that bank mergers and acquisitions may have on local banking markets. A local banking market typically encompasses a metropolitan area or a number of rural communities that are economically linked. Survey evidence regarding where people do their banking and research linking local banking market concentration and prices, such as loan rates, suggest that banking markets retain a local dimension.

Indeed, antitrust enforcement regarding bank mergers focuses primarily on the effects on local market concentration. Under the Bank Holding Company Act, the Bank Merger Act, and other statutes, the Federal Reserve and the other bank regulatory agencies review proposed bank mergers for acceptable increases in concentration, post-merger levels of concentration, and post-merger market shares.

Regulatory approval of a merger may require a divestiture of acquirer or target branches in the relevant markets to a third party such that the resulting change in concentration is acceptable. On the other hand, mitigating factors may argue for approval in a particular market. For example, the relevant market may have strong population growth, indicating the likelihood of a rapidly increasing demand for banking services. In such a case, the market would be expected to attract new entrants at an above average rate, which would tend to alleviate the increase in concentration due to the merger.

Concentration in local markets

Interstate mergers usually would not have affected concentration at the local level, since the acquirer and the target would have operated in different states and therefore, usually, in different local markets. However, intrastate mergers, even among the smaller organizations, and failures could have had a significant impact. Therefore, the change in the number of depository organizations within a state is an important indicator of the potential effects of consolidation on local markets. Between 1984 and 2001, the number of depository organizations in Oregon declined 46.1%, from 102 to 55, while the number in Washington declined 30%, from 160 to 112.

Regulators assessing the effect of mergers on concentration in local banking markets typically rely on a statistic called the Herfindahl-Hirschman Index (HHI) which is calculated by summing the squares of the individual percent market shares of all the participants in a market. For example, a market with four firms with market shares of 30%, 30%, 20%, and 20% has an HHI of 2,600. The HHI gives proportionally greater weight to the market shares of the larger firms, in accord with their relative importance in competitive interactions. The Department of Justice divides the spectrum of market concentration into three broad categories: unconcentrated (HHI below 1,000), moderately concentrated (HHI between 1,000 and 1,800), and highly concentrated (HHI above 1,800).

For Oregon and Washington, changes in local banking market concentration were computed for 15 urban markets and 26 rural markets between 1984 and 2001. In urban markets, the average HHI increased 206 points, from 1,296 to 1,502. So, on average, urban markets in Oregon and Washington stayed within the moderately concentrated range.

Regarding individual markets, 11 urban markets (73.3%) had a higher HHI in 2001 than in 1984. However, only one–Longview, Washington–moved up to being highly concentrated. After starting out at 993 in 1984, Longview’s HHI increased to 1,986 in 2001. All the other urban markets except for Walla Walla, Washington, which already was highly concentrated in 1984, remained moderately concentrated.

In rural markets, the average HHI increased 75 points, from 2,095 in 1984 to 2,170 in 2001. So, on average, rural markets in Oregon and Washington already were highly concentrated in 1984, and became only very slightly more concentrated.

In 14 rural markets (53.9%), the HHI was higher in 2001 than in 1984. among these, seven markets went from being moderately concentrated in 1984 to highly concentrated in 2001. These were the Coos Bay, Hood River, Lincoln County, Pendleton, and Roseburg markets in Oregon, and the Sunnyside and Wenatchee markets in Washington. Four of these–Coos Bay, Pendleton, Roseburg, and Sunnyside–now have HHIs more than 300 points above the highly concentrated benchmark of 1,800. However, given that 9 of the 12 rural markets that already were highly concentrated in 1984 became less concentrated by 2001, it is possible that concentration in some of these newly highly concentrated markets rural markets eventually also may fall.

Conclusion

Consolidation in banking has left its mark on concentration in the Northwest. At the state level, concentration has increased slightly in Oregon, more so in Washington. Among local banking markets, concentration increased both on average and in the majority of urban and rural markets. However, relatively few markets moved into the highly concentrated range–one urban market and about one-fourth of the rural markets. Even among the rural markets, the average increase in market concentration has been limited.

