John T. Rose

Geographic diversification in banking, market share changes, and the viability of small independent banks

The prospect of unlimited nationwide banking raises a question about the viability of small independent banks in competition with large, geographically diversified banking organizations. This study addresses the issue of small bank viability by focusing on the relative performance of independent banks and bank holding company subsidiaries in a regime of intrastate banking, where “performance” is measured by the cumulative change in a banks local market share over time. Two regression equations of the same general form are estimated using the same sample of independent and affiliated banks, albeit for different time periods to distinguish between the short-term and long-term effects of affiliation. Regression results indicate that affiliation with a geographically diversified bank holding company generally provides no significant long-term competitive advantage (in terms of market share accumulation) for holding company subsidiaries over independent banks. The only exception is a modest benefit afforded to banks with relatively small pre-acquisition market shares that are acquired by larger bank holding companies as initial entry vehicles into new markets.

Thrift strategies after FIRREA: A cluster analysis of high-performance institutions

Abstract This study examines thrift institution strategies and viability in the post-FIRREA period. Specifically, we use cluster analysis to identify the major strategy(s) of the most profitable thrifts during the early post-FIRREA years, based on their 1993 balance sheet structures. We then compare the earnings record of the various cluster groups in 1993 and again in 1994 when interest rates reversed their downward trend and turned upward. Empirical results indicate three major cluster groups, representing a strategy continuum from traditional institutions to diversified organizations with a mix of mortgage banking, some traditional mortgage lending, and a limited amount of consumer lending. However, no single strategy stands out as most profitable, and the traditional thrift strategy still appears to be a viable alternative for well-managed institutions.

Interstate Banking and Small Business Finance: Implications from Available Evidence

The prospect of full interstate banking in the near future raises questions about the supply and cost of bank credit for small business firms under such a regime. This study explores this issue, drawing on the evidence of prior research. Specifically, the focus is on three questions: (1) the likely commitment of large, nationwide banks to the small business sector; (2) the implications of interstate banking for the viability of small, independent banks; and (3) the effect of nationwide banking on the overall level of local bank competition. The available evidence indicates little reason to expect the supply or cost of small business credit to be affected adversely by interstate banking. If anything, nationwide banking should increase the supply, and possibly lower the cost, of bank financing for small firms.

Dominant banks, market power, and out-of-market productive capacity

Abstract This study examines the link between the market power of dominant local banks and the existence of fringe competitors with access to out-of-market productive capacity. Alternative models of dominant-firm market power are presented and estimated from a sample of banking markets drawn from unit banking states. The results provide some support for the hypothesis that the existence of out-of-market productive capacity available to fringe banks serves to attenuate the market power of dominant local banking organizations. However, the estimated relationship between the market share and market power of the dominant bank is so strong that any such attenuation effect is, from a practical standpoint, unimportant, at least for this sample of markets. Finally, the widely touted suggestion to account for the attenuation effect of out-of-market productive capacity by simply modifying market shares is not appropriate for this sample.