Competition from Large, Multimarket Firms and the Performance of Small, Single-Market Firms: Evidence from the Banking Industry


  • The opinions expressed in this paper do not necessarily reflect those of the Federal Reserve Board, the Federal Reserve Bank of New York, or their staffs. The authors thank the editor, Mark Flannery, and the two anonymous referees for valuable suggestions that improved the paper significantly. We also thank Ron Borzekowski, Christa Bouwman, Diana Hancock, Janice Hauge, Bob Hunt, and Larry Mote for very helpful comments, and Nate Miller and Phil Ostromogolsky for outstanding research assistance. We dedicate the paper to the memory of our friend, Larry Goldberg, who died during the completion of this paper.


We offer and test two competing hypotheses for the consolidation trend in banking using U.S. banking industry data over the period 1982–2000. Under the efficiency hypothesis, technological progress improved the performance of large, multimarket firms relative to small, single-market firms, whereas under the hubris hypothesis, consolidation was largely driven by corporate hubris. Our results are consistent with an empirical dominance of the efficiency hypothesis over the hubris hypothesis—on net, technological progress allowed large, multimarket banks to compete more effectively against small, single-market banks in the 1990s than in the 1980s. We also isolate the extent to which technological progress occurred through scale versus geographic effects and how they affected the performance of small, single-market banks through revenues versus costs. The results may shed light as well on some of the research and policy issues related to community banking.