BANKS HEADQUARTERED BY REGION

MARCH 31, 2002

(NOT SEASONALLY ADJUSTED, PRELIMINARY DATA)

(BANKS WITH ASSETS LESS THAN OR EQUAL TO $1 BILLION ARE DEFINED AS

SMALL)

ASSETS AND LIABILITIES — $ MILLION

UNITED STATES

ALL SMALL LARGE

ASSETS

TOTAL 6,443,567 1,040,440 5,403,127

FOREIGN 710,295 955 709,341

DOMESTIC 5,733,271 1,039,485 4,693,786

LOANS

TOTAL 3,861,298 666,693 3,194,605

FOREIGN 290,349 854 289,495

DOMESTIC 3,570,949 665,839 2,905,110

REAL ESTATE 1,762,619 435,577 1,327,041

COMMERCIAL RE 515,061 163,939 351,121

SINGLE FAMILY RES 953,494 180,409 773,085

COMMERCIAL 815,271 116,701 698,570

CONSUMER 589,344 72,602 516,742

CREDIT CARDS 246,678 6,455 240,224

AGRICULTURAL 44,176 28,647 15,528

OTHER LOANS 359,540 12,311 347,229

INV. SECURITIES

TOTAL 1,161,542 241,854 919,687

U.S. TREASURIES 49,194 11,922 37,272

U.S. AGENCIES, TOTAL 717,134 164,585 552,548

U.S. AGENCIES, MBS 523,312 75,984 447,328

OTHER MBS 81,551 4,306 77,246

OTHER SECURITIES 313,663 61,041 252,621

LIABILITIES

TOTAL 5,832,088 936,719 4,895,369

DOMESTIC 5,122,005 935,765 4,186,240

DEPOSITS

TOTAL 4,317,833 857,334 3,460,499

FOREIGN 603,282 1,590 601,693

DOMESTIC 3,714,551 855,745 2,858,807

DEMAND 490,975 116,416 374,559

MMDA & SAVINGS 1,811,906 252,459 1,559,447

SMALL TIME 720,279 258,158 462,121

LARGE TIME 540,284 136,883 403,401

OTHER DEPOSITS 151,108 91,828 59,279

OTHER BORROWINGS 529,601 46,287 483,314

EQUITY CAPITAL 600,579 103,618 496,961

LOAN LOSS RESERVE 74,433 9,780 64,652

LOAN COMMITMENTS 5,061,006 638,332 4,422,675

TIER1 CAPITAL RATIO 0.102 0.136 0.096

TOTAL CAPITAL RATIO 0.130 0.148 0.127

LEVERAGE RATIO 0.080 0.095 0.077

LOAN LOSS RESERVE RATIO 1.928 1.467 2.024

TWELFTH DISTRICT

ALL SMALL LARGE

ASSETS

TOTAL 645,184 95,443 549,741

FOREIGN 3,455 18 3,437

DOMESTIC 641,729 95,425 546,304

LOANS

TOTAL 414,133 63,925 350,208

FOREIGN 2,550 47 2,503

DOMESTIC 411,583 63,878 347,705

REAL ESTATE 218,697 40,949 177,748

COMMERCIAL RE 78,294 22,237 56,057

SINGLE FAMILY RES 100,536 7,498 93,039

COMMERCIAL 88,877 13,895 74,982

CONSUMER 76,599 6,758 69,841

CREDIT CARDS 50,413 1,337 49,076

AGRICULTURAL 5,563 1,452 4,112

OTHER LOANS 21,846 824 21,022

INV. SECURITIES

TOTAL 117,030 16,770 100,260

U.S. TREASURIES 3,327 775 2,552

U.S. AGENCIES, TOTAL 51,848 10,933 40,914

U.S. AGENCIES, MBS 38,098 5,818 32,279

OTHER MBS 12,565 932 11,633

OTHER SECURITIES 49,291 4,130 45,161

LIABILITIES

TOTAL 573,655 85,188 488,466

DOMESTIC 570,199 85,171 485,029

DEPOSITS

TOTAL 441,277 76,458 364,819

FOREIGN 11,929 46 11,883

DOMESTIC 429,348 76,412 352,936

DEMAND 51,139 12,259 38,880

MMDA & SAVINGS 255,861 28,681 227,180

SMALL TIME 50,534 15,271 35,263

LARGE TIME 62,389 15,261 47,128

OTHER DEPOSITS 9,426 4,941 4,486

OTHER BORROWINGS 63,791 5,417 58,374

EQUITY CAPITAL 71,235 10,227 61,008

LOAN LOSS RESERVE 8,829 1,313 7,516

LOAN COMMITMENTS 815,012 341,535 473,478

TIER1 CAPITAL RATIO 0.115 0.130 0.113

TOTAL CAPITAL RATIO 0.144 0.143 0.144

LEVERAGE RATIO 0.092 0.101 0.090

LOAN LOSS RESERVE RATIO 2.132 2.054 2.146

QUARTERLY EARNINGS AND RETURNS — $ MILLION

UNITED STATES

ALL SMALL LARGE

INCOME

TOTAL 130,077 19,942 110,134

INTEREST 88,063 16,227 71,836

FEES & CHARGES 6,991 1,047 5,944

EXPENSES

TOTAL 96,194 15,604 80,589

INTEREST 29,927 5,926 24,001

SALARIES 24,700 4,462 20,237

LOAN LOSS PROVISION 11,555 820 10,735

OTHER 30,012 4,396 25,616

TAXES 11,103 1,182 9,920

NET INCOME 21,557 3,033 18,524

ROA (% ANNUALIZED) 1.336 1.180 1.366

ROE (% ANNUALIZED) 14.357 11.708 14.910

NET INTEREST MARGIN (% ANNUALIZED) 3.603 4.008 3.527

TWELFTH DISTRICT

ALL SMALL LARGE

INCOME

TOTAL 13,972 2,135 11,837

INTEREST 9,583 1,587 7,996

FEES & CHARGES 598 76 522

EXPENSES

TOTAL 9,670 1,670 8,000

INTEREST 2,415 442 1,973

SALARIES 2,355 512 1,843

LOAN LOSS PROVISION 1,523 182 1,342

OTHER 3,377 535 2,842

TAXES 1,538 157 1,381

NET INCOME 2,566 245 2,321

ROA (% ANNUALIZED) 1.610 1.051 1.705

ROE (% ANNUALIZED) 14.407 9.581 15.216

NET INTEREST MARGIN (% ANNUALIZED) 4.497 4.912 4.426

ASSET QUALITY — PERCENT OF LOANS

UNITED STATES

ALL SMALL LARGE

NET CHARGEOFFS (% ANNUALIZED)

TOTAL 1.143 0.318 1.316

REAL ESTATE 0.151 0.084 0.173

COMMERCIAL 1.465 0.497 1.600

CONSUMER 3.931 1.476 4.244

CREDIT CARDS 7.916 8.482 7.901

AGRICULTURAL 0.335 0.108 0.738

PAST DUE & NON-ACCRUAL

TOTAL 2.709 2.392 2.775

REAL ESTATE 2.055 2.050 2.056

CONSTRUCTION 2.285 2.221 2.308

COMMERCIAL 1.846 1.875 1.832

FARM 3.256 3.011 3.821

HOME EQUITY LINES 0.983 0.908 0.992

MORTGAGES 2.472 2.241 2.532

MULTI-FAMILY 1.069 1.086 1.064

COMMERCIAL 3.703 3.091 3.788

CONSUMER 3.527 3.034 3.590

CREDIT CARDS 4.769 7.721 4.690

AGRICULTURAL 3.146 2.596 4.122

NUMBER OF BANKS 7,986 7,604 382

NUMBER OF EMPLOYEES 1,709,055 385,569 1,323,486

TWELFTH DISTRICT

ALL SMALL LARGE

NET CHARGEOFFS (% ANNUALIZED)

TOTAL 1.352 0.813 1.450

REAL ESTATE 0.093 0.096 0.092

COMMERCIAL 2.071 1.304 2.211

CONSUMER 4.324 4.372 4.320

CREDIT CARDS 5.753 13.981 5.529

AGRICULTURAL 0.604 -0.005 0.819

PAST DUE & NON-ACCRUAL

TOTAL 2.444 2.427 2.447

REAL ESTATE 1.730 1.723 1.732

CONSTRUCTION 2.882 2.276 3.126

COMMERCIAL 1.460 1.429 1.473

FARM 4.782 6.639 3.618

HOME EQUITY LINES 1.040 0.821 1.074

MORTGAGES 1.734 2.074 1.710

MULTI-FAMILY 0.854 0.512 0.962

COMMERCIAL 3.592 3.271 3.651

CONSUMER 3.387 4.560 3.274

CREDIT CARDS 4.123 11.537 3.921

AGRICULTURAL 4.505 3.411 4.891

NUMBER OF BANKS 564 490 74

NUMBER OF EMPLOYEES 159,000 37,157 121,843

INTEREST RATES ON LOANS

FEB MAY AUG NOV

TYPE OF LOAN 2000 2000 2000 2000

COMMERCIAL and INDUSTRIAL LOANS

TOTAL U.S. 7.44 7.78 8.28 8.15

DISTRICT 7.04 7.42 7.90 7.85

BY RISK RATING:

MINIMAL RISK U.S. 6.47 6.82 7.42 7.54

DISTRICT 6.49 6.19 7.25 6.66

LOW RISK U.S. 6.87 7.15 7.55 7.57

DISTRICT 6.79 6.99 7.65 7.68

MODERATE RISK U.S. 7.54 7.97 8.41 8.33

DISTRICT 7.15 7.57 8.06 8.04

OTHER U.S. 8.24 8.63 8.95 8.85

DISTRICT 7.23 7.57 8.00 7.79

BY MATURITY/REPRICING INTERVAL:

DAILY U.S. 6.84 7.21 7.74 7.84

DISTRICT 6.87 7.59 7.94 7.85

2 TO 30 DAYS U.S. 7.42 7.60 8.18 7.60

DISTRICT 7.00 7.37 7.83 7.78

31 TO 365 DAYS U.S. 7.67 8.04 8.13 8.04

DISTRICT 6.96 7.05 7.70 7.68

OVER 365 DAYS U.S. 8.81 8.37 8.84 8.37

DISTRICT 7.90 4.64 8.72 9.03

CONSUMER, AUTOMOBILE U.S. 8.88 9.21 9.62 9.63

DISTRICT 9.28 9.23 9.87 9.87

CONSUMER, PERSONAL U.S. 13.76 13.88 13.85 14.12

DISTRICT 14.41 14.89 13.25 13.25

CONSUMER, CREDIT CARD U.S. 15.47 15.39 15.98 15.99

DISTRICT 15.60 15.76 16.16 16.25

FEB MAY AUG NOV

TYPE OF LOAN 2001 2001 2001 2001

COMMERCIAL and INDUSTRIAL LOANS

TOTAL U.S. 7.19 6.22 5.61 3.89

DISTRICT 7.04 5.94 5.22 3.58

BY RISK RATING:

MINIMAL RISK U.S. 6.23 6.01 4.50 2.97

DISTRICT 6.54 4.98 4.48 2.88

LOW RISK U.S. 6.54 5.44 4.81 3.08

DISTRICT 6.53 5.42 4.66 3.14

MODERATE RISK U.S. 7.28 6.38 5.57 4.25

DISTRICT 7.51 6.35 5.54 3.84

OTHER U.S. 7.97 6.82 6.16 4.31

DISTRICT 7.70 6.64 6.35 4.39

BY MATURITY/REPRICING INTERVAL:

DAILY U.S. 6.88 5.94 5.15 3.67

DISTRICT 7.22 6.03 5.33 3.91

2 TO 30 DAYS U.S. 6.94 5.80 5.84 3.66

DISTRICT 6.96 5.87 5.16 3.47

31 TO 365 DAYS U.S. 7.22 5.90 5.42 3.94

DISTRICT 6.39 5.47 4.72 3.23

OVER 365 DAYS U.S. 8.48 7.61 7.02 6.09

DISTRICT 7.36 7.70 7.30 5.08

CONSUMER, AUTOMOBILE U.S. 9.17 8.67 8.31 7.86

DISTRICT 9.94 9.34 8.34 8.54

CONSUMER, PERSONAL U.S. 13.71 13.28 13.25 12.62

DISTRICT 13.67 12.48 13.22 12.45

CONSUMER, CREDIT CARD U.S. 15.66 15.07 14.60 14.22

DISTRICT 16.94 15.54 15.28 15.01

FEB MAY

TYPE OF LOAN 2002 2002

COMMERCIAL and INDUSTRIAL LOANS

TOTAL U.S. 3.66 3.60

DISTRICT 3.36 3.77

BY RISK RATING:

MINIMAL RISK U.S. 2.10 2.61

DISTRICT 2.59 2.79

LOW RISK U.S. 3.41 2.86

DISTRICT 2.91 3.18

MODERATE RISK U.S. 3.89 3.84

DISTRICT 3.48 4.35

OTHER U.S. 4.01 4.00

DISTRICT 3.98 4.55

BY MATURITY/REPRICING INTERVAL:

DAILY U.S. 3.10 3.12

DISTRICT 3.71 3.65

2 TO 30 DAYS U.S. 3.61 3.46

DISTRICT 3.25 3.71

31 TO 365 DAYS U.S. 3.74 3.44

DISTRICT 2.88 3.24

OVER 365 DAYS U.S. 5.66 6.01

DISTRICT 5.71 6.82

CONSUMER, AUTOMOBILE U.S. 7.50 7.74

DISTRICT 8.32 9.20

CONSUMER, PERSONAL U.S. 11.72 12.57

DISTRICT 14.39 12.36

CONSUMER, CREDIT CARD U.S. 13.65 13.55

DISTRICT 13.21 13.34

SOURCES: SURVEY OF TERMS OF BUSINESS LENDING AND TERMS OF CONSUMER

CREDIT

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